Corporate Governance Hewlett-Packard Case

Agenda Introductory Summary including Questions Character Sketches Basic Facts Quotes on Corporate Governance An Outline on Corporate Governance: Leading Categories

Basic Questions Who embodies the best approach to corporate governance? Dunn who takes a compliance approach best outlined in the Law of Agency Perkins who takes more of a stewardship approach that places less emphasis on compliance Perkins and Dunn have different takes on the leaks of information made by board members to the press For Perkins, leaks performed the function of a “release valve” that allowed frustrated insiders to vent concerns about company policy For Dunn, leaks were, first and foremost, violations of company confidentiality, ultimate damaging because they undermined relations of trust necessary for board deliberations

Physical Surroundings People, Groups, and Roles Procedures Laws Hardware Software Physical Surroundings People, Groups, and Roles Procedures Laws Information and Information Structures Pretexting Tools: Telephones, cell phones, Internet, PowerPoint Presentations Silicone Valley (Home of Venture Capitalism) Director of HP Board HP Board Members Tech Board Finance Reporters SEC HP Mgt (CEO) Public Relations Private Investigators Speaking with Press (On/Off Record) Electing Board Members R/ Board-Mgt Procedures for Pretexting Model for Corp Gov (Agency vs Stewardship) Identity authenticating Procedures Post-Enron: Sarbanes / Oxley Fed Sentencing Guidelines SEC Regs Privacy Legis Law of Agency Company records (Employee Info) Tele info (Call records) Emails (stored info) Project Kona I Project Kona II Confidentiality M M V X V Privacy M V (Press pierces privacy) M V (Press Procedures / Role Conflict) M V (Transparency of Law) Trust M V (Maintained by mgt but vulnerable to Board Members Undermined by transparency of law Supported by keeping information confidential

STS Highlights Confidentiality Privacy Protected under law of agency. General expectation that information on BOD deliberations is confidentiality. This preserves trust Hardware, software and procedures protect confidentiality Leaks to press considered violation of confidentiality (relation to press and procedures = vulnerability) Privacy Protected piece-meal by law. However, as case progressed, pretexting became illegal because it bordered on ID theft and invasion of privacy Pretexting involves a deception Privacy and Confidentiality are in conflict with transparency mandated by Sarbanes-Oxley and Federal Sentencing Guidelines

Pretexting Enabled PIs to track reporter and board member movements by hacking into email exchanges and phone records Used SS#s of Board members to open false email accounts Sent emails to reports posing as potential leakers. Emails had Trojan Horses to access computer files and emails records “it involved investigators requesting information from operators orally, over the phone, pretending to be someone else if necessary.” (DeLia quoted in Stewart) “created a fictitious disgruntled employee named Jacob to make e-mail contact with Kawamoto. “ E-mail has a Trojan Horse

Corporate Governance

Lawrence and Webber on CG “The system of allocating power in a corporation that determines how and by whom the company is to be directed.” 557 “The term corporate governance refers to the process by which a company is controlled or governed. Just as nations have governments that respond to the needs of citizens and establish policy, so do corporations have systems of internal governance that determine overall strategic direction and balance sometimes divergent interests.” 320

Stewart on Corporate Governance “a term that technically refers to all aspects of running a corporation but in recent years has come to emphasize issues of fairness, transparency, and accountability.” Questions: How does transparency required by corporate governance fit in with the confidentiality required for Board of Director Deliberations

Dunn on corporate governance “The most fundamental duties of a director—the duties of deliberation and candor—rely entirely upon the absolute trust that each director must have in one another’s confidentiality. This is true for trivial as well as important matters, because even trivial information that finds its way from the boardroom to the press corrodes trust among directors. It is even more critical when discussions can affect stock prices….Leaking “good” information is as unacceptable as leaking “bad” information—no one can foretell how such information may advantage or disadvantage one investor relative to another.” (quoted by Stewart, 156)

CG Models Agency Theory Stakeholder theory Stewardship theory Managers act as the agents of the corporation Problem = keeping managers faithful to the interests of the owners / investors Stakeholder theory Corporation is run, by its managers, for the sake of the stakeholders Managers are not just faithful agents of stakeholders. Instead of faithful agency, they are responsible for balancing conflicting stakeholder stakes corporation Stewardship theory Starts from premise that manager and owner interests are more or less the same Managers act, not as agents, but as stewards for stakeholders Stakeholder interests are aligned with the long term wellbeing of the corporation. Managers facilitate this alignment.

