HP's Loss Offers Lessons

When I put on my law teaching hat for the first time all summer, in preparation for my fall term class at DePaul University College of Law,  it became apparent that the unfolding situation at Hewlett Packard is going to be a case study for many law and business school courses.  A fortiori, this means that it is fertile ground for today’s corporate governance devotees.

Regular visitors to this space will recall that about a year ago, yours truly noted that the ouster of HP’s CEO, Mark Hurd, was a poor reflection upon both our existing corporate governance legal regimen and the performance of the HP board, Mark Hurd’s Termination from HP: Case Study.  The ultimate issue for both was the lack of emphasis on CEO performance vis a vis business strategy and market performance, and overemphasis on personal behavior. Yours truly elaborated on these sentiments in a law review article at http://hq.ssrn.com/submissions/SimpleSubmission.cfm?AuthorID=1249244&abstractid=1872143&rev=true&type=start#top. The article contains both general sentiments and those pertinent to the HP situation.

Without saying “I told you so,” I’ll simply note: The crash in HP’s market cap last week in response to the revelation of its replacement CEO’s intention to spin off the PC business in favor of a pricey acquisition (Investors Rebel Against H-P Plan) even during a week of great market upheaval, does nothing to dispel my concerns. These events suggest that HP’s board, at all times in question, was out of touch with the company’s basic business strategy and its acceptance or lack thereof in the marketplace. Ousting Hurd for personal transgressions while ignoring the company’s growing estrangement from its actual and prospective customers indicates a board more concerned with appearance than substance.

While the market’s initial reaction – a 20% one day decline in market cap – is hardly determinative, replacing him with a CEO, Leo Apotheker, who seems to have no idea of how to reconnect with the marketplace other than a vague plan for jettisoning a major business in order to pursue a costly acquisition, does not indicate excellent governance at present. As some wags might put it, paying 10X revenue for an acquisition, as HP is doing with Autonomy, is “so ‘90’s.” This would be a nuanced way of stating that the HP board has destroyed and continues to destroy a great deal of shareholder value because of its apparent ignorance of (or disdain for?) the specifics of management business strategy.

Yours truly has argued, perhaps ad nauseum, for a change in our governance regime to place more emphasis on results and less on process and compensation, and firmly believes that episodes such as those at HP over the past year support that position. Whatever may be said for or against present law, boards and investors elsewhere need to learn from these events that management must be meaningfully overseen in such a way that its business strategies and major tactics are continuously vetted. Having a board remain passive absent personal scandal is hardly proper governance.

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