HP scandal offers look at world of directors

September 16, 2006|By San Jose Mercury News

SAN JOSE, Calif. -- The spying scandal at Hewlett-Packard has provided a rare window into a normally private, august institution - the corporate board of directors.

It revealed an HP board wracked by turmoil in recent years, from the battle led by a board member to stop the firm's merger with Compaq Computer to the board's ouster of Carlton S. "Carly" Fiorina as chief executive. And now the snooping debacle.

Some say that the contentiousness of HP's board reflects an era when boards are being held more accountable. Under the Sarbanes-Oxley Act of 2002, companies and boards have to comply with a host of new financial and governance rules.

Companies also face more shareholder activism and a movement toward more independent, outside board members. In this new environment, board controversy and dissent are more likely - and scrutiny of boards has become intense.

Four key people in the HP case have been asked to testify before the investigative subcommittee of House Energy and Commerce on Sept. 28.

Expected to testify are board Chairwoman Patricia Dunn; HP legal counsel Ann Baskins; Larry Sonsini, a prominent Silicon Valley lawyer who is HP's external lawyer; and Ronald R. DeLia, a Needham, Mass., private investigator and operator of Security Outsourcing Solutions.

"Given the circumstances surrounding this particular case of pretexting involving the highest levels of corporate governance within Hewlett-Packard Co., the company's general counsel, and the board of directors' outside counsel, I ask that HP carefully consider this hearing an opportunity to be fully open and transparent with the testimony that its officers and counsel provide," Edward Whitfield, a Kentucky Republican and chairman of the subcommittee, said in letters to the four.

All four have played prominent roles in reports about the investigation, which is looking into who was leaking information from board meetings to the media.

HP spokesman Michael Moeller said yesterday that "HP has been and will continue to fully cooperate with all ongoing investigations and inquiries and we will continue to do so going forward."

Well before the HP scandal erupted last week, directors had been under growing pressure to prove themselves worthy of the job or face shareholder wrath. The fallout from Enron and changes in laws affecting boards and companies have increased the pressures on boards.

The HP imbroglio of the past 10 days has underlined that boards are no longer private, safe clubs, say corporate directors.

The HP boardroom leak probe provoked a furor when it became known that questionable methods had been used by investigators to obtain the phone records of board members, two HP employees and nine journalists without their knowledge. The phone records were obtained by a subcontractor through "pretexting" - pretending to be the account holder - and using personal information.

"HP's situation just raises the stakes further," said Kurt Jaggers, a managing director at TA Associates, a venture firm in Boston. "You can't assume you won't come under public scrutiny."

Boards are going from being dormant to becoming activist and independent, and with that come risks.

"The role of the board now is to rock the boat," said Thomas J. Campbell, dean of the business school at the University of California-Berkeley and a former U.S. congressman. "The optimal CEO today might include a characteristic that wasn't there before - being able to collaborate effectively with outside directors."

Fueling the tumult on corporate boards is a clash between old-school directors, brought in by a chief executive, and new-school directors, whom the board has found through a lengthy process.

George A. Keyworth II, a longtime HP board member, was accused by some board colleagues of leaking information to the press. Meanwhile, the chair of the board, Patricia Dunn authorized hiring outside investigators to uncover who was leaking information from the board to the press. The investigators pretended to be board members and journalists to get telephone records

Some say situations such as HP's will make board members even more fearful their actions and what they say in a confidential setting could come to light.

"I sometimes envision a world in which every independent director has to show up to a board meeting with his or her lawyer by his side, like congressmen and their aides," said Mitchell Kertzman, former chief executive of Powersoft and Sybase.

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