corpgov hp case

7/28/2019 CorpGov HP Case

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Corporate Governance

Hewlett-Packard Case


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Agenda

Introductory Summary including Questions

Character Sketches

Basic Facts

Quotes on Corporate Governance

An Outline on Corporate Governance: LeadingCategories


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Basic Questions

Who embodies the best approach to corporategovernance? Dunn who takes a compliance approach best outlined in the Law

of Agency

Perkins who takes more of a stewardship approach that placesless emphasis on compliance

Perkins and Dunn have different takes on the leaks ofinformation made by board members to the press For Perkins, leaks performed the function of a release valve

that allowed frustrated insiders to vent concerns aboutcompany policy

For Dunn, leaks were, first and foremost, violations of companyconfidentiality, ultimate damaging because they underminedrelations of trust necessary for board deliberations


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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

VentureCapitalism)

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

ConfidentialityM M V X V X V X V

Privacy M V M V (Presspierces privacy)

M V (Press

Procedures /

Role Conflict)

M V

(Transparency of

Law)

M V

Trust M V M V (Maintainedby mgt but

vulnerable to

Board Members

M V Undermined by

transparency of

law

Supported by

keeping

information

confidential


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STS Highlights

Confidentiality 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, pretextingbecame illegal because it bordered on ID theft and invasion of privacy

Pretexting involves a deception

Privacy and Confidentiality are in conflict with transparencymandated by Sarbanes-Oxley and Federal Sentencing Guidelines


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Corporate Governance


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Lawrence and Webber on CG

The system of allocating power in a corporation thatdetermines how and by whom the company is to bedirected. 557

The term corporate governance refers to the processby which a company is controlled or governed. Just asnations have governments that respond to the needsof citizens and establish policy, so do corporations have

systems of internal governance that determine overallstrategic direction and balance sometimes divergentinterests. 320


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Stewart on Corporate Governance

a term that technically refers to all aspects ofrunning a corporation but in recent years hascome to emphasize issues of fairness,

transparency, and accountability.

Questions:

How does transparency required by corporategovernance fit in with the confidentiality requiredfor Board of Director Deliberations


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Dunn on corporate governance

The most fundamental duties of a directortheduties of deliberation and candorrely entirely uponthe absolute trust that each director must have in oneanothers confidentiality. This is true for trivial as well

as important matters, because even trivial informationthat finds its way from the boardroom to the presscorrodes trust among directors. It is even more criticalwhen discussions can affect stock prices.Leaking

good information is as unacceptable as leaking badinformationno one can foretell how such informationmay advantage or disadvantage one investor relative toanother. (quoted by Stewart, 156)


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CG Models

Agency 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 offaithful agency, they are responsible for balancing conflictingstakeholder 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 thecorporation. Managers facilitate this alignment.


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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 theowners/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


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Stewardship Theory (Perkins)

Managers and employees can be trusted to act as stewards or guardians of thecorporation. 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, ethicsaudits, corporate codes, and so forth

(3) respond to values "gaps by means of moral support Training programs

DPO procedures

Proactive performance evaluations

Empowering leadership


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Sarbanes-Oxley

Provide increased protection for whistle-blowers

Adhere to an established code of ethics or explainreasons for non-compliance

Engage in "full, fair, timely and understandabledisclosure"

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 SocietyMagazine. 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


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Federal Sentencing Guidelines

Establishing standards and procedures to prevent anddetect criminal conduct

Promoting responsibility at all levels of the program,together with adequate program resources and authorityfor its managers

Exercising due diligence in hiring and assigning personnel topositions with substantial authority

Communicating standards and procedures, including aspecific 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 andprevent 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.


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Characters / Participants


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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


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Carly Fiorina

CEO of HP until ousted by board

High profile corporate executive

Considered a good salesperson but a poormanager by members of the board

Later Republican candidate for US senate fromCalifornia


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Jay Keyworth

Longest-standing member of HP BOD

Physics division at Los Alamos National

Laboratory

Developed close relation with CNET report, DawnKawamoto

When identified as source of leaks was forced toleave HP BOD


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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 onfrom there0

Resigned from board in protest over removal of Keyworth.

