HP: Hewlett Packard's Corporate Governance Woes - 4

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Dunn and Perkins Butt Heads Over the Investigation Findings

Patricia Dunn, HP Chair, 2005-06

In her written testimony for the US Senate Hearing, Dunn states Perkins began to pressure her to deal with the findings of the investigation privately and not before the whole board. He suggested that if and when the identity of the leaker was discovered, the two of them should privately seek a confession from the leaker, obtain a promise never to do it again, and not bring the matter before the whole board expect to say that the leaker had confessed, the investigation was closed and the matter was behind them. She goes on to state that the legal advice she received was that the full board should have the opportunity to deliberate on the investigation's findings and determine proper course of action. Nevertheless, in what followed, Perkins said Dunn and he had an agreement on how to handle the matter privately and that Dunn "betrayed him."

Keyworth Exposed at an Acrimonious Board Meeting But Declines to Resign

Dr. George Keyworth, former HP director The investigative team presented its report for submission to the board at its meeting on May 18, 2006. The report concluded that the source of the leaks was Keyworth. Dr. Keyworth was asked to leave the room while the board deliberated the findings. The meeting was chaired by a Mr. Ryan so that Dunn could offer her views and the majority of the board was persuaded to ask Keyworth to resign.

The following is a quote from HP's 8-K filing with the SEC: "At a Board meeting on May 18, 2006, after Dr. Keyworth acknowledged that he had leaked confidential information, the Board, after deliberation, asked Dr. Keyworth to resign his position as a director, which he declined to do.

Perkins Resigns - One Down, One to Go

Tom Perkins, former HP Director It is at that Board meeting on May 18, 2006 that Mr. Perkins resigned from the Board after expressing personal frustration with the Chairman of the Board relating to the handling of the matter with the Board. He stated that he objected to the matter being brought before the full Board and that he believed the Chairman had agreed that he and she would handle the matter privately. The Chairman disputed Mr. Perkins' assertion, explaining that she was complying with advice from outside counsel on the appropriate handling of the matter."

In what followed, David Kirkpatrick, Fortune senior editor, reports that supporters of Dunn "say that she deliberately stonewalled Perkins when he began demanding that the board acknowledge to the SEC that he had left over a fundamental disagreement - about how it had conducted its investigation into board member leaks."

Perkins also felt that Dunn had not fully informed the board about the nature of the investigation. On May 29, 2006, he informed the NewsCorp board that Dunn had organized and conducted an elaborate spying campaign on HP directors for no good reason except a delusion of paranoia. While Dunn felt that since the board members approved the investigation, they tacitly accepted the notion that they would be investigated, Perkins stated in a June 20 email to the HP's outside counsel, Larry Sonsini, that the investigation was "unknown to the board except...in the most vague and imprecise terms."

Kirkpatrick concludes that by filing the 8-K with the SEC, Dunn "Dunn in effect called Perkins' bluff", publicly disclosed Keyworth as the leaker, and "That set the stage for a negotiated settlement that would guarantee Keyworth's departure."

HP's 8-K Filing with SEC

Any time a director resigns, or otherwise leaves the position, from a U.S. public corporation, federal law requires the corporation to inform the United States Securities and Exchange Commission about the resignation or removal in an 8-K filing including the details of any disagreement about operations, policies or practices.

HP reported the resignation of Tom Perkins, an HP board member and Silicon Valley venture capitalist, on May 22, 2006 to the SEC via a 8-K filing (view the 8K document) without reasons for the resignation expect for attaching a press release thanking Perkins for his service to HP.

Through two emails to the HP board, Perkins demanded the reasons for his resignation be included in the reporting. As he received no response from HP, Perkins represented by his lawyer Viet Dinh, a former Bush administration official, asked the SEC in August to require HP to file an explanation for his resignation. The company is reported to have objected on the grounds that Perkins did not give any reasons when he resigned. Nevertheless, on September 6, 2006, HP filed an additional 8-K form which states:

"HP has been the subject of multiple leaks of confidential HP information, including information concerning the internal deliberations of its Board of Directors. HP believes these leaks date back to at least 2005. In response to these leaks, outside legal counsel conducted interviews of directors in early 2005 in order to determine the source of the leaks and to obtain each director's reaffirmation of his or her duty of confidentiality. The interview process did not yield the source of the leaks. Notwithstanding these actions, the leaks continued. As a result, the Chairman of the Board, and ultimately an internal group within HP, working with a licensed outside firm specializing in investigations, conducted investigations into possible sources of the leaks of confidential information at HP. Those investigations resulted in a finding that Dr. George A. Keyworth II, one of HP's directors, did, in fact, disclose Board deliberations and other confidential information obtained during Board meetings to the media without authorization. At a Board meeting on May 18, 2006, after Dr. Keyworth acknowledged that he had leaked confidential information, the Board, after deliberation, asked Dr. Keyworth to resign his position as a director, which he declined to do. It is at that meeting that Mr. (Thomas J.) Perkins resigned from the Board after expressing personal frustration with the Chairman of the Board relating to the handling of the matter with the Board. He stated that he objected to the matter being brought before the full Board and that he believed the Chairman had agreed that he and she would handle the matter privately. The Chairman disputed Mr. Perkins' assertion, explaining that she was complying with advice from outside counsel on the appropriate handling of the matter. At the time, Mr. Perkins confirmed he did not have any disagreement with HP on any matter relating to HP's operations, policies or practices.