Agency Theory (Dunn) Owners/directors set the central objectives of the corporation. Managers executing these. Corporate governance = procedures to control management and restrict to carrying out owner directives. Managers cannot be trusted to remain faithful to interests and goals of the owners/directors. Human Nature = Egoistic pursuit of self-interest The owners/directors = principal. Originates the action and bears primary moral and legal responsibility for it. Principal delegates executive authority to agent, often because of a lack of knowledge of details pertinent to execution Develops compliance structures to compel agents to be faithful to interests in executive function. Managers = agents. Responsibility: serve as faithful executors of the goals and interests of the principals Positively this assumes the exercise of due care (proper exercise of professional judgment) Negatively: avoiding conflicts of interests and maintaining confidences Bound and Free Agency Corporate Governance Focus Primary emphasis is placed on compliance, i.e., enforced conformity to rules that constitute minimum thresholds of acceptable behavior. (1) rule based codes, (2) systems of monitoring to detect violations, and (3) punishments and rewards to deter non-compliance and reward compliance

Stewardship Theory (Perkins) Managers and employees can be trusted to act as stewards or guardians of the corporation. A steward is a caretaker who looks after the owner's property and interests when the owner is absent Corporation modeled on conception of a social contract Corporation is a cooperative, collaborative enterprise. Individuals transcend narrow self interest and find meaning in concerns of corporation Managers can, to a certain extent, act on altruistic motives CG consists of build trust and social capital. Owners still establish the cardinal objectives for corporation But they must provide managers with an environment conducive to meaningful work. Stewardship focuses on management by values (1) identify and formulate common aspirations or values as standards of excellence, (2) encourage employees to adopt values as core aspirations through training programs, ethics audits, corporate codes, and so forth (3) respond to values "gaps“ by means of moral support Training programs DPO procedures Proactive performance evaluations Empowering leadership

Sarbanes-Oxley Provide increased protection for whistle-blowers Adhere to an established code of ethics or explain reasons for non-compliance Engage in "full, fair, timely and understandable disclosure" Maintain“ honest and ethical" behavior. Report ethics violations promptly Comply with "applicable governmental laws, rules, and regulations" Quoted from Dyrud, M.A. (2007) "Ethics, Gaming, and Industrial Training," in IEEE Technology and Society Magazine. Winter 2007: 36-4. Dyurd cites: ELT, Ethics and Code of Conduct, n.d.; http://www.elt-inc.com/solution/ethics_and_code_of_conduct_training_obligations.html

Federal Sentencing Guidelines Establishing standards and procedures to prevent and detect criminal conduct Promoting responsibility at all levels of the program, together with adequate program resources and authority for its managers Exercising due diligence in hiring and assigning personnel to positions with substantial authority Communicating standards and procedures, including a specific requirement for training at all levels Monitoring, auditing, and non-internal guidance/reporting systems Promoting and enforcing of compliance and ethical conduct Taking reasonable steps to respond appropriately and prevent further misconduct in detecting a violation Dyrud, M.A. (2007) "Ethics, Gaming, and Industrial Training," in IEEE Technology and Society Magazine. Winter 2007: 36-44.

Characters / Participants

Patricia Dunn Board member and supported ouster of Fiorina Specialist in corporate governance with impeccable reputation Advanced through ranks of Wells Fargo Investment Advisors (later acquired by Barclays) to become CEO of Barclays

Carly Fiorina CEO of HP until ousted by board High profile corporate executive Considered a good salesperson but a poor manager by members of the board Later Republican candidate for US senate from California

Jay Keyworth Longest-standing member of HP BOD Physics division at Los Alamos National Laboratory Developed close relation with CNET report, Dawn Kawamoto When identified as source of leaks was forced to leave HP BOD

Tom Perkins Close relation with HP founders and family Venture Capitalist Author of “Sex and the Single Zillionaire” “Heather was nude upon the bed and Kim, above, was also nude, but wearing some sort of complicated black leather harness…” (It goes on from there0 Resigned from board in protest over removal of Keyworth. Later, claimed he was victim of invasion of privacy by HP investigation. Responsible for information of investigation becoming public outside of HP

Ron DeLia Private Investigator From Boston firm, Security Outsourcing Solutions Firm uses pretexting to get information on board members to advance leak investigation Were these methods an invasion of the privacy of board members? Were they illegal

