Hewlett-Packard's Hurd Says Probe Ignored `HP Way' (Update3)

Sept. 28 (Bloomberg) -- Bill Hewlett stopped off to pick up a microscope at a company storeroom one weekend, several years after founding Hewlett-Packard Co. in 1939. After he had to break a latch to get into the equipment cage, he left a note insisting that it never be locked again.

``Open bins and storerooms were a symbol of trust, a trust that is central to the way HP does business,'' wrote co-founder David Packard, recounting the story in ``The HP Way,'' his guide to the tenets that built the Palo Alto, California-based company into a Silicon Valley icon.

That trust has been shattered with revelations that the company spied on its own directors, as well as journalists, to find out who was leaking information to the media. In Washington today, Chief Executive Officer Mark Hurd was asked to do what predecessors Hewlett and Packard never had to: Explain to a congressional committee behavior that was unethical at best and possibly illegal.

``The point of the `HP Way' was character and service to others,'' said Paul Saffo, who has followed the company for two decades as director of the Institute of the Future in Menlo Park, California. ``That's what makes this story so sad; this wasn't just another company. HP was once a company that stood for something.''

Hurd acknowledged as much in his opening statement today. ``If Bill Hewlett and David Packard were still alive, they would be appalled,'' he said about the probe, which spiraled into an elaborate scheme to deceive reporters, follow directors and trawl through trash.

`Hewlett-Packard's Scandal'

Hurd was joined at the U.S. House Energy and Commerce Committee by ousted Chairwoman Patricia Dunn and outside counsel Larry Sonsini. Hewlett-Packard's former top lawyer, Ann Baskins, also scheduled to appear, resigned today and refused to testify, invoking her Fifth Amendment rights.

Outside investigators declined to testify as well. They had been called to discuss their use of fake identities to obtain phone records, a practice that has given the session its title and etches the company's name in Washington's archives: ``Hewlett-Packard's Pretexting Scandal.''

In his first public comments on the scandal on Sept. 22, Hurd may have raised as many questions as he answered. He said he hadn't read a written report for management about the probe, and that he approved using a phony name in an e-mail sent to a reporter to trace her sources.

Carly's Reign

``He has to project the image that he's in charge, that he's responsible and he's going to clean up HP,'' said James Post, a professor of management at Boston University, before the hearing. ``He has to make a compelling argument that he can fix HP's problems.''

The unraveling of the `HP Way' may have begun during the reign of Carly Fiorina, who was ousted as CEO in February 2005. Fiorina orchestrated the $18.9 billion purchase of Compaq Computer Corp. in 2002 over the opposition of Walter Hewlett, son of the founder. In the months before her ouster, she argued publicly with investors unhappy with the company's performance.

``The HP image took some tough blows with Carly in charge, but they were on the mend,'' said Chuck Jones, an analyst at Atlantic Trust Stein Roe in San Francisco, which has $16 billion in assets, including Hewlett-Packard shares. ``They'll never get back to where they were, and that's a combination of Carly and the industry changing.''

Walter Hewlett declined repeated requests to comment, as did Fiorina, who next month will release a book on her time at Hewlett-Packard.

Internal Memos

Hewlett and Packard started their company in a one-car garage in Silicon Valley. Over the years, they put together a list of principles that ultimately became ``The HP Way,'' published in 1957.

``The point was character and service to others,'' said Saffo of the Institute of the Future. ``For them, the `HP Way' was a way of life, it was respect for individuals, do the right thing.''

Internally, Hurd has evoked the principles of the founders in three messages to the company's 150,000 employees since the Sept. 6 announcement disclosing the leak probe and the resignation of a director in protest. In one, a video presentation Sept. 13, Hurd apologized to employees for the investigation that has resulted in ``HP's reputation being called into question.''

The probe is ``not indicative of how we conduct business,'' Hurd said.

House committee members said they will be asking for more information about the company's use of pretexting, a practice that Hewlett-Packard has said it initially thought was within the law.

Up to the Board

Congress is considering whether to pass a federal law barring the practice and expects ``to learn from the HP hearings to see if we have to modify, improve or delete part of that proposed legislation,'' said Bart Stupak, a Michigan representative who is the top-raking Democrat on the committee.

Whether Hurd should be held accountable ``is not up to Congress,'' Stupak said. ``That's really up to HP's board.''

California Attorney General Bill Lockyer is conducting a separate review to determine if criminal charges should be brought against executives or the company's outside contractors.

Hewlett-Packard's investigation, and admissions of possible illegal behavior, caught the company just as Hurd's turnaround plan was taking hold. Hewlett-Packard was winning PC market share from leader Dell Inc., and profit had surpassed expectations in every quarter since he took charge.

The shares have risen 26 percent in the past year, and even after a 9 percent drop since the company said its investigators may have broken the law are trading near a four-year high.

Sticking to Business

Hewlett-Packard executives have resisted questions on the scandal. They say their concern is ensuring the company meets its revenue and profit numbers for this quarter.

``Our objective is to focus on the business,'' Vyomesh Joshi, head of Hewlett-Packard's printing and imaging division, said in an interview. Customers haven't expressed any worries about the scandal, he said. ``Our values are very simple: the business is No. 1.''

It's a sentiment echoed by Hurd in a Sept. 22 e-mail to employees. ``You have been unwavering in your focus,'' he said. ``I ask you to maintain that focus as we have 38 days left in the fourth quarter, and I'll try to get back from Washington as soon as I can to help you.''

To contact the reporter on this story: Connie Guglielmo in San Francisco at cguglielmo1@bloomberg.net.

To contact the editor responsible for this story: Emma Moody in New York at emoody@bloomberg.net.