"On June 19, following his resignation and after HP reported Mr. Perkins' resignation on Form 8-K, Mr. Perkins sought information from HP concerning the methods used to conduct HP's investigations into the leaks, asserted that phone and e-mail communications had been improperly recorded as part of the investigation, and informed HP that he had recently consulted with counsel regarding that assertion. In response to Mr. Perkins' request, HP informed Mr. Perkins that no recording or eavesdropping had occurred, but that some form of "pretexting" for phone record information, a technique used by investigators to obtain information by disguising their identity, had been used. Mr. Perkins, although no longer a director, then requested that HP conduct an inquiry into the propriety of the techniques used to conduct the investigation.

"HP's Nominating and Governance Committee thereafter engaged the outside counsel to conduct an inquiry into the conduct and processes employed with respect to HP's investigation of leaks of confidential information (the outside counsel was not involved in the investigations of the leaks initiated by the Chairman or the internal HP group). The Committee was advised that HP had engaged an outside consulting firm with substantial experience in conducting internal investigations and that this firm had retained another party to obtain phone information concerning certain calls between HP directors and individuals outside of HP. The Committee was further advised that the Chairman and HP had instructed the outside consulting firm to conduct its investigation in accordance with applicable law and that the outside consulting firm and its counsel had confirmed to HP that its techniques were legal. After its review, the Committee determined that the third party retained by HP's outside consulting firm had in some cases employed pretexting. The Committee was then advised by the Committee's outside counsel that the use of pretexting at the time of the investigation was not generally unlawful (except with respect to financial institutions), but such counsel could not confirm that the techniques employed by the outside consulting firm and the party retained by that firm complied in all respects with applicable law.

"Based upon its investigation, the Nominating and Governance Committee has recommended to HP's Board and Chief Executive Officer that controls relating to investigations be strengthened and that management should be in a position to assure that all aspects of HP's investigations comply with applicable laws and HP's code of ethics as applicable to HP's directors, officers and employees. HP's Board and Chief Executive Officer have accepted the conclusions and recommendations of the Committee.

"HP recently has been informally contacted by the Attorney General of the State of California requesting information concerning the processes employed in the investigations into the leaks. HP intends to cooperate fully with that inquiry. HP also has received a comment letter from the staff of the Securities and Exchange Commission's Division of Corporation Finance with respect to its May 22 Form 8-K regarding Mr. Perkins' resignation. HP intends to respond to the SEC staff that it believes its disclosures in the May 22 Form 8-K with respect to Mr. Perkins' resignation were accurate and complete at the time of filing and were based upon Mr. Perkins' actions and representations prior to such time concerning the reasons for his resignation.

"In addition, on August 31, 2006 the HP Board of Directors, upon the recommendation of the Nominating and Governance Committee, also determined that, based on his conduct, Dr. Keyworth should not be nominated for another term on the Board of Directors."

Keyworth Resigns - Two Down

Dr. Keyworth finally gave in and resigned from the board on September 12, 2006. With his resignation and Perkins earlier resignation in May, Patricia Dunn had finally achieved one of her principle objectives. Events, however, had already overtaken her and she had become a victim of her own design.

Dr. George Keyworth on the Leaks at HP

Until his forced resignation from HP, Dr. George Keyworth, 66 and a renowned physicist, had been HP's longest serving director.

Associated Press reports Dr. Keyworth and his lawyer, Reginald Brown, as saying that Keyworth's reputation had been unfairly tarnished because of his anonymous participation in one innocuous story on CNET's News.com, published in January 2006 - an account of a board retreat in the California desert. Keyworth's lawyer said that the New.com story contained information that was public (and therefore Dr. Keyworth did not violate board confidentiality rules or agreements) and that his client "had the best interest of HP shareholders in mind."

The report goes on to say that as a former science adviser to three U.S. presidents and head of the physics division at Los Alamos National Laboratory, Dr. Keyworth had been privy to classified nuclear weapons secrets. Dr. Keyworth prides himself on keeping confidential information to himself.

While Dr. Keyworth acknowledges speaking to other reporters with the company's blessing, HP has not released evidence linking him to any other media leaks despite hiring investigators who, says the report, spied on Dr. Keyworth and his wife, rummaged through their trash, and attempted to install monitoring software on CNET reporter Dawn Kawamoto's computer.

There was still no word on the source of the leak quoted in the Wall Street Journal on January 24, 2005.

HP's News Release on Keyworth's Resignation

September 12, 2006. George A. (Jay) Keyworth II, who has served on the HP board of directors since 1986, has resigned from the board, effective immediately.

