At H.P., Governance Trumps Gossip - Commentary by Jeffrey Sonnenfeld

At H.P., Governance Trumps Gossip
By Jeffrey Sonnenfeld
Published August 26, 2010, on the New York Times DealBook Blog 
Read the article in its original context on the New York Times website.

The legendary movie mogul Samuel Goldwyn once complained about a bland film script this way: "We want a story that starts out with an earthquake and works its way up to a climax." Some disappointed critics of Hewlett-Packard are similarly seeking escalating drama, revealing their concerns about frustrated gossip rather than frustrated governance. As a past critic of the old H.P. board, I salute this largely new board for getting it just right.

The H.P. board, with noteworthy courage, has emphasized long-term enterprise principles over short-term business performance. This is how great enterprises are built to last. The H.P. sequel may not be steamy potboiler, but it is a welcomed model of board governance after a steamy season of costly corporate cowardice elsewhere.

Shareholders suffered disappointing apathy from the boards of shattered companies as they rallied behind weakened leaders. This summer, the BP board seemed paralyzed as its overwhelmed chief executive, Tony Hayward, compounded tragic decisions about the Gulf of Mexico oil disaster with credibility-destroying communications. This followed years of the BP board’s circling the wagons around his scandal-plagued predecessor, John Browne.

H.P. was not BP. Instead of denying bad news through gauzy misleading public relations, H.P.’s directors promptly conducted an independent investigation, ensured due process and then made a painful decision to dismiss Mark V. Hurd, a highly successful chief executive who had increased shareholder wealth by 112 percent but who lost their trust. The minimal legal severance was paid with accumulated earned stock, but no accelerated vesting was offered, as other boards have done.

H.P. appointed its highly regarded chief financial officer, Cathie Lesjak, as its interim chief executive, and she enhanced her own independence by denying her candidacy for the permanent spot. Another great legacy of Mr. Hurd is H.P.’s exceptionally strong executive bench strength. Many hope that the H.P. board, like those at Intel, General Electric, DuPont and U.P.S., will fortify morale and cultural values by considering highly respected insiders for chief executive; top candidates may include Todd Bradley, Vyomesh Joshi, Ann Livermore and Shane Robison. A prominent outside search firm has also been brought in to guide H.P.’s board. These are all the right steps.

Thus, the hot tabloid-like headlines on Mr. Hurd’s exit have cooled into routine legal severance and a standard leadership succession process. Mr. Hurd is a talented leader with much to offer whose career need not be over. He can learn from this incident and easily rebound.

Still, as H.P. and Mr. Hurd move on to new but separate paths, some techies of Silicon Valley grasp for prurient details.

For example, ignoring H.P.’s just-announced strong third-quarter earnings across its businesses, Chris O’Brien, a columnist for The San Jose Mercury News, complained on Friday that "we still do not know the full story" about Mr. Hurd’s departure, adding that H.P.’s "only responsible option is to disclose the full truth so investors, employees and customers can judge how the board handled this situation."

Relishing the plot details that investors need to know about the personal relationship between Mr. Hurd and a controversial contractor, Jodie Fisher, Mr. O’Brien states:

There are certainly other questions we’d love to know the answers to ("Did they have sex?" "Did Hurd harass her?") … What was the nature of Hurd’s relationship with Fisher? The other supposed misdeeds stem from this one key issue. All sides say there was no sex and no affair.

H.P. has disclosed that Mr. Hurd failed to disclose a "close personal relationship" with a contractor, indicating a potential conflict; that there were numerous instances in which the contractor, Ms. Fisher, was paid when there was no legitimate business reason; and that misleading expense reports had been submitted to conceal the relationship with Ms. Fisher. "The board concluded Mark’s conduct demonstrated a profound lack of judgment," Michael J. Holston, H.P.’s general counsel said.

Similarly, Mr. Hurd himself acknowledged, "I realized there were instances in which I did not live up to standard and principles of trust, respect and integrity that I have espoused at H.P." If the boss does not live by his own standards, he cannot enforce them for others. If Mr. Hurd would have fired anyone else for such transgressions, he knew he had to step down. Nonetheless Mr. O’Brien complains, "Hurd has not specified what — if anything — he did actually did wrong."

If all sides agree that Mr. Hurd has lost his legitimacy to lead, what then is the moral outrage or the vital material information denied investors? Investors are not clergy evaluating confessions or schoolteachers demanding statements of contrition on the blackboard.

In an e-mail to the New York Times soon after Mr. Hurd’s ouster, Oracle’s founder and chief executive, Lawrence J. Ellison, argued that Mr. Hurd’s termination "was the worst personnel decision since the idiots on the Apple board fired Steve Jobs," the company’s visionary founder. Yes, other boards have fired chief executives recklessly under the guise of good governance.

In particular, widespread regret followed the startling ouster of such strong leaders as Mickey Drexler of the Gap, Chris Galvin of Motorola, David Neeleman of Jet Blue, Bill Perez of Nike, Nick Nicholas of Time Warner and Jim Donald of Starbucks.

A more appropriate target for Mr. Ellison, however, is the chief executive succession drama, a week after H.P.’s news, at General Motors. Last year, under government pressure, the G.M. board finally removed its troubled chief executive, Rick Wagoner, after letting him whither on the vine a decade too long. His successor, Fritz Henderson, led the automaker quickly through bankruptcy, but he was inexplicably removed from office nine months later and replaced with Edward E. Whitacre Jr., a retired telecommunications chief and an eager G.M. board member.

Mr. Whitacre energized vital customer constituencies with ebullient ad campaigns and public appearances fusing G.M.’s recovery with his personal identity. Then he too inexplicably resigned — soon after waving off any immediate succession agenda. He stepped down just days before G.M.’s filing for an historic initial public officer and was replaced with another former telecommunications chief executive and board member with no search process. Now here is an untold board mystery drama, unlike the H.P. situation, begging for Hollywood attention.

Jeffrey Sonnenfeld is senior associate dean for executive programs at the Yale School of Management and the Lester Crown Professor in the Practice of Management, as well as an author of “Firing Back: How Great Leaders Rebound from Adversity.”

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