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M5C: HP's Boardroom Drama and Divorce

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HP’s Boardroom Drama and Divorce

A series of dramatic mishaps took Hewlett Packard far from its original mission. The respected “HP Way” has fallen apart over the years as several CEOs have come and gone, leaving scandals and instability in their wake. Current CEO Meg Whitman is attempting to get HP back on track by cutting jobs to increase competitiveness and splitting the company into two firms to focus resources.

Read the case below and in your case essay (700-1,000 words) answer the questions that follow.

With some $115 billion annual revenues in 2015, Hewlett-Packard (HP) is one of the largest technology companies in the world. Indeed, HP was once so successful that it was featured as one of a handful of visionary companies in the business bestseller Built to Last (published in 1994). These select companies outperformed the stock market by a wide margin over several decades. Built to Last opens with a quote by HP’s co-founder Bill Hewlett:

“As I look back on my life’s work, I’m probably most proud of having helped to create a company that by virtue of its values, practices, and success has had a tremendous impact on the way companies are managed around the world. And I’m particularly proud that I’m leaving behind an ongoing organization that can live on as a role model long after I’m gone.”

Hewlett passed away in 2001. Much has changed at HP since then. Within the short months from April 2010 to November 2012, HP’s market value dropped by almost 80 percent, wiping out $82 billion in shareholder wealth. Longer term, since early 2010 until summer 2015, HP’s stock price declined by 42 percent, while the tech-heavy NASDAQ 100, containing many firms that compete with HP, rose by over 143 percent. This marks a whopping 185 percentage points difference in performance! It turns out that a perfect storm of corporate-governance problems, combined with repeated ethical shortcomings, had been brewing at HP for a decade. The result: a sustained competitive disadvantage.

This development is even more astonishing given that, at one point, HP was much admired for its corporate culture—known as “the HP Way.” The core values of the HP Way include business conducted with “uncompromising integrity,” as well as “trust and respect for individuals,” among others (see Exhibit MC20.1) The HP Way guided the company since its inception in 1938, when it was founded with some $500 of initial investment in Dave Packard’s garage in Palo Alto, California. As one of the world’s most successful

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technology companies (think “laser printing”), HP initiated the famous technology cluster known as Silicon Valley. Over the last decade, however, HP’s board of directors—a group of individuals that is supposed to represent the interests of the firm’s shareholders and oversee the CEO—seemed to forget the HP Way as it violated its core values time and time again. In the process, HP’s board of directors acted out a drama series rivaling House of Cards, with the season finale not yet in sight.

The first season of the drama “aired” in 2006. The online technology site CNET published an article on HP’s strategy. Quoting an anonymous source, the article disclosed sensitive details that could have come only from one of the directors or senior executives at HP. Eager to discover the identity of the leaker, Patricia Dunn, then chair of the board, launched a covert investigation. She hired an outside security firm to conduct surveillance on HP’s board members, select employees, and even some journalists. Although it is common for companies to monitor phone and computer use of their employees, HP’s investigation went above and beyond. The private investigators used an illegal spying technique called “pretexting” (impersonating the targets) to obtain phone records by contacting the telecom service providers. The security firm obtained some 300 telephone records covering mobile, home, and office phones of all directors (including Dunn), nine journalists, and several HP employees. Not to leave anything to chance, the security firm also obtained phone records of the spouses and even the children of HP board members and employees. The firm also conducted physical surveillance of the suspected leaker—board member George Keyworth and his spouse —as well as two other directors.

In a May 2006 board meeting, Dunn presented the evidence gathered, implicating Keyworth as the source of the leak. Dunn’s disclosure of the investigation infuriated HP director Thomas Perkins, a prominent venture capitalist, so much that he resigned on the spot. Perkins called the HP-initiated surveillance “illegal, unethical, and a misplaced corporate priority.” Perkins also forced HP to disclose the spying campaign to the Securities and Exchange Commission (and thus the public) as his reason for resigning. Dunn and Keyworth were dismissed from the board along with six senior HP managers. Despite the boardroom drama, HP came out unscathed financially, largely due to the superior performance of then-CEO Mark Hurd.

Hurd was appointed Hewlett-Packard’s CEO in the spring of 2005. He began his business career 25 years earlier as an entry-level salesperson with NCR, a U.S. technology company best known for its bar code scanners in retail outlets and automatic teller machines (ATMs). By the time he worked his way up to the role of CEO at NCR, he had earned a reputation as a low-profile, no-nonsense manager focused on flawless strategy execution. When he was appointed HP’s CEO, industry analysts praised its board of directors. Moreover, investors hoped that Hurd would run an efficient and lean operation at HP and return the company to its former greatness and, above all, profitability.

