August 14, 2010
Why Did the HP Board Need a Pretext for Firing Mark Hurd?
Posted by Gordon Smith

In my initial reaction to Mark Hurd's firing, I assumed that he was being terminated for an ethical lapse. It seemed pretty straightforward at the time, but in the past week, people have been asking what Mark Hurd did that was so terrible. Was it really just a relatively minor expense manipulation? Or was there more to the sexual harassment story than originally reported?

Earlier today, Usha took a closer look at HP's Standards of Business Conduct to determine whether they might hold the answer, but she found the Standards "vague." This afternoon, Joe Nocera offers an alternative explanation for the firing: "Mr. Hurd’s supposed peccadilloes were a smoke screen for the real reason they got rid of an executive they didn’t trust and employees didn’t like." In short, his firing based on a violation of the company's Standards of Business Conduct was a pretext ... which is an ironic way to go for Hurd, who became the CEO in the wake of the pretexting scandal at HP in 2006.

Why didn't the board of HP like Hurd? As I suggested in a series of posts about Mark Hurd's ethics in 2006 (see here, here, here, and here), Hurd was up to his eyeballs in the pretexting operation. It seemed odd to me at the time that people were giving him a pass, but according to Anthony Bianco, who wrote a book on the scandal, "There was a residue of mistrust because of the pretexting scandal."

So the board watched and waited for four years (!), then seized an opportunity. Standing alone, this story doesn't make sense, but combine the board's distrust with employee dissent, and you have the recipe for ouster. Back to Nocera:

The consensus in Silicon Valley is that Mr. Hurd was despised at H.P., not just by the rank and file, but even by H.P.’s top executives. (Perhaps this explains why Ms. Lesjak was so quick to denigrate him once she took over.) “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. “He didn’t have the support of his people,” Mr. Enderle said. Although he was good at “holding executives’ feet to the fire, he seemed to be the only one benefiting from H.P.’s success,” Mr. Enderle continued. “He alienated himself from the people who might have protected him.”

There's lots more in Nocera's piece, which makes a pretty convincing case against Hurd as CEO, then raises and answers an important question: "Are any of these firing offenses? They probably should be, but they’re not, not in the culture we live in."

The problem, according to Nocera, isn't that HP's board was limited in its power, but rather that the directors were limited in their courage. Why did the board need a pretext? Because Hurd was delivering results. He "was a brilliant operational executive, but had the strategic sense of a gnat, and knew only how to cut costs." 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.

UPDATE: The W$J has more information on the firing, suggesting that the "board decided to oust Mark Hurd Aug. 6 after the chief executive reached a sexual-harassment-claim settlement that directors thought impeded their probe of the claim." Later in the story, another source tells the Journal that the settlement "weighed in" the board's decision but was not the only issue.

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