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Where the Buck Stops at HP

By Peter Burrows Carly Fiorina remains as much a magnet for headlines now that she is gone, as she was when she was running Hewlett-Packard (HPQ). But just as much attention should be paid to the role of HP's board in the tumultuous events of recent days.

Yes, HP's board deserves credit for taking action to oust one of the world's most famous, charismatic CEOs -- something too many boards lack the courage to do. But a closer examination shows that the board waited too long, and it came up lacking on many major duties of a board: to hire, fire, and monitor the execution of management's strategy. All too often, HP's directors succumbed to Fiorina's powerful brand of salesmanship, allowing her to pursue plans and tactics that wound up hurting HP's businesses and its standing with investors, employees, and customers (see BW Online, 2/17/05, "The Shadow on HP's Good News").

As the board begins a search for a new CEO, it should also take steps to reform itself by bringing in new blood as well as finding ways to recapture lost credibility.

FUZZY DIRECTION. How did the board fall short? Let's start with Fiorina's hiring. It's often forgotten that by the time Fiorina was named as the first outside CEO of HP, she was competing in a field of one. Other candidates, such as former Oracle (ORCL) President Ray Lane and former Sun Microsystems (SUNW) President Edward Zander, had taken themselves out of the running. While HP publicly said it had considered HP Executive Vice-President Ann Livermore, internally she was not seriously considered.

Certainly, many factors are involved, but the board deserves some blame. While Zander and Lane each did multiple interviews for the job, both backed away, in part, due to concerns that the board wasn't mapping out clear marching orders. One example: Just how much of the famous "HP Way" corporate culture should the new CEO retain?

Lane and Zander also were put off by the board's request that they take a 340-question psychological exam. In a 2002 interview, Lane said, "That worried me. What kind of board am I going to be working for? I thought it was a silly thing for a CEO to be asked to do."

"MORE DUE DILIGENCE." Then there's oversight. In many ways, the board did Fiorina no favors by giving her carte blanche to remake the company. Certainly, an incoming CEO should be accorded appropriate freedom to do his or her job. But this case was unique. Fiorina had never been a CEO, nor had she ever been in the computer or printer business.

Most of all, she had no big-time operational experience. Her reputation at Lucent (LU) was as a master of sales and marketing. "I think they could have done more due diligence on her," says former HP executive Bob Frankenberg, who oversaw HP's rise as a PC power in the early 1990s. "While she was eloquent and a great communicator, she'd never had to run operations, or develop and bring a product to market. But the board was incredibly enthusiastic about her."

Despite the lack of operational background, the board let Fiorina vault into a full-scale transformation of what may well be tech's most complex company. She tore down what had been 80-plus fiercely independent business units and tried to meld them into a far more centralized entity, while at the same time revamping everything from compensation practices to how HP spent its marketing budget.

SEALING LIPS. Too often, these changes simply replaced one form of inefficiency with another, and Fiorina's insistence on setting aggressive growth targets in the midst of all this change led many of HP's best executives to lose faith. Meanwhile, as top performers such as former laser-printer chief Carolyn Ticknor and inkjet-printer chief Antonio Perez left, Fiorina's HP failed to attract any new big-name talent.

To many insiders, the board seemed out of touch. While it was clear inside HP that all of her reforms had yet to jell, the board handed her the mantle of chairperson as well as CEO in September, 2000 -- just over a year after joining the company.

By 2001, the problems at HP were becoming clearer, setting the stage for Fiorina's biggest move: the $19 billion acquisition of Compaq Computer. But investors panned the deal, driving the stock down 17% in hours. Indeed, in the run-up to the deal announcement, only company scion and board member Walter Hewlett had professed big concerns about acquiring Compaq. Rather than leave him free to speak his mind, the board pressured him to back a clause requiring unanimous board support for the deal.

"IT WAS DECEITFUL." Certainly, Hewlett should have spoken up sooner. But that doesn't excuse the board's backing of Fiorina's efforts to stifle Hewlett after he launched what became the largest proxy fight in corporate history. At a time when whistle-blowers at Tyco (TYC), Enron, and elsewhere were being hailed for questioning boardroom groupthink, HP's directors approved a public-relations campaign by management to marginalize Hewlett as little more than a nostalgic, cello-playing dilettante. Sure, that would have been warranted had it been true. But as hindsight shows, it wasn't. Hewlett got a bum rap.

