March 10 (Bloomberg) -- Hewlett-Packard Co. directors, including Chief Executive Officer Leo Apotheker, went against company rules in their appointment of new board members, according to a shareholder-advisory group.
Apotheker played a direct role in picking new board members, a move that contravenes the board’s own rules governing director selection, according to Institutional Shareholder Services Inc., an adviser to investors on corporate governance matters.
“The direct participation of Apotheker in the appointment of five new directors raises red flags,” ISS said in a report prepared for clients and obtained by Bloomberg News. “The board is responsible for representing shareholders and overseeing management, in particular the CEO.”
Hewlett-Packard reshaped its board with executives who have ties to Apotheker, whose tenure as CEO began Nov. 1. One director sits on a board in Europe with Apotheker, and at least three others have been customers of German software maker SAP AG, where Apotheker was CEO and worked for two decades. The ties could inhibit directors from acting objectively, ISS said.
ISS recommended that shareholders vote against three sitting directors who are up for re-election at the annual meeting, scheduled for March 23, because they shouldn’t have permitted Apotheker to play a role in the nomination, ISS said.
Hewlett-Packard Chairman Ray Lane said that the board didn't go against company rules. Apotheker was a member of an ad hoc committee, appointed by Lane, that recommended candidates who were later considered by the full board, Lane said in an interview today.
“Apotheker didn’t have authority on the ad hoc committee,” Lane said. “He was simply a member of it.”
ISS’s recommendation is based on a “misinterpretation of the process that HP employed in identifying, selecting and nominating” directors, Mylene Mangalindan, a spokeswoman for Palo Alto, California-based Hewlett-Packard, said in a statement sent by e-mail yesterday.
“We do not believe that it would be in the best interests of HP’s stockholders to lose the service of the experienced and dedicated board members who have been delegated primary responsibility for establishing and maintaining those governance practices,” she said.
The charter for Hewlett-Packard’s nominating and governance committee calls for the identification of potential director candidates to be conducted by independent directors only, according to ISS.
“The CEO’s formal participation in the ad hoc committee established to identify potential director candidates runs contrary to the Nominating and Governance Committee’s Charter,” the group said.
Three directors -- Lawrence Babbio, Sari Baldauf and G. Kennedy Thompson -- shouldn’t have permitted Apotheker to play a role in the nomination, ISS said.
“Shareholders should be significantly concerned about the committee’s failure to fulfill its role in leading the process for board appointments,” according to the report.
Lane said the board chose directors based on their expertise in the technology industry.
The new board members “aren’t buddies of Apotheker,” Lane said. “I knew these people better than Leo,” he said. “But because Leo and I know the industry it would be hard to pick any name we don’t know.”
Glass Lewis & Co., another shareholder adviser, also recommended against the re-election of Babbio for his role in approving the severance package for former CEO Mark Hurd. The executive departed in August after the company said inaccurate expense reports filed by Hurd or on his behalf concealed a personal relationship with a contractor, in violation of HP’s standards of business conduct.
It also faulted Babbio for failing to create a succession plan that “may have avoided last summer’s high-profile and ultimately expensive CEO hunt,” Glass Lewis said.
Hewlett-Packard’s directors “have carried out their obligations in a fully compliant manner,” Mangalindan said.
ISS also recommended that shareholders vote against Apotheker’s proposed pay package, valued by ISS at $47 million, given his role in appointing directors.
The new board members, who were announced Jan. 20, include Dominique Senequier, who runs AXA Private Equity, the investment buyout arm of French insurer AXA SA. Apotheker formerly sat on AXA’s supervisory board. Senequier and Apotheker both sit on the supervisory board of Schneider Electric SA, the world’s largest maker of circuit breakers.
Whitman, Russo, Reiner
Three other newly appointed directors -- Meg Whitman, former CEO of EBay Inc.; Patricia Russo, former CEO of Alcatel-Lucent SA; 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 SAP customers post excess goods for sale on EBay. 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. At General Electric, Reiner handled technology matters such as e-commerce under CEO Jack Welch and his successor Jeffrey Immelt. GE has been a customer of SAP’s Business Objects data-analysis software.
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