FOLLOW THE LEADER: HEWLETT-PACKARD AND ITS SUCCESSION CRISES Sari Baldauf put down the telephone and leaned back in amazement into her hotel suite's plush sofa to try to register what she had just heard. She always looked forward each time she took the long journey from Helsinki to Palo Alto for meetings of the Hewlett-Packard Company (hereafter “HP”) Board of Directors. But this time, at the beginning of August, 2010, what confronted the Board was a particularly ticklish confrontation with CEO Mark Hurd himself, one that she had never before had to encounter during her tenure on the Executive Board at Nokia. Hurd had been accused of sexual harassment by a former HP marketing contractor (and B-film actress), Jodie Fisher. What's more, the ensuing internal investigation had shown that several expense reports from Hurd's office from the period of the alleged relationship were fraudulent, with an amount in dispute of up to $20,000. And now the CEO had pre-empted everything by reaching a private settlement with Fisher (via her attorney, the notorious Gloria Allred) just the previous day. So had Baldauf come all the way to Southern California for nothing? Of course not! What about the “The HP Way”? Sari Baldauf knew full well that the lingering influence of founders William Hewlett (1913-2001) and David Packard (1912-1996) meant that HP had always been more than just another IT equipment company. That “HP Way” embodied the precepts upon which they intended that their company's operations would always be based, as set out in five axioms: 1. We have trust and respect for individuals. 2. We focus on a high level of achievement and contribution. 3. We conduct our business with uncompromising integrity. 4. We achieve our common objectives through teamwork. 5. We encourage flexibility and innovation. To Baldauf and to the rest of the Board – of which seven out of ten had been recruited to the Board by Hurd - the duty was clear: on August 6, they voted unanimously to remove Hurd as CEO of the company. Carly Fiorina: First From Outside Chief Financial Officer Cathie Lesjak took over as CEO for the interim, which was necessary since no full- time replacement had been designated nor seemed immediately available. The Board's Nominating & Governance sub-committee swiftly got in touch with usual the head-hunting firms. This was the first time Baldauf had had the opportunity to see this body swing into action, and she found their approach a little bit strange. She had noticed that the first couple of successors as CEO to Bill Hewlett himself – namely John Young (1978-1992) and Lewis Platt (1992-1999) - had been promoted from inside the company. Carly Fiorina had been the first to have had nothing to do with HP previously to her appointment as CEO.. Yet somehow the N&G committee's search was nonetheless clearly focused to the outside. ____________________________ Professor Fred Lachotzki and research associate Michael Olson prepared this case as basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright©2012 Nyenrode Business Universiteit. This made Baldauf uncomfortable. It's true she had long held Fiorina in a special regard - not just as HP's first female CEO (and Board Chairman as well), but in fact the first woman ever to head a company making up the Dow Jones Industrial Average – yet she also could not escape the thought that Fiorina's tenure was where HP's problems had begun. Already named by Fortune as the “#1 Most Powerful Woman in Business” while still at Lucent, Fiorina brought to HP an at times overwhelming wave of celebrity and media interest. She unified all the HP-brand marketing under the theme “Invent,” but the highlight of her service there was undoubtedly the $25 billion acquisition of Compaq Computer in May, 2002. However, there was clearly a direct line between the costs and internal restructuring which that mega-deal made necessary and HP's reporting for 2002 the first annual loss in its entire history as a public company. Company sales and financial performance simply did not respond to Fiorina's star-power. As HP's stock price dipped down to half of what it had been when she had come on board, the increasinlgy dire state of affairs finally moved the Board to require her to step down at a special session in February, 2005. Baldauf had ultimately been glad to vote to ask Fiorina to leave – with a severance package of just over $21 million in cash - yet in the wake of Mark Hurd's ouster she was alarmed at the task of yet again having to find a suitable replacement in short order. Surely this was no way to run such an important company? HP's “Pretexting” Scandal: The Chairman Falls At least Baldauf's Board colleague Patricia Dunn, CEO of Barclays Global Investors, had been