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Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Thursday, September 22, 2011

Dysfunctional Boards: Hewlett-Packard Again!

Hewlett-Packard is in the news again, with reports that the board was meeting to fire its CEO Leo Apotheker only 11 months after firing Mark Hurd.  If that isn't newsworthy enough, James Stewart, columnist of the New York Times, has a bombshell -- when the board's search committee narrowed the CEO candidates to three, no one else on the board was willing to interview the candidates!  According to Stewart's sources, not one of the directors met Apotheker before he was hired! "I admit it was highly unusual.  But we were just too exhausted from all the infighting,"  one of those directors told Mr. Stewart. (NYTimes, Voting to Hire a Chief Without Meeting Him)

Several years ago, I presented a Symposium on Dysfunctional Boards, and my inspiration was Hewlett-Packard.  As you will recall, the scandal at that time involved allegations that the board authorized "pretexting" to obtain personal phone records as well as other unethical and possibly illegal methods of obtaining information about a possible leak within the board room.  (In my introduction[Download INTRODUCTION - Publication Proof] to the Symposium, I discuss the allegations in greater detail.) At that time, I thought that H-P presented a "cautionary tale of the damage caused by distrust and dissension within the boardroom."

And sadly it appears that the H-P board learned nothing from its prior experience.  Besides spying on fellow directors and failing to fulfill their responsibilities in appointing a CEO, the directors' conduct illustrates another serious symptom of dysfunctionality -- the apparent failure of these directors to understand the importance of confidentiality.  The board's authorization of pretexting resulted from intense pressure to uncover the source of serious leaks to the press.  The Wall St. Journal had reported details about a board retreat that could only have come from a participant.  Similarly, Stewart says his information comes from interviews with several current and former directors and other people closely involved in the CEO search.  What good do they think will come of blabbing?  As I wrote previously about the H-P board:

All H-P directors and officers are subject to the company's Standards of Business Conduct that require prior approval before granting interviews or providing comments to the press.  Moreover, even if a director sincerely believes that management's policies are misguided, the solution is not to leak confidential information to the press; instead, the director should work to change management's policies.  What confluence of events caused at least one HP director to breach his obligation to maintain the confidentiality of corporate information?

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