The front page of today's WSJ features a behind-the scenes look at HP's troubled Autonomy deal, an acquisition squired by former CEO Leo Apotheker that was recently written down to the tune of over $8billion in light of accounting improprieties and other problems. The authors blames a variety of factors for the deal, including "an H-P board, populated with several new members, that had to wrestle simultaneously with another far-reaching proposal." According to the article, half of the board focused on what to do with HP's PC business, and only looked at the Autonomy acquisition. Plus HP's board welcomed 5 new members, and a new chairman. The clear message of the article is that the board was duped by Autonomy in part because it was composed of 1) so many newcomers and 2) faced a big distraction. If only it had been running at full strength!
It's a good story, but I'm not buying. As I have recently argued, boards shouldn't be in the business of making these kinds of substantive strategic decisions. Apotheker was a new CEO hungry for a splashy acquisition, and the board was composed of independent directors. Here "independent" means people from outside the company, part-timers who by definition have limited knowledge of the business and limited time to devote to it. Why should they be in charge of corporate acquisitions?
From what I can piece together from the article and a shareholder complaint, the board at the time consisted of:
- Leo Apotheker, CEO
- Meg Whitman, then-director, current CEO
- G Kennedy Thompson: former CEO of Wachovia, currently senior adviser to Aquiline Capital Partners LLC, a private equity firm.
- Rajiv L. Gupta: Retired CEO of Rohm & Haas
- Shumeet Banerji: CEO of Booz & Company
- Gary M. Reiner: a special adviser at General Atlantic, a private equity firm,
- John H. Hammergren. According to the WSJ, Hammergren skeptical of the deal, but his day job is CEO of McKesson Corp. How much time did he have to devote to sussing out the true value of Autonomy.
- Marc L. Andreessen: a venture capitalist
- Ann M. Livermore: an inside director
- Patricia F. Russo: CEO of Alcatel-Lucent
- Ralph V. Whitworth: principal of Relational Investors LLC, a registered investment adviser
- Lawrence T. Babbio: then-senior adviser to Warburg Pincus, former President of Verizon
- Sari M. Baldauf: retired executive VP of Nokia
- Rayond Lane: managing partner of Kleiner Perkins, a VC firm
Make no mistake, this is an impressive collection of talent and experience, and I take as a given that the outside directors tried their best to fulfill their duties to the company. But out of 14 13 members, only 2 or 3 actually work for the company. And we expect them to assess the value of a proposed acquisition better than HP's CEO and other executives, when that's the latter's full-time job?
The WSJ article makes much of the fact that the board wasn't told about allegations of accounting problems by a former Autonomy finance executive, and that HP's CFO opposed the deal. I argue that the problem isn't what the board knew or didn't know, but that we expect a random group of people to have the final say-so on matters of corporate policy that they are almost guaranteed to know very little about. The role of the public board, composed as it is of independent directors whose chief qualification is a lack of ties to management, should be reserved for areas of conflict with management. Chief among these areas is the hiring and firing of a CEO.
The die was cast on the Autonomy acquisition when the HP board picked Apotheker, a CEO "bent on a high impact acquisition." The fault we can fairly blame the HP board for was in picking the wrong CEO, not on signing off on the Autonomy deal.
Update: Despite being named in the complaint, Ralph Whitworth joined the HP board after the August 2011 Autonomy acquisition. I have amended my post accordingly.
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