Then the board gave its tacit consent to more worrisome tactics. To ease investors' concern about Fiorina's lack of operational chops, officials repeatedly argued that Compaq CEO Michael Capellas would stay at the company to handle the day-to-day duties. The board knew it almost certainly wasn't true because Capellas had been promised $14.4 million if he left within one year of the close of the deal.

"The No. 1 duty of a board is to communicate honestly," says Yale corporate-governance expert Jeffrey Sonnenfeld, president of the Chief Executive Leadership Institute. "By commission and omission, it was deceitful." Capellas did jump ship to become CEO of MCI (MCIP). Says Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware: "If a CEO makes statements that are untrue, directors have an obligation to ensure that it is corrected."

DEPLETED RANKS. And what about the booting of Fiorina? Even in this instance, the board acted slowly. Since the departure of Capellas, directors were pressuring Fiorina to appoint a chief operating officer. Rather than pressure, it should have acted.

In fact, a simple solution was available in late 2003. That's when long-time HP exec Webb McKinney successfully finished the task of integrating the Compaq and HP operations, and approached Fiorina for his next job. Multiple insiders say McKinney asked for the COO job, but Fiorina refused. The board should have forced her hand.

Outside of operational shortcomings, Fiorina also was let go due to board concern about HP's lack of bench strength. A stream of well-regarded executives from Mary McDowell, currently executive vice-president at Nokia (NOK), to Juergen Rottler, now an executive vice-president at Oracle, bolted over the past 18 months.

AVAILABLE TALENT. The board, however, did little to hold Fiorina accountable until her Feb. 9 ouster. And when the company missed its third-quarter numbers last year, Fiorina promptly fired three high-ranking sales executives. "How could they let her go on this finger-pointing campaign?" wonders Sonnenfeld, who says that IBM's (IBM) board rebuked then-CEO John Akers for similar actions in the early 1990s. The point: HP should have held Fiorina accountable, and insisted she take the heat rather than further deplete the executive talent.

Fast-forward to the present. As the HP board begins the search for a new CEO, it should also reform itself. Job No. 1: Bring in some new blood -- although not a full transfusion. Some people close to HP, for example, are calling for the head of Richard Hackborn. A brilliant strategist who started HP's hugely successful printer business, he was instrumental in choosing Fiorina, and was a key champion of the controversial Compaq merger.

"Given his support for Fiorina, many of us felt he should have resigned as well -- for the same reason: she didn't succeed," says Carl Snyder, HP's former head of procurement before he retired in the mid-1990s.

WHO'S NEXT? That might be excessive. Hackborn is one of the few heavy hitters on the board when it comes to running a major tech company. Renaming interim CEO Robert Wayman to the board was also a good move. Despite the turbulence of recent years, Wayman built up huge credibility during his long career as HP's CFO.

And the directors inherited from Compaq clearly know how to build shareholder value. Consider that Compaq's investors are far better off than they would have been without the HP merger.

Less of an argument can be made for others, such as Robert Knowling Jr. A former telecom executive, he was pushed out of Covad Communication Group shortly after Fiorina named him to the board. At the time, his allegiance seemed inclined far too much to Fiorina, rather than to HP's investors. As he told BusinessWeek at the time, "I didn't join HP. I joined Carly. If she left tomorrow, I'd resign tomorrow."

PASSIVITY'S PENALTY. Mostly, HP should look to bring in some new faces -- experts who can bring ideas for how HP can reestablish itself as an information-technology industry leader of the future. For too long, the HP board has gone along for the ride. Before now-deceased founders Bill Hewlett and David Packard backed away from the scene in the 1980s, the board understandably rubber-stamped most of their moves. Then, the board became too passive with a very different kind of leader.

Now, having mustered the courage to ax Fiorina, the board needs to be just as courageous when it looks at its own makeup and its role going forward. Burrows is Computer editor in BusinessWeek's Silicon Valley bureau

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