August 14, 2010
The Hurd Affair and Corporate Codes of Conduct
Posted by Usha Rodrigues

I'm in newborn-baby land, living my life in 2-3 hour increments, and spent a 10-minute breakfast reading a frontpage FT article "Loophole pressure on HP brings Hurd severance pay near $40m".  In case you haven't been following the story, successful HP CEO Mark Hurd was fired by the board for ethical lapses involving a sometime-actress/independent contractor.  CEO accountability is a good thing! says Nell Minow, "doyenne of the U.S. corporate governance movement" (will I ever be called "doyenne" of anything?).  If the only issue is $20K of expense manipulation, as some reports have it, it's a bad thing, says John Coffee, since the board is destroying a lot of shareholder value over a mere peccadillo.   

How strong was the board's case for firing Hurd?  The "loophole" is that Hurd's contract didn't specify what "cause" means--a pretty big oversight.  But Hurd has admitted to a "close personal relationship" with a contractor that violated the code of conduct.   As something of an expert (dare I say, doyenne?) in corporate codes of conduct, I was surprised to find no quotations from the actual code of conduct at issue.  These codes are quite easy to find.  So I went looking on the HP site.  See after the jump for an exciting click-by-click account of what my sleep-deprived mind found.

The code of conduct itself was easy to find because Sarbanes-Oxley 406 allowed codes of ethics to be filed via company website rather than with the SEC.  No need to check the EDGAR database, just hp.com to investor relations to corporate governance to this page.  But hang on, here's something interesting: the file name for HP's Standards of Business Conduct is "SBC(Updated August 2010, PDF file, 1.61 MB)."  August 2010?  As in this month?  Was this the code that applied to Hurd's ethical lapses?  Did the company neglect to update the code until the scandal unfolded?  Unclear. If you have read the paper, you know that my co-author and I have a big problem with website disclosure, which is ephemeral and highly manipulable. 

OK, now let's open up the document.  First page has a message from the Chief Ethics and Compliance Officer, telling HP employees "We have made minor changes to our Standards of Business Conduct (SBC) since the version released in 2008. These updates reflect recent policy, business, organizational, and legislative changes."  So that answers the why-the-update-question satisfactorily!  Let's move deeper.

To whom does the code of conduct apply?  To all employees and board members (this is noteworthy because SOX only requires disclosure of the code of conduct that applies to CEO, CFO, and Chief Accounting Officer).  Timing questions aside, Hurd is on the hook for actions that violate this code.

Next up, the "headline test."  Huh, I haven't seen this in a code of conduct: "We should each ask ourselves what the impact would be if the conduct or actions became public or were reviewed by colleagues we respect. If you are uncomfortable with the answer, don’t do it!"  Sounds awfully loosey-goosey, but I guess we can say that Hurd failed the "headline test."  Strike one against him.

Here's the sexual harassment language (although the board found no sexual harassment occurred):

• Do not behave in a disrespectful, hostile, violent, intimidating, threatening, or harassing manner

• Encourage a harassment-free work environment.

• Refuse to accept or tolerate sexual harassment, including unwelcome sexual advances, requests for sexual favors, or other unwelcome verbal or physical conduct of a sexual nature"

OK, I'm running out of time between feedings, so I'll cut to the chase.  The SBC is vague.  There are other provisions Hurd could have violated, including ones governing gifts to and entertaining suppliers.  Notably, there's no section on the repercussions of violation: some codes specify that failure to follow them can/will lead to sanctions, up to and including dismissal.  Hang on again, I found something!  This file, titled "Corporate Governance Guidelines" (also coincidentally updated August 2010) states:

The Board expects all directors, as well as officers and employees, to display the highest standard of ethics, consistent with HP’s longstanding values and standards. HP has and will continue to maintain a code of conduct, known as the "Standards of Business Conduct" that is applicable to directors, officers and employees...The Board also expects directors, officers and employees to acknowledge their adherence to the Standards of Business Conduct on an annual basis.

So, ladies and gentleman, could HP's board have fired CEO Hurd solely for failure to adhere to its code of conduct, in the absence of a detailed for-cause provision in his contract?  Despite all of this mandated website disclosure, we can't say for sure.  The code is vague, as they always are.  Because of the transitory nature of website disclosure, it's unclear which code of conduct was in place when the unethical behavior occurred--the one currently on the HP site, or some former one now lost in the mists of the internet.  It's likewise unclear whether Hurd acknowledged his adherence to this version of the code, or another version, and what it would mean if he did so and then violated it.  Regardless, the fact that both documents were updated this month is some kind of fishy, no?

These uncertainties are why we ultimately conclude that ethics disclosures are mere "placebo."  A whole lot of disclosure that doesn't really tell us anything.

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