HP's Mark Hurd Resigns After Sexual-Harassment Probe

Hewlett-Packard Co.’s Mark Hurd resigned as chief executive officer after an investigation found he had a personal relationship with a contractor who received numerous inappropriate payments from the company.

Chief Financial Officer Cathie Lesjak, 51, will take over as interim CEO. While an investigation didn’t find a violation of the company’s sexual-harassment policy, Hurd “demonstrated a profound lack of judgment that seriously undermined his credibility and damaged his effectiveness in leading HP,” General Counsel Michael Holston said. The shares plunged 9.3 percent in late trading after the announcement.

The departure leaves Hewlett-Packard, the world’s biggest maker of personal computers and printers, in search of a new CEO and chairman after more than five years under Hurd. On his watch, the Palo Alto, California-based company regained leadership in the PC market from Dell Inc. and used acquisitions to expand into new areas, such as computer services. The company’s stock-market value increased $44.6 billion, rising to $108.1 billion, since Hurd took the helm on April 1, 2005.

“Clearly he’s been a significant leader and visionary in restructuring the company,” said Jeffrey Fidacaro, an analyst at Susquehanna Financial Group in New York. “It’s going to be a significant loss to the company in terms of operations.”

Hewlett-Packard fell $4.31 to $41.99 in extended trading. The shares, down 10 percent this year, dropped 5 cents to $46.30 earlier today on the New York Stock Exchange.

Successors?

Lesjak, a 24-year HP veteran, doesn’t wish to replace Hurd permanently, the company said. Todd Bradley, who runs the personal computer division, and Ann Livermore, executive vice president of the enterprise business, could be candidates.

External possibilities include Steve Mills, who has run the software group at International Business Machines Corp. for a decade and recently took over the hardware division, said Rick Sturm, chief executive officer of EMA, which researches the information technology industry. Another possible candidate is Ray Lane, the former chief operating officer of Oracle Corp., who’s now a managing partner at Kleiner Perkins Caufield & Byers, said Neil Sims, a managing director at Boyden, an executive search firm.

HP initiated the investigation on June 29 after the contractor made a claim of sexual harassment. The woman, who HP declined to identify, worked on marketing tasks for two years, the company said. The probe found violations of HP’s standards of business conduct, though it didn’t find violations of the harassment policy.

Expenses

Hurd submitted receipts for expenses ranging from $1,000 to $20,000 over two years, including meals and travel, that should have been labeled as personal and not related to business, said a person familiar with the situation.

The expenses were incurred at HP-hosted “CEO forums,” mostly in North America, in which Hurd participated, this person said. The woman worked as a contractor hosting the events. Hurd, who is married and has two children, intends to pay the company back the entire amount.

Discussions of Hurd’s departure began about a week ago, the person said.

The contractor didn’t have an affair or a sexual relationship with Hurd, according to Gloria Allred, the woman’s attorney.

Gina Tyler, an HP spokeswoman, declined to comment beyond what HP said during a conference call and in statements.

Hurd will get a severance payment of $12.2 million, plus other benefits that include a prorated vesting settlement of 330,177 restricted HP shares. He received $30.3 million in compensation in 2009 and $42.4 million the year before.

Severance Payment

“The board took immediate action in this matter and their decision was right and necessary to uphold HP’s values of trust, respect and uncompromising integrity,” Holston said.

Hurd isn’t the first CEO to resign after a relationship surfaced. In 2005, Boeing Co. ousted CEO Harry Stonecipher for having an affair with an employee, 15 months after he returned from retirement to lead the company’s recovery from a purchasing scandal. Boeing is the world’s second-biggest commercial jet builder.

In June, Mark McInnes resigned as CEO of David Jones Ltd., Australia’s second-largest department store chain, apologizing for “unbecoming” behavior toward a female colleague. The employee, Kristy Fraser-Kirk, sued him and the company, saying McInnes made unwelcome sexual advances toward her.

‘Would Be Difficult’

“It would be difficult for me to continue as an effective leader at HP and I believe this is the only decision the board and I could make at this time,” Hurd, 53, said in a statement. “I want to stress that this in no way reflects on the operating performance or financial integrity of HP.”

Hurd, who took over as CEO after Carly Fiorina stepped down in 2005, used acquisitions to expand in businesses that generate wider profit margins. Hurd’s biggest deal came in 2008 with the $13.2 billion takeover of Electronic Data Systems Corp., a provider of computer services. That catapulted HP to No. 2 in the services market, behind IBM, helping offset a slump in demand this year for PCs and printers.

This year, Hurd acquired 3Com Corp., stepping up competition with Cisco Systems Inc. in networking equipment, as well as the smart-phone maker Palm Inc.

Hewlett-Packard relied on its retail connections and mobile-computer designs to grab the largest share of the PC market in 2006. The company’s tens of thousands of retailers put its products in front of more consumers -- giving it an edge over former leader Dell, which mostly sold computers online and through catalogs.

Topping Dell

“The company has a very strong management team behind Mark Hurd,” Nehal Chokshi, an analyst at Technology Insights Research-Southridge Research Group in New York. “However, whenever there is a key executive that has brand value, such that Mark Hurd does have, you would expect the stock to react negatively.”

The company also reported preliminary results for the fiscal third quarter. Excluding some costs, earnings were about $1.08 a share, compared with the $1.07 average estimates of analysts in a Bloomberg survey. Revenue rose 11 percent to about $30.7 billion, HP said. Analysts had predicted $30 billion on average.

For the full year, earnings will be $4.49 to $4.51 a share and sales will be $125.3 billion to $125.5 billion, the company said. Analysts have predicted profit of $4.49 and revenue of $124.6 billion.

Annual Forecast

“HP remains in an exceptionally strong position both financially and in the marketplace,” Lesjak said in a memo to employees. “It is essential, however, that we remain focused and continue to achieve -- if not exceed -- our operational and financial objectives.”

Hurd’s departure had nothing to do with the company’s performance, HP said.

“Mark was an important part of this story operationally over the last several years and a big part of where HP was going,” said Aaron Rakers, an analyst at Stifel Nicolaus & Co. in St. Louis. He recommends buying the stock.

Hurd is also on the board of News Corp. Jack Horner, a spokesman for the media company, declined to comment on whether he would keep that post.

To contact the reporters on this story: Connie Guglielmo in San Francisco at cguglielmo1@bloomberg.net; Ian King in San Francisco at ianking@bloomberg.net; Aaron Ricadela in San Francisco at aricadela@bloomberg.net

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