Friday, September 15, 2006

The Problem at HP Wasn't Dunn, but the Board

HP has been in the news for all the wrong reasons in the past 3 weeks. Our focus has gone away from the impressive rise in its stock price since Mark Hurd's appointment as CEO; as quickly as Dell's stock price and corporate reputation has dropped, HP's has risen.

We've previously spoken out on how Hurd's qualities as a leader have -- in many ways -- been the perfect antidote to the erstwhile Carly regime. And, yet, we've had to endure the titilating but disturbing news of the "pretexting" actions carried out down the line from the board's decision to purge a "leak" from within their midst.

The mainstream press commentary on this whole sorry episode has focused primarily on either (1) the disregard for privacy exhibited by the board's actions, (2) whether Dunn should have left sooner, or (3) the lack of a full apology by the board or Hurd to the events. However, little, if any, attention has been paid to the composition of the HP board itself -- the entire group responsible for the actions that have drawn such criticism.

The fact is that the entire HP board deserves an overhaul after this mess. Nell Minow -- corporate goverance critic -- calls the board "dysfunctional" and she's right.

Here's a quick run-down of the players (from HP's site):

Lawrence T. Babbio, Jr.

Director since 2002Mr. Babbio has served since 2000 as vice chairman and president of Verizon Communications, Inc. (formerly Bell Atlantic Corporation). Mr. Babbio was a director of Compaq from 1995 until its merger with HP in May 2002. Mr. Babbio is also a director of ARAMARK Corporation. In 1997, he was elected president and chief operating officer of Network Group and chairman of Global Wireless Group of Bell Atlantic.

Sari M. Baldauf

Director since 2006Ms. Baldauf served as Executive Vice President and General Manager of the Networks business group of Nokia Corporation ("Nokia"), a communications company, from July 1998 until February 2005. She previously held various positions at Nokia since 1983. Ms. Baldauf also serves as a director at SanomaWSOY, F-Secure, the Savonlinna Opera Festival and on the Global Board of the International Youth Foundation.

Patricia C. Dunn

Director since 1998Ms. Dunn was named non-executive chairman of the board of directors of HP in February 2005. A member of HP's board since 1998, she previously served as chairman of the audit committee. Ms. Dunn was elected vice chairman of Barclays Global Investors (BGI) in 2002 and served as its co-chairman, chairman and chief executive officer from 1995 through 2002. As CEO of BGI, she directed its growth into new global markets for the firm's core investment capabilities and expanding its offerings into new product categories. Ms. Dunn advises on strategy and key business issues for BGI. She joined the firm's predecessor organization, Wells Fargo Investment Advisors, in 1978. She also serves on the advisory board of the UC Berkeley Haas School of Business, as well as the conference board's Center for Corporate Governance, and serves as the director and a member of the executive committee of Larkin Street Youth Services in San Francisco.

Richard A. Hackborn

Director since 1992Mr. Hackborn served as HP's chairman of the board of directors from January 2000 to September 2000. Prior to retiring from HP in 1993 after 33 years of service, he held several top management positions at the company. From 1990 until his retirement, he was responsible for HP's PC and personal information product business. His leadership and design engineer background resulted in the integration of HP's early minicomputer and high-frequency test instrumentation businesses. In 1979, Mr. Hackborn served as general manager and then vice president of the printing business, where he was responsible for the development of key HP printing technologies, such as inkjet and laser printing, and for the design and manufacture of non-impact print technologies.

John H. Hammergren

Director since 2005Mr. Hammergren has served as Chairman of McKesson Corporation since July 2002 and President and Chief Executive Officer since April 2001. From July 1999 to April 2001, Mr. Hammergren served as Co-President and Co- Chief Executive Officer.

Mark V. Hurd

Director since 2005Mr. Hurd became chief executive officer and president of HP, and joined HP’s board of directors, effective April 1, 2005. Mr. Hurd served as chief executive officer of NCR Corp. from March 2003 to March 2005, and as president from July 2001 to March 2005. From September 2002 to March 2003, Mr. Hurd was the chief operating officer of NCR, and from July 2000 until March 2003, he was chief operating officer of NCR’s Teradata data-warehousing division. Mr. Hurd also served as executive vice president of NCR from July 2000 through July 2001.

Robert L. Ryan

Director since 2004Mr. Ryan served as senior vice president and chief financial officer of Medtronic, Inc., a medical technology company, from 1993 until his retirement in May 2005. He is a director of UnitedHealth Group.

Lucille S. Salhany

Director since 2002Ms. Salhany founded JHMedia, a consulting company, and has served as its president and chief executive officer from 1997 to 1999 and again since 2002. Ms. Salhany has consulted for such clients as Macy's, NASA and Chris-Craft Industries. From 1999 to 2002, she was president and chief executive officer of LifeFX Networks, Inc. Ms. Salhany was a director of Compaq from 1997 until its merger with HP in 2002. She is also a director of Boston Restaurant Associates and a trustee of The Hillside School and Emerson College.