Basic Facts / Case Narrative

Basic Facts Carly Firoina became CEO of HP and sought to reinvent the company “Fiorina had a vision, and she did a phenomenal job acquiring Compaq and comgining the assets. But we had to make the assets deliver. We had an execution problem. The stock took a bit hit. She was a better saleswoman than a manager.” (Stewart 156) Fiorina was fired by the BODs in a very political manner Rumors of board discontent were leaked to press in advance of decision Leaks also occurred about a strategic planning meeting held by Fiorina with HP board (source talked about long days and imparted strategic plans of HP that could affect stock prices) Fiorina: It was probably Keyworth and Perkins two board members who felt that HP should return to its more aggressive, venture capitalist culture who were the sources of the leaks

Back to Basic Facts Dunn became “on-executive” chairperson of HP Board of Directors Board appointed Mark Hurd CEO of HP to take place of Fiorina Top priority: stop board leaks to the press Two investigations were eventually carried out called the Kona files after a vacation retreat in Hawaii used by Dunn

Basic Facts First investigation yielded no concrete results Not clear who leaker was Second investigation used more aggressive techniques Hired PI firm (Ronald R. DeLia from Security Outsourcing Solutions from Boston) In second investigation, firm used a method called pretexting “it involved investigators requesting information from operators orally, over the phone, pretending to be someone else if necessary.” (DeLia quoted in Stewart) “created a fictitious disgruntled employee named Jacob to make e-mail contact with Kawamoto. “ E-mail has a Trojan Horse

E-Mail (Quoted from Stewart, 160) Hello, I am a senior level executive with a high tech firm in the valley and an avid reader of your columns. My real name is not used, you might understand why. Not quite sure how to approach you on this, but I’ll attempt anyway. In short, tired of broken promises, misguided initiatives and generally bad treatment. Have some information that I would be interested in passing along. Felt it might be appropriate to contact you.

Basic Facts Board Meeting held to inform them about results of leak investigations Jay Keyworth was identified as source of leaks Apologized to board; thought he’d only get a slap on the wrist But Board voted to request his resignation Perkins objected: “Jay is the longest serving director on this board!” (Stewart 163) Perkins resigns in protest Because Keyworth was fired or because of pretexting?

Basic Facts Resignations of Board members must be reported to the SEC No reason given initially Perkins gets message from ATT that it had to lock his online account. But he had not set up such an account. This was done as part of pretexting used during leak investigation. Perkins: “My personal phone records were ‘hacked’” “I am now legally obliged to disclose publicly the reasons for my resignation. This is a very sad duty. Perkins states as his reasons his objections to the violation of his and other board members’ privacy by the leak investigations

Leaks: A “steam valve” or a violation of trust?

Perkins on leaks “Leaks don’t happen in stable, happy companies. They’re a steam valve. People talk. They’re a symptom of something else.”

Leaks or press handling? Message to Keyworth (HP board member) about how to handle press “Please transition to Carly and her skill set. Specifically, her brilliant strategic mind and her confidence—illustrated by her deep engagement of the board….This is an opportunity for us to reset Carly’s image to show the Carly we all know and love.” Keyworth talked to press, specifically to Dawn Kawamoto, a reporter fro CNET He felt conversations were continuation of public relations directives in above e-mail and not leaks although the information printed in Kawamoto story was not common knowledge. This was, he felt, a way of getting positive press for the company and building up good will with an influential reporter

Keyworth on Leaks “I apologize for any discussion I had with the reporter in question that may have resulted in any of my colleagues on this board losing trust with me.” “All I did was take advantage of a lunch with a reporter to say some nice things about Mark Hurd. I thought the worst that might happen would be that they’d slap my wrist.” Quoted by Stewart 163

Fiorina on Leaks “It is hard to convey how violated I felt. Until a board makes a decision, its deliberations are confidential….Trust is a business imperative. No board or management can operate effectively without it.…I sent an e-mail message to the board. I informed them of the leak. I said this was completely unacceptable behavior by a board member. I convened a conference call for Saturday morning. I was as cold as ice during the call. I said the board could not operate in this way and I would not.…Jay [Keyworth] Dick [Hackborn], and Tom [Perkins] all acknowledged that the reporter had contacted them. They all denied they had spoken with her.” Fiorina, Tough Choices. Quoted by Lawrence, 504.”

Conclusion Hewlett-Packard, a company with outstanding ethics reputation, suffered as a result of invasive investigation Dunn was targeted for federal prosecution Did she properly supervise investigation? Dunn and Perkins embody different approaches to corporate governance Agency and Stewardship approaches respectively Case shows how shifting government environment of organization has altered traditional business practices Emphasis of Sarbanes-Oxley on transparency undermines internal corporate confidentiality and trust built on it.