Following up the statement HP issued earlier today, Keyworth, Tom Perkins, former director of HP, HP Chief Executive Officer and President Mark Hurd and the rest of the HP board made the following comments.

Keyworth said: "Today I have announced my intention to resign from the HP board after more than 21 years of service. It has been one of the greatest honours and pleasures of my life to serve on the board, and I have sought to conduct myself in a way that would make our co-founder and my friend and mentor, David Packard, proud. The invasion of my privacy and that of others was ill-conceived and inconsistent with HP's values. I acknowledge that I was a source for a CNET article that appeared in January 2006. I was frequently asked by HP corporate communications officials to speak with reporters - both on the record and on background - in an effort to provide the perspective of a longstanding board member with continuity over much of the company's history. My comments were always praised by senior company officials as helpful to the company - which has always been my intention. The comments I made to the CNET reporter were, I believed, in the best interest of the company and also did not involve the disclosure of confidential or damaging information. There is but one issue that matters now and that is that Mark Hurd and the company have every opportunity to move beyond and above the current morass. While I intend to remain a member of the HP family, and to advise Mark where I can help, it is best for the company that every aspect of this unfortunate matter be put in the past."

Perkins said: "I believe in HP. I believe in Mark Hurd. I applaud Jay Keyworth for his courage in stepping down today and thank Patricia Dunn for her grace in letting HP move on. This too shall pass."

Hurd said: "On behalf of HP, I apologize to Tom Perkins for the intrusion into his privacy. I thank Tom for his contributions, his principles and his help in getting HP past this episode toward its rightful place as the envy of corporate America.

"Jay is an important member of the HP family. He has served admirably for more than two decades and has provided great expertise, especially on matters relating to technology policy. We wish him well. I appreciate his long and distinguished service to HP. He leaves the HP board with our best wishes and gratitude. I have personally valued his experienced counsel and hope that he will continue to provide me with his advice in the future," he said.

At HP's request, Dr. Keyworth often had contacts with the press to explain HP's interests. The board does not believe that Dr. Keyworth's contact with CNET in January 2006 was vetted through appropriate channels, but also recognizes that his discussion with the CNET reporter was undertaken in an attempt to further HP's interests. HP board chairman Patricia Dunn expressed regret for the intrusion into his privacy.

Dunn Falls from Grace

With the resignation of George Keyworth and Tom Perkins earlier resignation in May, Patricia Dunn had finally achieved one of her principle objectives. Events, however, had already overtaken her and she had become a victim of her own design. The news reports on her role in a potentially illegal investigation of her board members made her continuing as Chairwoman untenable.

During a September 11, 2006 special board meeting via telephone, Dunn agreed to step down as chair effective January 2007 while continuing as a director. However, at a board meeting on September 21, 2006, the board told her that the company could not move forward if she remained a director and that her presence on the board continued to create distractions. The board asked her to resign and announce that she had come to this decision on her own.

If Dunn's intention was to stop HP board affairs being discussed in the media, the manner in which she lead her campaign to achieve her objective, resulted in her having to publicly disclose a great deal of the internal workings of the board - perhaps far more than the disclosures made by the leaker she pursued so vigorously.

With her reputation as a leader in corporate governance, her decision-making skills and integrity, her judgment and leadership skills in question, Patricia Dunn had added her resignation to the resignations of Perkins and Keyworth, and HP once again has a single person who holds the titles of chairperson, CEO and president.

Patricia Dunn's Postscript - HP Scandal as a Post-Sarbanes-Oxley Phenomenon

Patricia Dunn's written testimony to the US House hearing:

"When the final story is written on what happened at HP, I believe that its roots will be understood as emanating from a clash between the old and the new cultures in the Boardroom, driven importantly by Sarbanes-Oxley (SOX) and related regulatory changes.

"The clash is perhaps particularly poignant in Silicon Valley, where the culture of innovation, freedom of manoeuvre and creativity are seen as essential to value creation. The machinery required to implement SOX in the boardroom can be seen as cumbersome, time-wasting and a drag on directors' desires to focus on the truly interesting and valuable parts of their roles-for example, business and product strategy.

"I saw my role as Non-Executive Chairman as helping the Board transition from its roots as a "founder's board" to a modern, fully professional board that was driven by appropriate process as opposed to by personalities. The fact that the rules applied to everyone was not accepted by everyone on the HP Board. The fact that, in a modern board, every director is as important as every other director, was not accepted by everyone on the HP Board. I am proud of the work that I have done to improve the corporate governance at HP, including helping to bring in strong new directors who meet the test of independence in every sense. I do not agree with those who contend that a company cannot receive high marks for governance and still be innovative and successful."

"The saying that "a reputation made over a lifetime can be ruined in minutes" has a sickening level of resonance for me. As a stickler for the sanctity of the boardroom, it pains me to be in a position where I have little choice but to go on the record with details about the HP Board's inner workings."