Later, claimed he was victim of invasion of privacy by HPinvestigation. Responsible for information of investigationbecoming public outside of HP


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Ron DeLia

Private Investigator

From Boston firm, Security Outsourcing Solutions

Firm uses pretexting to get information on boardmembers to advance leak investigation

Were these methods an invasion of the privacy ofboard members? Were they illegal


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Basic Facts / Case Narrative


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Basic Facts

Carly Firoina became CEO of HP and sought to reinvent thecompany

Fiorina had a vision, and she did a phenomenal job acquiring Compaqand comgining the assets. But we had to make the assets deliver. Wehad an execution problem. The stock took a bit hit. She was a bettersaleswoman 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 ofdecision

Leaks also occurred about a strategic planning meeting held by Fiorina

with HP board (source talked about long days and imparted strategicplans of HP that could affect stock prices)

Fiorina: It was probably Keyworth and Perkins two board memberswho felt that HP should return to its more aggressive, venturecapitalist culture who were the sources of the leaks


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Back to Basic Facts

Dunn became on-executive chairperson of HP Boardof 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 calledthe Kona files after a vacation retreat in Hawaii used byDunn


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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 OutsourcingSolutions from Boston)

In second investigation, firm used a method calledpretexting

it involved investigators requesting information from

operators orally, over the phone, pretending to besomeone else if necessary. (DeLia quoted in Stewart)

created a fictitious disgruntled employee named Jacob tomake e-mail contact with Kawamoto. E-mail has a TrojanHorse


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E-Mail (Quoted from Stewart, 160)

Hello, I am a senior level executive with a high tech firm inthe 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 Ill attemptanyway.

In short, tired of broken promises, misguided initiatives andgenerally bad treatment.

Have some information that I would be interested inpassing along.

Felt it might be appropriate to contact you.


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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 hed only get a slap on thewrist

But Board voted to request his resignation

Perkins objected: Jay is the longest serving director on thisboard! (Stewart 163)

Perkins resigns in protest

Because Keyworth was fired or because of pretexting?


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Basic Facts

Resignations of Board members must be reported to theSEC No reason given initially

Perkins gets message from ATT that it had to lock his onlineaccount. But he had not set up such an account. This wasdone 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 myresignation. This is a very sad duty.

Perkins states as his reasons his objections to the violation of hisand other board members privacy by the leak investigations


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Leaks: A steam valve or a

violation of trust?


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Perkins on leaks

Leaks dont happen in stable, happy

companies. Theyre a steam valve. People

talk. Theyre a symptom of something else.


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Leaks or press handling?

Message to Keyworth (HP board member) about how to handlepress

Please transition to Carly and her skill set. Specifically, her brilliantstrategic mind and her confidenceillustrated by her deep

engagement of the board.This is an opportunity for us to resetCarlys image to show the Carly we all know and love.

Keyworth talked to press, specifically to Dawn Kawamoto, areporter fro CNET

He felt conversations were continuation of public relations directivesin above e-mail and not leaks although the information printed inKawamoto story was not common knowledge.

This was, he felt, a way of getting positive press for the company andbuilding up good will with an influential reporter


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Keyworth on Leaks

I apologize for any discussion I had with thereporter in question that may have resulted inany of my colleagues on this board losing trustwith me.

All I did was take advantage of a lunch with areporter to say some nice things about MarkHurd. I thought the worst that might happen

would be that theyd slap my wrist.

Quoted by Stewart 163


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Fiorina on Leaks

It is hard to convey how violated I felt. Until a boardmakes a decision, its deliberations are confidential.Trust isa business imperative. No board or management canoperate effectively without it.I sent an e-mail message tothe board. I informed them of the leak. I said this was

completely unacceptable behavior by a board member. Iconvened a conference call for Saturday morning. I was ascold as ice during the call. I said the board could notoperate 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 hadspoken with her. Fiorina, Tough Choices. Quoted byLawrence, 504.


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Conclusion

Hewlett-Packard, a company with outstanding ethicsreputation, suffered as a result of invasive investigation

Dunn was targeted for federal prosecution

Did she properly supervise investigation?

Dunn and Perkins embody different approaches tocorporate governance Agency and Stewardship approaches respectively

Case shows how shifting government environment oforganization has altered traditional business practices Emphasis of Sarbanes-Oxley on transparency undermines

internal corporate confidentiality and trust built on it.

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