Hewlett-Packard Co. (HPQ) investors will get the chance to voice dismay over the $8.8 billion writedown of Autonomy Corp. when they’re asked to re-elect Chairman Ray Lane and other directors at an annual meeting today.
Shareholder advisers have said that the board failed to properly vet the acquisition of software maker Autonomy, and are recommending that investors vote against Lane and some other members of the 11-person body. Institutional Shareholder Services Inc. and Glass Lewis & Co. faulted the board for the writedown due to “serious accounting improprieties,” and for depleting the stock’s value through years of mismanagement.
The specter of shareholder activism is the latest challenge facing Hewlett-Packard’s corporate management as it struggles to revitalize the troubled company. Chief Executive Officer Meg Whitman is working to stabilize the world’s largest personal computer maker after strategy shifts, diminishing demand for PCs and stepped up competition from Apple Inc. (AAPL), Samsung Electronics Co. (005930) and low-cost server makers led to six quarters of falling sales.
“It’s a real warning shot over the bow,” said Chris Bertelsen, chief investment officer at Global Financial Private Capital LLC. The board “needs to step back and let the executives turn this thing around.”
ISS recommends investors vote against chairman Lane and long-serving directors John Hammergren and G. Kennedy Thompson. Glass Lewis & Co. is urging shareholders to remove Hammergren and Thompson, as well as venture-capital investor Marc Andreessen and lead independent director Rajiv Gupta.
Even if the recommendations don’t lead to the ouster of directors, they underscore dissatisfaction with oversight of a company beset by slowing growth and upheaval in executive ranks.
“What the shareholders and proxy advisers are suggesting is accountability,” said Brent Bracelin, an analyst at Pacific Crest Securities LLC in Portland, Oregon. He has a sector perform rating on the shares, the equivalent of a neutral recommendation. “When you have tech companies that are struggling, people want a scapegoat.”
The company has shown early signs of progress under Whitman, Hewlett-Packard’s fourth CEO in three years. It forecast fiscal second-quarter profit that topped analysts’ estimates last month amid cost cutting and rebounding demand for enterprise services.
“Meg’s doing a great job with the hand she’s been dealt,” Bracelin said.
Whitman’s turnaround effort suffered a setback in November, when Hewlett-Packard disclosed that it had discovered accounting irregularities at Autonomy.
Lane is the former president and chief operating officer of Oracle Corp. (ORCL), the largest maker of database software. He brings to Hewlett-Packard decades of experience in business computing, an area it’s counting on to reignite growth. Given his position and closeness to former Hewlett-Packard CEO Leo Apotheker, who orchestrated the Autonomy deal, Lane should have been more vigilant in assessing the purchase, according to ISS.
“Shareholders reasonably expected Lane to exercise good judgment and oversight; in that respect he may bear the most responsibility in the boardroom with respect to the Autonomy failure,” the advisers said in a March 4 report.
Chief Financial Officer Cathie Lesjak also opposed the deal, Glass Lewis pointed out in its March 1 report.
The former executive team of Autonomy, lead by founder and ousted CEO Mike Lynch, sent a letter to shareholders calling HP’s allegations of accounting impropriety “aggressive and unusual.”
The group published a list of five suggested questions to investors that call for Hewlett-Packard’s board to provide evidence of its claims and details about how it calculated the impairment charge from the acquisition. Lynch and his team have consistently denied that they mishandled the company’s finances and point to audit reports from Deloitte LLC that found no irregularities.
“The problem with the Autonomy acquisition by HP lies in the mismanagement of that business by HP under its ownership, making it impossible for Autonomy to deliver on HP’s expectations,” the team said in the letter. “We refuse to be a scapegoat for HP’s own failings.”
Hewlett-Packard declined to make Lane available for comment. Michael Thacker, a spokesman for the Palo Alto, California-based company, said in an e-mailed statement that, “we feel we have the right board in place to turn HP around.”
Lane, who wasn’t opposed by either of the two advisers last year, was re-elected with 96 percent of the vote in the 2012 shareholder meeting. Glass Lewis recommended votes against Andreessen, Gupta, Hammergren and Thompson. None of them received more than 84 percent of the vote.
“It’s going to be very close, and anything that’s close is going to have to demand action by the board,” said Michael Pryce-Jones, a senior research analyst at shareholder CtW Investment Group, which advises pension funds affiliated with the labor group Change to Win on corporate governance. CtW met with Lane and other directors last month to push for the removal of Hammergren and Thompson.
Pryce-Jones said the investment group has “profound concern” about directors’ decision-making on mergers and acquisitions and other matters.
Even after a 74 percent rally in Hewlett-Packard shares since Nov. 19, the day before the Autonomy writedown was announced, the stock has lost half of its value since Aug. 6, 2010, the day Mark Hurd departed as CEO.
Hurd’s exit, after the board said he violated the company’s standards of business conduct, kicked off a three-year period of management upheaval and strategy shifts that included Apotheker’s troubled 11-month tenure.
Whitman has said that turnaround will take half a decade, and Hewlett-Packard is projected to report declining sales for the next three years, according to data compiled by Bloomberg.
The U.K.’s Serious Fraud Office is investigating Hewlett-Packard’s allegations that Autonomy inflated its sales and profit, as is the U.S. Securities and Exchange Commission.
“While Ms. Whitman and the board have made significant strides over the past year to set the company on the right track and attempt to reclaim its status as one of the preeminent American technology firms, the mishaps of the past several years have continued to weigh on the company’s progress,” Glass Lewis said in its report.
The stock performance and Autonomy impairment charge “call into question the oversight of the company’s longer-serving directors,” Glass Lewis said.
Hammergren, chairman of the board’s finance committee, has been a director since 2005 and is also chief executive officer at McKesson Corp. (MCK) Thompson, a director since 2006, heads the audit committee. Andreessen, co-founder of venture-capital firm Andreessen Horowitz, joined the board in 2009. Gupta, on the board since 2009, became lead independent director in 2011. Bloomberg LP, the parent of Bloomberg News, is an investor in Andreessen Horowitz.
Shareholders at today’s annual meeting will be asked for an advisory vote on the company’s pay plan for executives, and ratifying Ernst & Young LLP as the outside auditor.
Glass Lewis recommends shareholders vote against the measures. ISS backs Ernst & Young and has reversed its stance on the compensation measure, Hewlett-Packard said.
New York City Pension Funds on March 8 added pressure on the company to replace some directors, saying it will vote against the reappointment of Hammergren and Thompson, following the push by Change to Win for shareholders to remove the directors and drop Ernst & Young.
“The Autonomy debacle is the latest and most expensive in a series of ill-advised acquisitions and boardroom fiascos that have destroyed tens of billions of dollars in shareowner value,” John Liu, New York City Comptroller, said in a statement at the time. “While the board now appears to be taking steps to improve oversight, it will be unable to restore investor confidence without swiftly replacing these two directors.”
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