HP's Board Split Over Dunn

With Hewlett-Packard Chairwoman Patricia Dunn's status in jeopardy for seeking phone records, possibly illegally, in search of leaks, the HP board is in an uproar

As the Hewlett-Packard (HPQ) board prepares for a second day of meetings to discuss the fate of Chairwoman Patricia Dunn, who oversaw a controversial—and possibly illegal—investigation into leaks from board members to the press, a picture of a management schism is emerging among the 10 directors of the legendary computer company.

With another board meeting scheduled for Monday evening, Sept. 11, Dunn may be asked to resign because of her central role in the probe. What is emerging from discussions with current and former directors and HP employees, all of whom declined to be identified by name, is a picture of a board polarized between two camps of directors with conflicting ideas about how best to guide the company. (See BusinessWeek.com, 9/8/06, "BW Writers Targeted by HP".)

On one side are Dunn and two staunch supporters: Verizon (VZ) Vice-Chairman Lawrence Babbio and former Medtronic (MDT) Chief Financial Officer Rob Ryan. Dunn and her supporters are focused on the need for rock-solid business processes and clear adherence to good governance policies—whether for financial reporting or complying with regulations such as Sarbanes Oxley. "I personally believe Patricia Dunn worked her butt off in the interest of HP," says one director. "As horrible as people may find the results, she was trying to do the right thing."


  One insider says there are three HP directors, however, who feel that Dunn's investigation never should have been a high priority, and who lay the blame for the "pretexting" of directors' and business journalists' phone records (including those of the author and two other Business Week reporters) squarely with Dunn. This group includes George "Jay" Keyworth, who was identified through phone records as the source of the leaks and will not be on the slate for reelection in 2007, as well as director Lucy Salhany, and former HP executive and long-time director Richard A. "Dick" Hackborn.

In the middle are four directors whose perspectives are less clear: longtime HP CFO Robert P. Wayman, and newer members Sari Baldauf, an executive vice-president at Nokia (NOK), and McKesson (MCK) Chairman John Hammergren. Insiders say that both camps feel that HP CEO Mark V. Hurd is aligned with them. While Hurd was very critical of leaks, sources say he also found some of Dunn's focus on process tiresome and not the best use of the board's time.

While that may seem like the makings of a close vote, at least one source suggests it' unlikely that Dunn will survive this evening's session because many directors feel they're taking the heat for an investigation they didn't know much about. This source, who is familiar with the boards' proceedings, says keeping Dunn in place could make for an untenably hard slog in the months ahead. "If she isn't canned, the whole board is going to have to say that what happened wasn't so bad," says the source. Company spokesperson Michael Moeller confirms that HP has received an informal inquiry from the Justice Dept. related to the pretexting and says the company is cooperating fully.

The HP spokesman declined to discuss the workings of the board, and efforts to reach Dunn and other directors were unsuccessful. But in discussions over the last six days with three current directors and a former board member, it's clear there wasn't unanimous agreement with Dunn on the probe or more general management oversight issues.

If Dunn is ousted, it's unclear who would become the next chairman. Dick Hackborn, who was chairman for a year when Carleton S. "Carly" Fiorina first became CEO in 1999, is one possibility. He's considered the father of HP's printer business and has had a major behind-the-scenes role in every big management change over the past 20 years. On the other hand, he is closely associated with ex-board member Tom Perkins and Keyworth.


  As the company is currently looking to add at least two more directors who are high-ranking CEOs, one of them could step into the chairman's role. Sources say it is unlikely Hurd would be given the job, since HP has earned kudos with governance experts for splitting the CEO and chairman titles held by Fiorina until her ouster in early 2005.

The distinct camps on HP's board break down along philosophical lines regarding the nature of directorship. Keyworth, Hackborn, and Perkins, who resigned from the board in a rage after Keyworth was dumped from the 2007 slate, believe the role of a director is to focus on advising the CEO on how to run the company. "Hurd likes to spend board meetings talking about business issues—the competition, the possible acquisition candidates, new product development paths, and what people we can hire," says the person with knowledge of the board's proceedings.

Former board member Keyworth was valued by at least one peer for his intimate knowledge of the company. After a long meeting May 18 at which the board agreed not to have Keyworth stand for reelection, director Ryan briefly questioned Dunn as to whether there wasn't some way to "sweep this under the rug" rather than oust Keyworth from the board, according to an HP director. But in the end, Ryan stood by the decision to oust Keyworth.


  The contrasting view of board members was in evidence long before the current crisis. Soon after Dunn became chairperson in February, 2005, she began suggesting that directors take training courses to learn the latest ins and outs of directorship in the post-Sarbanes Oxley period, according to a board member. Perkins "vociferously" resisted, saying the idea of veteran directors going off to "take some course" was "ridiculous." According to one director, Perkins "decided it was a bunch of paper-pushing."

The source familiar with HP's board proceedings also says it was no secret to other directors that Keyworth sometimes talked to the press. Indeed, some board members believed that there were occasions when a director could serve the company by talking to the press on background. According to the source, Keyworth frequently told Hackborn and Perkins when he was going to speak with the press.

According to some directors, Dunn felt that older members of the board—particularly Hackborn, Perkins, and Keyworth—were standing in the way of her efforts to modernize the workings of the board. She was frustrated with her inability to impose a more buttoned-down, process-oriented approach on high-tech old-timers who were set in their ways.


  Directors Hackborn, Perkins, and Keyworth were close friends with legendary HP founders Bill Hewlett and Dave Packard, and sources say, didn't want to stray from the approaches that had, for the most part, worked well over the years.

Dunn's desire to end the leaks—certainly, not a sign of a board with world-class processes“may be her undoing. Three directors last week told BusinessWeek that Dunn escalated the search from an informal set of discussions in the spring of 2005, when she asked HP's own investigations team to begin a formal search. They hired an outside private investigations firm, that HP has not yet identified, which in turn hired gumshoes, at least one of which did the "pretexting."

The source familiar with board proceedings insists that some of the directors never took Dunn's probe seriously. Says the source, "Patty had an absolute obsession about this leaking issue. She talked about it all the time, and nobody else wanted to hear about it."


  Dunn didn't reveal any of the details: which investigation firm had been hired, whether HP people would be involved, or what methods would be used. "This was 100% Patty's deal," and she ran it with HP's internal investigations team, according to the source. Other sources say Dunn was clear that she would not be able to provide specific tactics, as it would compromise the investigation.

Over the ensuing months, as HP's turnaround progressed under Hurd's management, even less attention was paid to the probe by some directors. "[The investigation] was an utter distraction. It was like 'if that's what Patty likes to do, let Patty go do it,'" says the source.

The probe of the leaks came to a head at the May 18 meeting. When Dunn revealed that home phone records had been used to identify Keyworth as the leak, the source says that more than one director asked if they had been legally obtained, since the directors had not given their O.K. While three directors told Business Week last week that Perkins had not been upset when told of this before the meeting, this source says Perkins was furious during the meeting. Perkins later contacted AT&T, which may be how he discovered his records had been "pretexted."

Editor's note: Author Peter Burrows is one of the reporters whose private phone records were sought by investigators for Hewlett-Packard.

Before it's here, it's on the Bloomberg Terminal.