INSIGHT - How HP's board presided over a train wreck

SAN FRANCISCO Thu Sep 22, 2011 10:49pm IST

A woman walks past the Hewlett Packard logo at its French headquarters in Issy le Moulineaux, western Paris, in this September 16, 2005 file photograph. REUTERS/Charles Platiau/Files

A woman walks past the Hewlett Packard logo at its French headquarters in Issy le Moulineaux, western Paris, in this September 16, 2005 file photograph.

Credit: Reuters/Charles Platiau/Files

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SAN FRANCISCO (Reuters) - To fire one CEO, or even two, may be regarded as misfortune; to fire three looks like carelessness.

When Hewlett-Packard Co named Leo Apotheker as its chief executive last year, the majority of the board that hired him had not even met the German executive.

That HP's board would appoint a CEO without insisting on an in-person interview with all directors is just one example of what critics say is a pattern of dysfunction behind the meltdown of the technology giant, which traces its roots to the beginning of Silicon Valley itself.

The board is expected to name former eBay Inc CEO Meg Whitman to replace Apotheker later on Thursday.

It's easy to blame Apotheker, who has cut financial forecasts for three straight quarters, U-turned on key aspects of HP's strategic roadmap, and failed to stem a nearly 50 percent plunge in the company's stock price.

But HP's problems go back much further than Apotheker's 11-month tenure. Interviews with insiders, former executives and experts paint a picture of an ever-changing roster of board directors who lacked a good grasp of the company's fundamentals and vacillated over what its business should be.

Not only did the full board not meet Apotheker before he was hired, many directors also did not interview Silicon Valley venture capitalist and former software executive Ray Lane, who became HP's chairman at the same time, according to a person familiar with the situation.

The board left the interviews to a four-member search committee, the person said, and gave no indication that they understood the tremendous change in strategy it had put under way by choosing two software experts to head HP, the world's largest personal computer maker. Apotheker was previously CEO of German software company SAP AG, where he lasted seven months before resigning abruptly amid customer complaints over software support fee increases.

"The company seems to have lost its way. It is sort of trying to commit suicide," said Tom Perkins, co-founder of venture fund Kleiner Perkins and a former HP board member who was also the one-time head of HP's research unit. "How did this happen? This is the fault of the board."

The 14-member board will on Thursday wrap up a two-day meeting to try to correct some of its mistakes. It will decide whether to oust Apotheker and examine a host of other strategic issues, according to another source.

If he goes, Apotheker would become the third CEO in a row to be ousted at HP. His predecessor Mark Hurd left in scandal after a female contractor accused him of sexual harassment and a board-commissioned investigation found discrepancies in his expense reports. Before Hurd, Carly Fiorina was fired in 2005 in a spat with the board over how to run the company.

Then there was Patricia Dunn, chairman of HP before Hurd. She left after facing a criminal probe into authorizing private investigators to impersonate directors and reporters in an investigation into boardroom leaks. Perkins resigned in 2006 over that scandal.

"I was trying to think of another company that had tripped up that often in this many years and I found it impossible to come up with another example," said Paul Hodgson, senior research associate at corporate governance advisers GovernanceMetrics International.

Hodgson and other experts did point to the many new faces the board has seen, a revolving door that means only four of the 14 directors joined before 2009. Six new directors joined this year alone.

While fresh faces can turn around a company in trouble, in this case the board turnover may have contributed to the problems.

Institutional knowledge rests primarily with Ann Livermore, who was relieved of her executive duties by Apotheker and promoted to the board after she was passed over for the CEO job. Now she is deliberating the future of the man who beat her.

WHO TO BLAME?

HP's problems started to brew during the tumultuous reign of Fiorina, but the real flare-up came with Hurd's departure.

A buttoned down, numbers-oriented executive known for his financial rigor, Hurd mostly kept directors insulated from the operational complexities of the day-to-day running of the hardware company, sources said.

He reinvigorated HP to become the largest tech company by revenue after Fiorina's departure, and he was much favored by the board prior to the eruption of the sexual harassment allegation, even though some members were cowed by his hard edge, the sources said.

The messy public brawl in the wake of Hurd's departure last year set the tone of HP coverage for months.

Critics of Hurd say he is also to blame for HP's trouble today, arguing that R&D budget cuts stifled innovation. Chairman Lane told Reuters in July that Hurd "burned the furniture to please Wall Street."

While cost-cutting and streamlining HP's massive operations made Hurd popular with investors, Hurd also presided over some major acquisitions including 3COM for $2.7 billion and Palm for $1.2 billion.

In the ensuing chaos during and after Hurd's departure, Silicon Valley heavyweight Marc Andreessen emerged as a key influential voice on the board, sources said.