Hurd did not disappoint. By all indications, he was highly successful at the helm of HP. The company became number one in desktop computer sales and increased its lead in inkjet and laser printers to more than 50 percent market share. Through significant cost-cutting and streamlining measures, Hurd turned HP into a lean operation. For example, he oversaw large-scale layoffs and a pay cut for all remaining employees as he reorganized the company. Wall Street rewarded HP shareholders with an almost 90 percent stock

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price appreciation during Hurd’s tenure, outperforming broader stock market indices by a wide margin.

Yet, in the summer of 2010, HP aired the second season of its boardroom soap opera. The HP board found itself caught “between a rock and a hard place,” with no easy options in sight. Jodie Fisher, a former adult- movie actress, filed a lawsuit against Hurd, alleging sexual harassment. As an independent contractor, she worked as a hostess at HP-sponsored events. In this function, she screened attending HP customers and personally ensured that Hurd would spend time with the most important ones. With another ethics scandal looming despite Hurd’s stellar financial results for the company, HP’s board of directors forced him to resign. He left HP in August 2010 with an exit package worth $35 million.

The third season of HP’s boardroom drama began in the fall of 2010 when HP announced Leo Apotheker as its new CEO. Apotheker, who came to HP after being let go from the German enterprise software company SAP, proposed a new corporate strategy for HP. He suggested that the company focus on enterprise software solutions and spin out its low margin consumer hardware business. HP’s consumer hardware business resulted from the $25 billion legacy acquisition of Compaq during the tumultuous tenure of CEO Carly Fiorina, prior to Mark Hurd. The hardware business had grown to 40 percent of HP’s total revenues. Under Apotheker, HP also exited the mobile device industry, most notably tablet computers. Many viewed this move as capitulating to Apple’s dominance.

As part of his new corporate strategy, Apotheker acquired the British software company Autonomy for $11 billion, which analysts saw as grossly overvalued. Shortly thereafter, HP took an almost $9 billion write-down due to alleged “accounting inaccuracies” at Autonomy. HP’s stock went into free fall. Under Apotheker’s short 11 months at the helm of HP, the share price dropped by almost 50 percent. HP’s due diligence process by the board was clearly flawed when acquiring Autonomy. The process itself was truncated. Moreover, the HP board did not heed the red flags thrown up by Deloitte, Autonomy’s auditor. Indeed, a few days before the Autonomy acquisition was finalized, Deloitte auditors asked to meet with the board to inform them about a former Autonomy executive who accused the company of accounting irregularities. Deloitte also added that it investigated the claim and did not find any irregularities.

Perhaps most problematic, the board fell victim to groupthink, rallying around Apotheker as CEO and Ray Lane, the board chair, who strongly supported him. Apotheker was eager to make a high-impact acquisition to put his strategic vision of HP as a software and service company into action. In the wake of the Hurd ethics scandal, an outside recruiting firm had proposed Apotheker as CEO and Lane as the new chair of HP’s board of directors. The full board never met either of the men before hiring them into key strategic positions! The HP board of directors experienced a major shakeup after the Hurd ethics scandal and then again after the departure of Apotheker. Lane stepped down as chairman of HP’s board in the spring of 2013, but remains a director.

After Apotheker was let go, HP did not conduct a search for its next CEO. Instead, in the fall of 2011, the board appointed one of its directors, Meg Whitman, as CEO because the board members were “too exhausted by the fighting.” She was formerly the CEO at eBay, had been appointed to HP’s board of3

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directors in 2011, and was a director when the Autonomy acquisition was approved. In an effort to regain competitiveness Whitman cut 55,000 jobs at HP.

In 2015, HP split into two firms, one focusing on consumer hardware (PCs and printers) called HP Inc. ($58 billion in revenues), and the other on business equipment and services called Hewlett Packard Enterprise ($57 billion in revenues). This corporate strategy move is very similar to what Apotheker had suggested three years earlier. This is also a similar move to that IBM undertook a decade earlier, one of HP’s main rivals. Whitman will remain as CEO of the new Hewlett Packard Enterprise, which is considered to have higher growth potential than the low-margin computer hardware business.

