Ouster of HP’s Hurd: A Shot Across the Bow of Overpaid Cost Cutters?

The sudden departure of HP’s CEO Mark Hurd didn’t add up. Ethical lapses by CEOs demonstrating at least adequate performance get buried unless unfavorable media coverage won’t go away, or the internal damage is so great that his authority is impaired. Neither seemed to be the case with Hurd.

I hadn’t given the Hurd case much thought, and Joe Nocera has offered a persuasive two factor explanation. First was that the board had been put off by Hurd’s conduct in HP’s pretexting scandal of 2006 and was waiting for an opportunity to retaliate, made sense. Then the company, keen to stop leaks that appeared to originate with the board, hired consultants who then hired private detectives who engaged in impersonation to obtain phone records. Congressional investigations and state and Federal indictments followed, with the most visible casualties being HP chairman Patricia Dunn and its general counsel, Ann Baskin. However, Hurd was deeply involved in the pursuit of the leakers, and accelerated Dunn’s departure by threatening to quit if she didn’t leave (one must assume to make sure the bad PR stayed focused on her).

So per Nocera, the board saw at close range that Hurd was a viper in their midst, and they were on the lookout for a reason to be rid of him. And it appears he provided one, and it was more fundamental than expense violations. From the New York Times:

The consensus in Silicon Valley is that Mr. Hurd was despised at H.P…..“He was a cost-cutter who indulged himself,” was one description I heard. His combined compensation for just his last two years was more than $72 million — a number that absolutely outraged employees since their jobs were the ones being cut.

Rob Enderle, a well-known technology consultant, noted that in recent internal surveys, nearly two-thirds of H.P. employees said they would leave if they got an offer from another company — a staggering number. ….

Charles House, a former longtime H.P. engineer who now runs a research program at Stanford University, openly rejoiced when he heard that Mr. Hurd was leaving….As Mr. House saw it — indeed, as many H.P. old-timers saw it — Mr. Hurd was systematically destroying what had always made H.P. great. The way H.P. made its numbers, Mr. House said, was not just cutting any old costs, but by “chopping R.&D.,” which had always been sacred at H.P. The research and development budget used to be 9 percent of revenue, Mr. House told me; now it was closer to 2 percent. “In the personal computer group, it is seven-tenths of 1 percent,” he added. “That’s why H.P. had no response to the iPad.”

Mr. House was also offended by Mr. Hurd’s dictum that H.P. executives had to resign from all civic boards, as well as his decision to cut off many of H.P.’s philanthropic activities. “H.P. has always been a model corporate citizen,” Mr. House said.

Yves here. Nocera points out that the board didn’t want to cross Wall Street, since Hurd was delivering its vaunted numbers. But Gordon Smith at Conglomerate, along with others, criticizes the board for cowardice:

Apparently, the board was unwilling to make that case to its investors and the public, so they exaggerated his expense manipulation and paid him a bundle of cash to go away.

This isn’t the way the corporate governance system is supposed to work. The board is supposed to supervise the officers, make judgments about their performance, and act on those judgments. Traditionally, boards have not done this very well, often, we are told, because they are beholden to the CEO or because they just don’t care enough. The HP directors didn’t suffer from either of those shortcomings, and, to their credit, the directors acted. But if Nocera is right, their unwillingness to be forthright about the reasons for their action deprives us of an object lesson in good corporate governance and creates questions about their ability to lead the company in the future.

I’m a teeny bit more hopeful. The HP case admittedly presents special circumstances, a common executive failing (delivering short term results by consuming a company’s seed corn) in combination with a board unusually willing to look past his PR. And even though for the most part, the media is dutifully replaying the party line on why Hurd left, the real reasons are likely very well understood in the comparatively small circle of people who sit on large company boards.

Originally appeared at naked capitalism and reproduced here with the author’s permission.