Tuesday, October 12, 2010

The Problem With Hewlett-Packard's Board

"May I have your attention please?
Will the real Slim Shady please stand up?
I repeat, will the real Slim Shady please stand up?
We're gonna have a problem here.."
- Eminem

Last week, I said that investors should give new Hewlett-Packard (HPQ - commentary - Trade Now) CEO Leo Apotheker a chance. I stand by that statement. But one group that doesn't deserve a second chance is the company's board of directors.

Within the past few weeks, Hewlett-Packard's board has been criticized by Oracle (ORCL -commentary - Trade Now) CEO Larry Ellison, former General Electric (GE - commentary -Trade Now) CEO Jack Welch and New York Times columnist Joe Nocera. On Friday, Ben Horowitz responded to the critics with a long blog post. Who is Ben Horowitz? He started a company called Loudcloud a couple of years ago with Marc Andreessen of Netscape fame. They later sold this start-up to Hewlett-Packard for $1.6 billion. Horowitz is now partners with Andreessen in an early-stage venture capitalist firm. Andreessen is now on Hewlett-Packard's board and played a central role in removing Mark Hurd and hiring Leo Apotheker.

Half of Horowitz's blog post is spot-on. He goes after critics who have said that the company's board was wrong to fire Mark Hurd for the small infraction of fudging expense reports and lusting after some staffer. Horowitz rightly points out: If you don't fire a CEO for lying about expenses, where do you draw the line?

If Horowitz had left his article at pointing out how silly it is for critics of Hewlett-Packard's board to mock the group for firing Hurd, it would have been fine. So what if he's clearly sticking up for his buddy Andreessen? So what if he's probably sold all his stock in the company and therefore has no skin-in-the-game basis for making this argument? I'd give him a pass, slap him on the back and say Ellison and Welch are clearly wrong on this (although I'd guess Ellison doesn't care given what Hurd's hiring has done for Oracle's stock price).

But Horowtiz didn't stop there. He goes on to pat the board on the back for being ethical, far-sighted and doing what's right for the hard-working men and women at Hewlett-Packard, because Horowitz got to know them so well from doing his time there (the way parolees have to do community service) for a couple of years as a condition of him getting his share of $1.6 billion. (I'm sure Ben really thinks he gets the struggles of the working men and women at the company from his long and protracted tenure.)

It was reading this second half of his blog post that made me immediately want to write this response. Horowitz would do well to remember that Hewlett-Packard's board is a badly governed board, which, in the case of firing Mark Hurd, made a good decision (for the reasons he spells out) but is still one of the most truly awful boards in large-cap corporate America.

Were the "ethical" directors doing right by the employees when they approved a plan to unilaterally cut all workers' pay by 5% a couple of years ago and committed that the senior executives would cut their own base salary by 10% but then doubled the total compensation (and perks) for Mark Hurd, Ann Livermore, Todd Bradley and other senior execs? Was that taking the long view?

And don't try to suggest that the board only knew about Hurd's shenanigans with this woman this past summer.

According to Hewlett-Packard, the board fired Hurd after it hired outside counsel to investigate claims of sexual misconduct. It was during the course of the investigation that the problematic expenses were uncovered that led to the firing. Yet, the company's originally filed 2008 proxy statement (which the board approved, so they either knew about it or were completely asleep when they rubber-stamped it) said that Mark Hurd charged almost $300,000 to shareholders that year for "personal meals" plus an additional $70,000 in tax gross-ups. Hmmm. Did the audit committee really think that Hurd (or even Hurd and his wife) could rack up that much in personal food expenses in a year? Even if they did, why the hell were Hewlett-Packard's shareholders paying for it? Either the members of the audit committee knew about what was going on with Hurd back then and chose to do nothing because (let's face it) Hurd was a popular CEO on Wall Street, or they were completely incompetent at their jobs of making sure all expenses are reasonable and legitimate, especially during a year of turning the screws on remaining employees with a 10% forced pay cut.

It was only after Michelle Leder of Footnoted and I complained publicly about these expenses, that Hewlett-Packard magically edited and refiled its proxy, claiming that the expenses were a clerical error.

Let me tell you, no SEC filing from a large company like Hewlett-Packard gets filed without about 15 levels of lawyers touching it first. There is never a mistake in a filing. Everything is there that's meant to be there. My belief is that this board knew stuff was going on a full two years ago -- that, at the least, warranted further investigation. Yet, they didn't act.

So don't even try to hold this board up as these thoughtful wise men doing right by shareholders.

This is a board in which no one seems to own any stock that they purchased out of their own pockets. They all have token shares that they received from options or grants. It's found money for them. If Hewlett-Packard's stock goes up, great; if it tanks (like it has since Hurd left), what do the directors care? It's not their money they lost.

Marc Andreessen (Horowitz's buddy) owns zero shares in Hewlett-Packard. Even after he sold his company to Hewlett-Packard for $1.6 billion in cash and stock a few years ago, he sold all his Hewlett-Packard shares. Even after being asked to join the board, he couldn't find the time to buy a few shares for himself. This is a guy who (conservatively) has a net worth over $1 billion. And he can't buy a few lousy shares? This is shameful. And it's not going to stop until Hewlett-Packard's shareholders (of which I am one, by the way) stand up and start screaming bloody murder.

Don't forget that this is a board with Ken Thompson sitting on it, the former CEO of Wachovia who killed his company and will never be able to work in financial services again because of it.

Hey, members of Hewlett-Packard's nominating committee, I hear that Jeff Skilling of Enron got a bad rap and deserves a second shot at being a director. Pay no mind to the fact that he's in jail. Or what about Chuck Prince or Angelo Mozillo or Dick Fuld or Stan O'Neal? So what if they all destroyed their companies? Those were all flukes. There aren't that many qualified directors around. Let's fill the board with such guys. The hard-working employees deserve these paragons of virtue representing their interests on the board. Thanks for taking such a long view for shareholders by nominating the guy who bought Golden West Financial and its mountain of California subprime mortgages for $26 billion.

I am sure that the hard-working Hewlett-Packard employees would feel much more comfortable about their board if each director committed to investing 5% of his/her net worth in open-market Hewlett-Packard stock purchases. If they believe Leo's the guy to take the company forward, great. Let's see them put their money where their mouth is.

I'm sure Horowitz supports his friend. But, next time, Ben, don't try to defend a truly awful board. Investors need investors representing their interests on the board. They don't need impartial rubber-stampers.

At the time of publication, Eric Jackson was long Hewlett-Packard.


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