The events following the dismissal of Mark Hurd at HP illustrate why I have so vehemently advocated introduction of a result orientation into governance law (Require Affirmative Proof in Specified Circumstances of “Too Big to Fail Companies” in Order to Meet the Business Judgment Rule). As we know, Hurd was dismissed in early August in the wake of revelations of his involvement with a female HP contractor which may have included the filing of erroneous expense reports. He was paid about $35 million in cash and stock in accordance with contractual severance provisions.
In rapid succession, HP made two large acquisitions at prices well above prior market prices (HP’s Acquisition Binge Continues With ArcSight Deal). Hurd accepted a position as co-president of Oracle and Sam Palmisano, IBM’s CEO, strongly criticized Hurd’s management of HP by stating that he had drastically deemphasized research and development, IBM’s Chief Thumps H-P, WSJ, 9/15/2010.
All of this indicates that the HP board was more focused on the peripheral matters of Hurd’s relationship and expense reports than on his business strategy, which appeared to have been a short-sighted one leaving technological gaps in its offerings. We have seen too many situations where this was the case. The financial sector is a perfect example of where boards, while they may have utilized proper process, appeared to disregard highly questionable business strategies which led to disaster.
Obviously, HP has not suffered the same fate as Lehman, Bear Stearns, Citigroup, etc. Nevertheless, the spate of acquisitions coupled with Palmisano’s observations suggest that there may have been reason for concern (and perhaps actual concern) with underinvestment in the business. This makes the HP board’s focus on peripheral matters so distressing. The relationship with the contractor was irrelevant to the company’s business prospects, while the expense issue, which would have necessitated dismissal if there were clear evidence of fraud, was quite ambiguous and did not come close to this level. The payment of the large severance suggests that the board agreed that there was no clear evidence of misconduct. Apparently, no action would have been taken but for the personal indiscretions, despite much more fundamental concerns.
For governance to genuinely improve in this proxy access era, we’ll need boards to critique business strategy being pursued by management for coherence and common sense, to voice objections when necessary, and to take strong action when such objections are not heeded. As a general counsel who has experienced the problems resulting from an overly involved public company board, I emphasize that this does not mean board involvement in day to day business decisions, which must remain the province of management as a matter of efficiency and to avoid undermining management authority and credibility.
It does mean the board familiarizing itself with management’s strategy at a high level and determining if it makes sense in the first instance or, even if it did, if changing circumstances warrant fundamental changes. If management is going to be dismissed or sanctioned, it must be on account of matters which have a bona fide impact on shareholder value. Whether or not there are personal indiscretions, management must be held accountable for the direction of the company and the results of its stewardship
The HP board was apparently unwilling to act with respect to Hurd’s business strategy and acted only when peripheral matters, which are arguably minutiae, became public and embarrassed the company. Financial industry boards never acted against management which was plainly on the wrong track, because none of these peripheral matters presented themselves. The societal consequences are clear. Going forward, we need a focus on what really matters.