Endnotes: 1 Bill Hewlett, HP co-founder, as quoted in Collins, J.C., and J.I. Porras (1994), Built to Last: Successful Habits of Visionary Companies (New York: HarperCollins), p. 1. 2 “Suspicions and spies in Silicon Valley,” Newsweek, September 17, 2006. 3 “How Hewlett-Packard lost its way,” CNN Money, May 8, 2012

Sources: Sources: This case is based on: “As H-P split nears, bosses tick off a surgery checklist,” The Wall Street Journal, June 30, 2015; “Split today, merge tomorrow,” The Economist, October 7, 2014; “Inside HP’s missed chance to avoid a disastrous deal,” The Wall Street Journal, January 21, 2013; “The HP Way out,” The Economist, April 5, 2013; “How Hewlett-Packard lost its way,” CNN Money, May 8, 2012; “HP shakes up board in scandal’s wake,” The Wall Street Journal, January 21, 2011; “HP CEO Mark Hurd resigns after sexualharassment probe,” The Huffington Post, August 6, 2010; “The curse of HP,” The Economist, August 12, 2010; “Corporate governance: Spying and leaking are wrong,” The Economist, September 14, 2006; “Corporate governance: Pretext in context,” The Economist, September 14, 2006; Packard, D. (1995), HP Way: How Bill Hewlett and I Built Our Company (New York: Collins); and Collins,

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Paper /Case Study Analysis Rubric

Criteria Ratings Pts

25.0 pts

20.0 pts

J.C., and J.I. Porras (1994), Built to Last: Successful Habits of Visionary Companies (New York: HarperCollins).

In your case essay (700-1,000 words) and answer the following questions:

1. Who is to blame for HP’s shareholder-value destruction—the CEO, the board of directors, or both? What recourse, if any, do shareholders have?

2. You are brought in as (a) a corporate governance consultant or (b) a business ethics consultant by HP’s CEO. What recommendations would you give the CEO, Meg Whitman? How would you go about implementing them? Be specific.

3. Why is HP splitting itself into two firms, a move that was rejected just three years earlier? Do you think the corporate strategy move of splitting the “old” HP into two companies (HP Inc. and Hewlett Packard Enterprise) will create shareholder value? Why or why not? Which of the two companies would you expect to be the higher performer? Why?

4. Discuss the general lessons in terms of corporate governance and business ethics that can be drawn from this case. (Additional resources: Link (http://business-ethics.com/2010/08/07/4535-mark-hurds- leadership-failure/) Link) (https://www.cio.com/article/2443743/hp-lessons-learned--be-a-good-board- member.html)

Main Elements 25.0 to >22.0 pts Distinquished

Includes all of the main elements and requirements and cites multiple examples to illustrate each element

22.0 to >19.0 pts Proficient

Includes most of the main elements and requirements and cites many examples to illustrate each element

19.0 to >17.0 pts Emerging

Includes some of the main elements and requirements

17.0 to >0 pts Not Evident

Does not include any of the main elements and requirements

Inquiry and Analysis 20.0 to >17.0 pts Distinguished

Includes all of the main elements and requirements and cites multiple examples to

17.0 to >15.0 pts Proficient

Provides in-depth analysis that demonstrates complete understanding of

15.0 to >14.0 pts Emerging

Provides in-depth analysis that demonstrates complete understanding of

14.0 to >0 pts Not Evident

Does not provide in- depth analysis

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Total Points: 100.0

10.0 pts

20.0 pts

15.0 pts

10.0 pts

illustrate each element

some concepts minimal concepts

Integration and Application

10.0 to >8.0 pts Distinguished

All of the course concepts are correctly applied

8.0 to >7.0 pts Proficient

Most of the course concepts are correctly applied

7.0 to >6.0 pts Emerging

Some of the course concepts are correctly applied

6.0 to >0 pts Not Evident

Does not correctly apply any of the course concepts

Critical Thinking 20.0 to >14.0 pts Distinguished

Draws insightful conclusions that are thoroughly defended with evidence and examples

14.0 pts Not Evident

Does not draw logical conclusions

14.0 to >13.0 pts Proficient

Draws informed conclusions that are justified with evidence

13.0 to >0 pts Emerging

Draws logical conclusions, but does not defend with evidence

Research 15.0 to >14.0 pts Distinguished

Incorporates many scholarly resources effectively that reflect depth and breadth of research

14.0 to >11.0 pts Proficient

Incorporates some scholarly resources effectively that reflect depth and breadth of research

11.0 pts Emerging

Incorporates very few scholarly resources that reflect depth and breadth of research

11.0 to >0 pts Not Evident

Does not incorporate scholarly resources that reflect depth and breadth of research

Writing (Mechanics/Citations)

10.0 to >8.0 pts Distinguished

No errors related to organization, grammar and style, and citations

8.0 to >7.0 pts Proficient

Minor errors related to organization, grammar and style, and citations

7.0 pts Emerging

Some errors related to organization, grammar and style, and citations

7.0 to >0 pts Not Evident

Major errors related to organization, grammar and style, and citations

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