Commentary: Ousting Carly Was Just The Start

To succeed, Hewlett's board needs new blood

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

Yes, HP's board deserves credit for taking action to oust one of the world's most famous and charismatic CEOs -- something too many boards lack the courage to do. In particular, director Patricia C. Dunn, a longtime exec at Barclays Global Investors, was instrumental in building a consensus to push out Fiorina and then taking on the role of non-executive chairman. Yet a close examination of Fiorina's stormy tenure shows that the board waited too long to act and all too often succumbed to Fiorina's powerful brand of salesmanship since hiring her in 1999. That allowed her to pursue plans and tactics that have hurt HP's business and its standing with investors, employees, and customers.

Now, as it embarks on a search for a new CEO, the HP board should take steps to reform itself. Most important, the board needs fresh blood -- top-notch directors with the tech savvy to help the company forge a new future.

How did the board fall short? 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. Qualified outside candidates, such as former Oracle Corp. (ORCL ) President Ray Lane and Motorola Inc. CEO Edward Zander, had taken themselves out of the running. Both did multiple interviews for the job but ultimately backed away. Among the reasons, they were put off by the board's request that they take a 340-question psychological exam. "That worried me," said Lane in a 2002 interview. "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."

Then there's the board's oversight of Fiorina. When she arrived, the career sales and marketing specialist had never been a CEO, never worked in the computer or printer business, and never logged any big-time operating experience. She brought a much-needed sense of urgency to the company and centralized its sprawling operations. Yet the board let her press her ambitious, top-down overhaul to the point that it tore at the corporate culture, the famous HP Way, which was built on pushing authority out to the business units.

Next, in 2001, came the $19 billion merger with Compaq Computer Corp. For starters, the board never met without Fiorina present to discuss the idea, former director and company scion Walter B. Hewlett has said. When dismayed investors drove the stock down nearly 30% in the weeks after it was announced, the board never seriously reconsidered the deal. Instead, it did what it could to stifle Hewlett's objections to the acquisition. After Hewlett launched a proxy fight to stop the merger, HP's directors approved management's public-relations campaign to marginalize him as a cello-playing dilettante, too attached to the good old days.

The board also 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 D. Capellas would stay at the company to handle the day-to-day duties. But the board knew that was unlikely, because Capellas had a contract that granted him $14.4 million if he left within one year of the close of the deal. That buyout wasn't made public until after Capellas jumped ship to run MCI Inc. (MCIP ). "The No. 1 duty of a board is to communicate honestly," says Yale corporate governance expert Jeffrey A. Sonnenfeld, president of the Chief Executive Leadership Institute. "By commission and omission, it was deceitful."

Following the departure of Capellas in late 2002, directors pressured Fiorina to appoint a chief operating officer. A simple solution presented itself in late 2003: Longtime HP executive Webb McKinney had finished helping lead the integration of HP and Compaq. According to several insiders, he was interested in the COO job. Fiorina refused to fill the post. The board should have forced her hand.


Indeed, the board's kid-glove handling of Fiorina only exacerbated the problem of HP's weak bench. Several top execs have bolted over the past 18 months, including Mary T. McDowell, a former top server manager who is now an executive vice-president at Nokia Corp. 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 rather than condone public firings that could hurt the company's efforts to attract and retain talented leaders.

Fast-forward to the present. As the HP board begins the search for a new CEO, it should remake itself by bringing in some new directors. Who should leave to make way? A good place to start may be former Ameritech Corp. executive Robert E. Knowling. Since Fiorina invited him onto the board in 2000, Knowling's allegiance has seemed more toward her than to HP's investors. "I didn't join HP. I joined Carly. If she left tomorrow, I'd resign tomorrow," he said at the time. Then there's Verizon Communications Inc. (VZ ) President Lawrence T. Babbio Jr. Both he and Knowling were on the compensation committee that signed off on Fiorina's $21 million in severance and related farewell payments. Plus, an insider says they were the only two board members to oppose Fiorina's ouster. Neither Babbio or Knowling responded to requests for interviews.

Many people close to HP are calling for the head of Richard A. Hackborn. A brilliant strategist who started HP's lucrative printer business, he was instrumental in choosing Fiorina and was a key champion of the 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 2000.

Trouble is, Hackborn is the only bonafide tech visionary on the board. There also are no outside CEOs on the board, which is very unusual among the top tech companies. All of this points to a pressing need: new faces that can bring fresh ideas. "I don't see a lot of people there that have the breadth of understanding about where the industry is heading," says Jay W. Lorsch, a professor at Harvard Business School. Having mustered the courage to change HP's chief executive, the board now needs to be just as courageous in changing itself.

By Peter Burrows

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