Corner Office-Pitfalls of a “Hurd” Mentality

Corner Office-Pitfalls of a “Hurd” Mentality

Lessons in corporate governance from Hewlett-Packard.

Since the nature of writing a magazine column means I’m typing these words a month before they are published, it’s usually my practice to avoid commenting on dynamic current events. But in these days of criticism of boards of directors that have run amuck, this is one opportunity I can’t let slip by: the lessons in corporate governance we can glean from Hewlett-Packard’s board of directors and the resignation of the company’s chairman, CEO, and president, Mark Hurd.

The HP board’s actions and Hurd’s resignation on August 6 present us with an opportunity to examine our bottom-line beliefs about the role of a CEO. Is his or her job to create value for shareholders? Or is it to be the ethical leader of the company? Or can it be both?

 

“Worst Personnel Decision”?

For those of you who haven’t followed this saga, Mark Hurd, one of the most respected and eminent leaders in Silicon Valley, was forced to resign from HP, the world’s largest computer manufacturer, as a result of a sexual harassment allegation brought against him.

Although the board’s probe into the lawsuit did not find any evidence of sexual harassment, the investigation discovered that Hurd had falsified up to $20,000 in travel and restaurant expenses during his relationship with Jodie Fisher, a marketing contractor who’d once been a reality show contestant and an actress (including in adult movies).

This finding caused the board to lose confidence in Hurd because his integrity became questionable. The board pressured him to resign—while also granting him a severance package of $12.2 million in cash plus vested options and restricted stock, for an estimated total of $34.6 million. A bit excessive for someone forced to resign for cheating the company, don’t you think?

News of Hurd’s resignation swiftly resulted in a firestorm of controversy, and HP’s stock tumbled to 52-week lows. Opinions on the matter ranged widely. A shareholder suit charged that the board had violated its fiduciary responsibilities in its handling of the matter and sought to reclaim the big severance paid to Hurd. In contrast, a scathing letter released around the world by Larry Ellison, head of Oracle and a fellow Silicon Valley icon, described the board’s decision as “the worst personnel decision since the idiots on the Apple board fired Steve Jobs many years ago.”

It’s Just Business

Some think that while $20,000 of expenses is a substantial amount of money to be spent on the entertainment of a “friend,” when compared with Hurd’s compensation ($24 million in 2009, according to the New York Times), or the financial benefit that the company has achieved from his leadership, it’s just peanuts.

They point to the fact that under the leadership of this capable executive during the past five years, the company has made some important acquisitions and slimmed its work force by 40,000. These moves helped the company transform itself from a basic computer and printer maker to a well-diversified technology giant with a huge product portfolio of hardware and business solutions, well positioned for a successful future.

Business leaders such as Ellison (a close friend of Hurd) point to Hurd’s track record of visionary strategic leadership that brought HP back to its finest days since founders William Hewlett and David Packard were at the helm. It’s irrefutable that since Hurd became CEO, HP has climbed to the top of global desktop and laptop computer sales rankings, while growing its share of the inkjet and laser printer market to about 50 percent. HP’s stock hit 52-week highs in April 2010, and analyst and shareholder confidence was the strongest it had been in many years.

For those in the camp believing that the CEO’s primary responsibility is to improve shareholder value, Hurd was a golden boy and should not have been forced to resign. A case of sexual harassment that was found to be without merit (and later was settled between Hurd and Fisher privately) and the relatively small amount of mishandled expenses should not have been enough to get rid of a very capable CEO. In other words, Hurd’s relationship with Fisher was a personal affair that should have been kept that way. The punishment did not fit the crime.

 

But What About Ethics?

However, others are of the opinion that when the board of directors loses confidence in its CEO because of unethical behavior, a change has to be made. I’ll give you a nanosecond to guess which side I’m on . . . . Okay, keep reading.

I side with Netscape founder Marc Andreessen, who joined HP’s board in 2009 and who was the public spokesperson during these events. In an interview with CNBC’s Maria Bartiromo, he said that “there was a fundamental conflict of interest . . . and there were issues with expenses that had the effect of essentially obscuring the personal relationship, and the other aspects of it made our decisions very, very clear.” Andreessen added that “this company has to have a CEO who is able to stand in front of the employees and live up to the values and standards of the organization.” According to Andreessen, the board’s decision to force the resignation was unanimous.

The irony is that HP’s board consists largely of directors that Hurd recruited; seven of the 10 current directors have joined the board in the last five years. But when confronted with the situation, Hurd had to agree with them that he was no longer an effective leader of HP. He said that he realized there were instances “in which I did not live up to the standards and principles of trust, respect, and integrity that I have espoused at HP and which have guided me throughout my career.” When faced with the facts, he had to follow his board and his conscience.

 

Why Can’t It Be Both?

These events highlight a herd (or Hurd?) mentality which asserts that the forced resignation of a very capable and popular CEO over a “personal” matter is detrimental to shareholder value. People like Ellison want to debate and parse words as to the degree to which someone has breached ethical behavior and integrity. But if someone robs a bank and gets only $100 instead of $1 million, he’s still a thief and a criminal.

The HP board’s actions demonstrate that the herd mentality of believing that the CEO’s single most important responsibility is to improve shareholder value has given way to a more wholesome definition of leadership and success, one that includes ethics, honesty, and integrity.

American business leaders, shareholders, and investors should all come around to believe that shareholder value and ethical leadership go hand in hand. In fact, both are vital for the long-term viability of the American economy and the businesses that serve customers, produce goods and services, and employ our citizens.

William Hewlett and David Packard are credited for creating a world-class organization operated by employees who follow the values set forth in “the HP way.” As Packard once said, “I think many people assume, wrongly, that a company exists to make money. While this is an important result of a company’s existence, we have to go deeper to find our real reason for being; a group of people get together and exist as an institution that we call a company to do something worthwhile and make a contribution to society.”

I applaud the HP board for adhering to the HP way and not sweeping Hurd’s unethical behavior under the rug, despite significant pressure to do so. It’s this ethical leadership and governance philosophy that guided HP to become a great company, and will result in a strong HP for many years to come. And it’s this leadership and governance philosophy that should be a model for all leaders and boards to follow.

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