elevated to Board Chairman shortly after Fiorina's departure, to Baldauf's considerable relief. CFO Robert Wayman became interim CEO, in a split of the duties of Chairman and CEO; which had never before been tried at HP. One urgent task from Fiorina's tenure still remained. There had appeared a series of leaks in leading national business publications that had exposed to the public gaze much of the internal turmoil around Fiorina's performance, and then the subsequent CEO-hunt. Their nature suggested that the source lay somewhere within the company's executive suite or boardroom. New Chairman of the Board. Dunn promptly established a task-force of internal HP security officials, together with some external contractors, to investigate these leaks in a confidential effort dubbed “Project Kona.” Still, even Fiorina's eventual successor, Mark Hurd, formerly CEO of NCR Corporation, found himself plagued by leaks. It took only a little over a month after taking up the job for him to inform a meeting of the company's highest executive ranks that he found such leaks “reprehensible and unacceptable” and to announce a “zero tolerance” policy – just one unauthorized leak of information from anyone, and that person would automatically be fired. Still, this failed to stop them,1 so the company redoubled its efforts over the following months. The effort finally came to a head in at the Board meeting on May 18, 2006, when enough evidence had been accumulated by then to implicate long-standing director George Keyworth, former Science Advisor to President Ronald Reagan, as the guilty party. 1 Among the further information that emerged were allegations that Mark Hurd used the “inside information” of his pending departure to HP to sell considerable amounts of his shares in NCR prior to the move; the SEC ultimately chose to take no action. Success, so it seemed, but the matter did not end there. Rather, over the next few months the extraordinary range of measures undertaken by agents acting in HP's name was itself leaked to the public. Offices of suspect media outlets (e.g. the Wall Street Journal, New York Times, CNET) had had their trash surreptitiously inspected and undercover agents infiltrated into them posing as clerical or cleaning staff; and suspected journalists had generally been subject to thorough investigations – including into their telephone records, to which investigators gained access by “pretexting,” i.e. posing on the telephone as those journalists themselves (e.g. citing their stolen Social Security numbers) to convince telephone company service representatives to release the information. The revelations of these methods being use by HP were spectacular because of the unethical taint that came thereby to the reputation of such an esteemed company. Congress quickly took notice, resulting in hearings in September, 2006, before the House Committee on Energy and Commerce, even as Patricia Dunn resigned from the HP Board and general counsel Ann Baskins from HP entirely. Mark Hurd - by then HP CEO and Chairman – had by then not been directly implicated in the “pretexting” scandal, but subsequent research suggests that he should have been. The worst journalist privacy abuses had actually been perpetrated by a special “Unauthorized Disclosures Team” that Hurd had established on his own authority, reporting only to him. In the end, however, Hurd managed to blur the line between this effort and Dunn's “Project Kona” so that the latter took the entire blame for the disgraceful investigative techniques employed. In effect, Mark Hurd succeeded in making Patricia Dunn take the fall for the abuses so that his shooting-star career could carry on. It was he who had to take up the task of getting the company back on track after this enormous disruption. Mark Hurd: Champion or Scoundrel? This he set about to do. Although not particularly well-known when he caught the N&G Committee's eye, Hurd was nonetheless hired for his demonstrated ability to perk up company performance as NCR's CEO, together with the almost eerie insider's perspective and exact analysis he had shown of HP's problems and their possible solutions during his CEO job-interview. When it came time to perform, Hurd did seem to fulfill all this promise and more. HP's stock price jumped by 40% just within his first partial year (April-December 2005) at the helm. He brought with him a new attentiveness to quantitive indicators of analysis – but most of all he brought a new determination to slash costs, carried over from his record with NCR, such as never had been seen before in the HP executive suite. Within that first partial year he laid off a full 10% of HP employees (15,200 personnel) and reduced the number of HP data centers from 85 to 6.