The board believed HP was in good shape financially and needed an executive who would keep the company running efficiently but bulk up its software business, they said.

Enter Apotheker, who was deemed to have the best resume among a three finalists, and Lane, whose candidacy for the chairman role also came through the same recruiting channels used for the CEO search.

The search committee of four directors Andreessen, Lawrence Babbio Jr., John Hammergren and Joel Hyatt, focused on finding a CEO and a chairman who could expand HP into new growing markets and beefing up areas where it was weak, like software.

Internal candidates were passed over, deemed not ready for the task.

STRATEGIC SHIFTS

The board rarely understood the strategic implications of the decisions it was constantly asked to make, sources said, adding that some members seemed to go along without much involvement.

"There were pockets of smart people asking smart questions. There were pockets of extremely dysfunctional behavior," said one former executive. "There were only a few board members who would get into details."

In retrospect the hiring of Apotheker and Lane seemed like a major strategic shift by a board making a calculated bet.

While Apotheker began to learn the company he was running, Lane presided over the exit of four directors after discussions with the board on what the chairman called "looking forward" after the "incredible decision to terminate its CEO."

Joel Hyatt, John Joyce, Robert Ryan, and Lucille Salhany stepped down voluntarily, Lane said at that time, adding that Hurd's departure had no impact on the decision.

But both Hyatt and Joyce were seen as staunch supporters of Hurd during the crisis, and Ryan and Salhany were in charge of the investigation into the sexual harassment allegation against Hurd, which vindicated him, sources said.

Whitman and three others joined the board, but failed to stem the flow of bad news or concoct a clear strategy. The board is now considering appointing Whitman interim CEO.

"Our conversations with shareholders and investors over the past month revealed a level of exasperation that we have not seen directed at HP or any other company in our universe in our 13 years following the sector," Toni Sacconaghi, an analyst with Sanford Bernstein, wrote in a note published on Thursday.

"The potential sudden removal of Apotheker as CEO - and the fact that such Board discussions were once again leaked to the press - are likely to further undermine the Board's already fragile credibility."

BUNGLES CONTINUE

In recent months, HP has launched, killed, and then decided to bring back its TouchPad tablet. It also said it was considering spinning off the personal computer business - then followed by saying it may also consider keeping it.

And after facing criticism that it paid too much for a data storage company called 3PAR, HP decided to pay nearly $12 billion to buy software firm Autonomy, a 60 percent premium over its average stock price the previous month.

"The board was a big part of this," another person familiar with the situation said, referring to the software deal. As for the PC business? "They are trying to figure out whether they should or shouldn't. Leo said that himself - maybe they do, maybe they don't," that person said.

Recently, Lane abandoned his effort to keep the board quiet and in the background. Last week, he took the CEO's place at an industry conference to defend HP's change in strategy and try to clear the confusion that followed in the market.

So far it hasn't worked. Whatever vision it has, the board has not communicated it.

HP has declined so far to address Wednesday's reports that its board was considering replacing Apotheker. The company also had no immediate comment when contacted by Reuters for this story. Emails to Lane were not returned. Hurd declined through a representative to comment, as did Fiorina.

"Part of the problem here is communication. No one knows anything (among investors)," the person familiar with the Autonomy situation said.

The announcement of Apotheker's hiring last year gave no clue to what strategy would be. His speech in March didn't help: the CEO explained that HP was moving into 'the cloud,' which means basing computing services on the Web.

Many senior-level executives did not see the path to achieving that goal.

COMMUNICATIONS MELTDOWN

During his first few months at HP, Apotheker was more interested in holding long-term strategic conversations with his management team and preferred to leave the intricacies of running HP's various businesses and the financials behind them to other executives, one of the sources said.

Communication was another issue.

"It seems as though everything is being done a little bit on the seat of their pants," said the former HP executive.

The most telling example of a communications bungle - before Wednesday - was on Aug. 18.

In a rapid-fire series of announcements, HP disclosed acquisition talks with Autonomy; confirmed a deal had been done; said it was considering spinning off its PC business; announced quarterly results that missed forecasts; and said it was killing the TouchPad.

The day after the series of announcements, HP shares nose-dived 20 percent, wiping out $16 billion of value in the worst single-day fall since the Black Monday stock market crash of October 1987.

"There are boards out there that have made mistakes but they've generally learned from them, eventually. Maybe replacing the board all the time is not the thing to do," said Hodgson of GovernanceMetrics International.

He said he would have expected a board of such caliber to avoid so many mistakes.

"It doesn't seem to be the case, and it's difficult to come up with an explanation," he said.

(Reporting by Poornima Gupta and Peter Henderson in San Francisco, additional reporting by Ben Berkowitz in New York, editing by Tiffany Wu and Claudia Parsons)

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