HP Reshapes Board With Directors Connected to CEO Apotheker

Hewlett-Packard Co. recruited five executives to its board who have business ties to Chief Executive Officer Leo Apotheker and will need to prove they can act independently, corporate governance experts said.

In a shakeup announced Jan. 20, HP said the new directors have experience in areas where it wants to expand, such as networking and consumer products. The new directors, due to replace four departing members in March, include more women and give HP more non-U.S.-based executives. The total rises to 13.

One director sits on a board in Europe with Apotheker, who is less than three months into his tenure at HP. At least three others have been customers of German software maker SAP AG, where Apotheker was CEO and worked from 1988 to 2010. Such interconnections could inhibit new directors from disagreeing with HP management and asserting independent viewpoints, said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware.

“If directors have significant relationships with the CEO or other directors of a company on whose board they sit, it’s harder for them to be objective,” Elson said. “Directors are supposed to be representing shareholders, not the CEO or one another, and that’s why companies typically try to recruit directors who are independent of one another and management.”

New directors -- including Booz & Co. CEO Shumeet Banerji; Meg Whitman, former CEO of EBay Inc.; and Patricia Russo, former CEO of Alcatel-Lucent SA -- joined Jan. 21 and will stand for re-election on March 23, HP said in a regulatory filing.

‘Independent Decisions’

“They are not there to support Leo or me,” HP Chairman Ray Lane said today in an interview at the World Economic Forum in Davos, Switzerland. “They are there to take independent decisions.”

Lane, who became non-executive chairman on Nov. 1, said Banerji and Whitman first met Apotheker during the recruitment process, while the others knew him before because of his role as SAP’s CEO.

“It’d be hard for Leo or myself, as long as we’ve been in this industry, to not have relationships with a lot of people in this industry who can help HP,” Lane told Bloomberg Television.

HP made the changes after it was faulted for how it handled the departure of former CEO Mark Hurd, who left in August after an investigation by the Palo Alto, California-based company found he violated HP’s business conduct standards in trying to hide a personal relationship with a contractor.

Shareholder lawsuits allege that HP directors wasted company money by awarding Hurd as much as $53 million in severance and other benefits. Oracle Corp. CEO Larry Ellison, who later hired Hurd as a co-president, likened the removal to Apple Inc.’s ouster of Steve Jobs in 1985.

Board History

In the past decade, HP’s board was criticized for the way it handled leaks to the media related to former CEO Carly Fiorina who left in February 2005 after the acquisition of Compaq hadn’t yet delivered the results she promised.

HP director Tom Perkins resigned in 2006 in protest over a company probe of the leaks. Chairwoman Patricia Dunn was ousted the same year amid the fallout from an investigation that showed private investigators, working for her, improperly obtained telephone records of directors, employees and reporters.

The recent changes may have been aimed at lessening the discord, said recruiters and analysts including Jayson Noland, an analyst at Robert W. Baird & Co. in San Francisco.

At the same time, HP’s board will need to ensure that members who have close ties to top executives aren’t inhibited from challenging management decision-making, Espen Eckbo, director of the Lindenauer Center for Corporate Governance at Dartmouth College’s Tuck School of Business.

Lane Reaches Out

“There’s nothing illegal about directors sitting on one another’s boards, but it does create a strong network between individuals which you hope won’t affect fiduciary responsibilities,” Eckbo said. “There has been a fair amount of volatility at HP and as a shareholder you want to make sure decisions aren’t influenced by any of these personal relationships.”

HP didn’t retain a search firm to recruit directors, according to a person familiar with the process, who asked not to be identified because hiring matters are confidential. Lane and Apotheker personally contacted the candidates, said Bill Wohl, a spokesman for HP.

“Ray did a lot of work to reach out to the people being considered,” Wohl said. “Every one of them said, ‘Sign me up.’”

One HP board member, Dominique Senequier, runs AXA Private Equity, the investment buyout arm of French insurer AXA SA. Apotheker sits on AXA’s supervisory board. Senequier and Apotheker also both sit on the supervisory board of Schneider Electric SA, the world’s largest maker of circuit breakers.

EBay, Alcatel-Lucent Ties

Russo, Whitman and Gary Reiner, former chief information officer of General Electric Co., all did business with SAP while Apotheker was in management.

In 2003, when Whitman was CEO of EBay and Apotheker was a top sales and marketing executive at SAP, the companies announced a deal that let customers of SAP’s business applications for managing inventory levels and sales post excess goods for sale on EBay’s marketplace using SAP software. Whitman was EBay’s CEO from 1998 to 2008.

SAP said in 2008 that Alcatel-Lucent had upgraded 6,000 users in 30 countries to a new version of SAP’s applications software. Russo relocated to Paris as a result of Lucent Technologies’ 2006 merger with French telecom-equipment maker Alcatel. Apotheker resided in Paris before joining HP last year.

At General Electric, Reiner handled matters including e- commerce under CEO Jack Welch and his successor Jeffrey Immelt. GE has been a customer of SAP’s Business Objects data analysis software. It also purchased software from Oracle during Lane’s tenure as chief operating officer.

Unprecedented Overhaul

Banerji, HP’s other new director, is CEO of Booz, where Lane was an executive prior to becoming president and chief operating officer at Oracle. Banerji has also been managing director of Booz’s European operations, and Booz has done business with Oracle and SAP.

Apotheker left SAP in February 2010 after being ousted as CEO. Lane worked at Oracle from 1992 to 2000.

Two of the four HP directors who plan to leave the board -- John Joyce and Joel Hyatt -- initially stood behind Hurd, according to two people familiar with the matter. Two other exiting directors, Lucille Salhany and Robert Ryan, advocated a management change after details about Hurd’s conduct emerged, said two people, who asked not to be identified because the discussions were private.

Whatever the degree of independence the board may exert, the extent of overhaul has little precedent, governance experts said. Tyco International replaced much of its board after former CEO Dennis Kozlowski was found to have misused company funds.

Director ‘Dumping’

“I don’t like the idea of a CEO dumping all the independent directors like this, but given the choice of having a terrible board continue to run the company, I’m in favor of kicking them out,” Nell Minow, co-founder of the Corporate Library and director of GovernanceMetrics, said in an interview.

“Sometimes directors who are completely independent aren’t involved enough,” Minow said. “You want people who are vitally connected to the trends and transactions in your business, which sometimes creates conflicts, but their connections can prove useful.”

Michael Bulger, a spokesman for Booz, said the company wouldn’t discuss its clients. HP declined to make the new directors available. Calls to Reiner, Russo, and Senequier weren’t returned.

As HP aims to quell criticism of its board that has marked the past decade, Apotheker’s ties to HP’s directors may cause the questions to persist, said Delaware’s Elson.

“The drama that this board has produced over the last several years is unusual,” he said. “And it’s a drama that doesn’t seem to be ending.”

To contact the reporters on this story: Carol Hymowitz in New York at chymowitz1@bloomberg.net; Aaron Ricadela in San Francisco at aricadela@bloomberg.net.

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net.

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