Robert P. Wayman

Director since 2005Mr. Wayman has served as chief financial officer of HP since 1984 and as executive vice president since 1992. Mr. Wayman served as interim chief executive officer from February 2005 through March 2005, and re-joined HP's board of directors in February 2005. Mr. Wayman had previously served on HP's board from 1993 to 2002. Mr. Wayman is a director of CNF Inc. and Sybase Inc. He also serves as a member of the Kellogg Advisory Board to the Northwestern University School of Business.


Here are some facts about the board today. 33% of the Directors today have career IT/PS experience - 3 of 9. However, all 3 of these people are HP "Insiders" - Hackborn and Wayman used to work for HP and Hurd is, of course, now Chair, CEO, and President. I have nothing against insiders serving on the board, but it would be ideal to have some other points of view on the board from the industry but outside the HP "way." While McKesson, Medtronic, and Verizon are big companies, can the growth strategies from these very different industries be applied within HP's portfolio of industries?

There are 2 former directors from Compaq on HP's board: Ms. Salhany and Mr. Babbio. But, they cannot give industry advice. Being a director is not being an operator and vice-versa; I will trade a boatload of "independent" directors (no matter their pedigree) for a handful of directors who are former operators from successful companies within the same industry any day of the week. The role of directors is to monitor and advise management, but how can you effectively do this if you don't "know" the industry?

And HP is dead wrong to give Mark Hurd the "Chairman" title. Pattie Dunn correctly was dismissed for her role in the scandal, but she served an important role on this board as a "non-executive chair." HP sought to provide a counter-balance to Hurd's new power on the board with his additional title by naming Dick Hackborn as "designated lead independent director."

Dick has been a director with HP since 1992. However, he was the strongest voice who pushed the board to appoint Carly Fiorina as CEO in late 1998. George Anders chronicles Hackborn's choice of Carly in his 2003 book "The Carly Chronicles." Here's a particularly interesting passage from Fast Company:

...Fiorina emerged as one of four finalists for the job. The crucial interview would be with Richard Hackborn, a key director and retired HP executive who had built the company's enormously successful printer business. They met at Chicago's O'Hare Airport, at a restaurant decorated like an imitation speak-easy. Within minutes, they were talking about HP more bluntly and more affectionately than either had expected.

Hackborn guided Fiorina through HP's business challenges that needed fixing: The personal-computing division was acting as if fast-charging rival Dell Computer Corp. didn't exist. The sales force was tripping over itself. The company was losing ground to younger rivals, such as Dell, Lexmark, and Sun Microsystems, which irked Hackborn greatly. "We're in danger of losing everything that made this company great," he said. Fiorina listened carefully and explained her work at Lucent, where she had built an industry-leading sales force. She had come to the lunch regarding Hackborn as the company's Yoda: the elder figure of supreme respect and the true decision maker in the search for HP's new CEO.

Several hours into the meeting, Fiorina began speculating about who should be chairman if she became CEO. She wanted some wise-uncle support early on. Departing CEO Platt had signaled his desire to remain chairman, and she thought he could help. But she quickly realized that Hackborn didn't like that idea. At that moment, an idea popped into her mind. Looking at Hackborn, other people might have seen a wrinkled retiree with sunken eyes and white hair. She saw something different: a special counselor. Rather than get tangled up in a Platt conversation, she looked at Hackborn and said, "Actually, Dick, I think you ought to be chairman."

The idea startled Hackborn. He had been seeking to wind down his commitments to HP. But as he and Fiorina continued talking, he warmed to the idea. When their meeting ended and Fiorina headed toward her plane, she told herself, "I've got him hooked!"

Soon afterward, Hackborn briefed the entire HP board on his chat with Fiorina. "I could see he was dazzled by her," fellow director Patricia C. Dunn recalls. "He was really excited about her vision for the company. She had a feel for the company's strengths and weaknesses. It corresponded with his feel." Hackborn expressed mild concern about Fiorina's lack of a technical background, but that wasn't a top-priority worry for him. "We may be getting one of the top two or three CEOs of our generation," Hackborn declared. "She could be the next Jack Welch."

And, so it goes. Carly's gone, Tom Perkins is gone, George Keyworth is gone, Pattie's going (in January), Mark's getting a promotion, and Dick will assume an elevated role within the board. Would this board still be in tact if HPQ's stock had not jumped 75% since the dawn of Hurd? It doesn't deserve to be, no matter the current success the organization is enjoying. HP's shareholders deserve better.

On the day it was announced that the board would be reshuffled, Tom Perkins -- who has been a strong voice in the HP boardroom, up until he resigned over the "pretexting" earlier this year -- said: "This too shall pass." Alas, Tom, I fear it will; and, in 5 years, HP's board will not be all that different from how it looks today.

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