Hewlett-Packard Hopes to End the Soap Opera

When some of Hewlett-Packard's (HPQ) board members became concerned about leaks to the press six years ago, they hired investigators to spy on fellow directors and reporters—creating a high-profile scandal. Then, HP's board tried to distance itself from controversial Chief Executive Officer Carly S. Fiorina by replacing her with Mark V. Hurd, a relatively unknown numbers guy from the Midwestern cash machine maker NCR (NCR). That back-to-business move worked—until a sexual harassment allegation from a B-movie actress-turned-marketing consultant triggered Hurd's abrupt resignation and a soap-opera-level feud between him and the HP board.

Under the new management of Chairman Raymond J. Lane and CEO Léo Apotheker, who both arrived in November shortly after Hurd's departure, HP's board is trying to put the drama behind it once and for all. On Jan. 20, HP announced the resignation of four directors who, according to several people familiar with the matter, had expressed firm feelings—both for and against—the company's handling of the Hurd situation. They're being replaced by five fresh faces.

The extensive overhaul put HP back in the spotlight and caught the attention of corporate governance experts. "That is quite a major change, to say the least," says William W. George, a professor of management practices at Harvard Business School. The departure of so many independent directors at once "is very rare unless there is something that comes to the level of a bankruptcy."

If the latest moves help the HP board finally shake its drama queen image, much of the credit will go to Lane, the former president of Oracle (ORCL) and a managing director at venture capital firm Kleiner Perkins Caufield & Byers.

Lane spearheaded the board makeover and chose to forgo hiring a search firm, relying instead on his own Rolodex and powers of persuasion. "Ray did a lot of work to reach out to the people being considered," says Bill Wohl, an HP spokesman. "Every one of them said, 'Sign me up.' " His actions typified the decisiveness that earned Lane, 64, accolades during his running of day-to-day operations at Oracle. "The headline here is that Ray, as the chairman of the board, is taking control and putting his own stamp on it," George says. "He is not some passive lawyer just overseeing things."

The board shakeup is also an effort to bolster HP's main business selling computing equipment to large companies. Several of the departing directors have little experience in that area. Former director Joel Z. Hyatt, for instance, is a lawyer, entrepreneur, and vice-chairman at Current Media, a television broadcaster specializing in programming submitted by viewers. Lucille S. Salhany, another departing director, is a former Hollywood executive and CEO of consulting company JHMedia.

Who's replacing them? Heavy hitters in the technology industry such as Meg C. Whitman, the former CEO of eBay (EBAY); Patricia F. Russo, former CEO of Alcatel-Lucent (ALU); and Gary M. Reiner, the former chief information officer at General Electric (GE). Their expertise in large-scale e-commerce, networking equipment, and business computing may help HP extend its lead as the world's largest supplier of technology infrastructure equipment.

George and other observers say Lane's board shakeup is a sign the chairman is preparing HP for confrontation as its business lines collide with those of powerful rivals. In the 1990s, enterprise computing companies including HP, Oracle, EMC (EMC), and Cisco Systems (CSCO) were content to make billions in their distinct niches. Those lines are now blurring. HP is stepping on Cisco's networking turf through its acquisition of 3Com. Oracle's purchase of Sun Microsystems threatens HP's line of servers and storage systems. Cisco has started selling servers that compete with gear made by HP and Oracle.

These companies sense the approach of an inflection point as business customers make the transition from older technologies to the new era of cloud computing, where software applications run in data centers and connect to PCs over the Internet. To take advantage of the cloud, businesses must upgrade to newer, faster equipment and applications. HP and its competitors are vying to be full-service suppliers that can fulfill all of a customer's cloud computing needs.

Tensions between HP and Oracle have run particularly high. Within a month of Hurd's ouster from HP he became a co-president at Oracle, prompting HP to file a lawsuit against its former CEO. (The suit was quickly settled.) Lane left Oracle on acrimonious terms with its outspoken CEO, Larry Ellison, and Apotheker used to run Oracle's archrival, business software maker SAP (SAP). "I think there is a huge emerging story, and that is the HP-Oracle war," says Harvard's George. "I think Ray Lane is gearing up for that and needs a board that understands that."

The board changes may do a lot for HP strategically, but the company still faces many of the same product challenges that have dogged it for years. "The disturbing thing is that I don't see people [on the board] who have built anything in terms of manufacturing," says Michael S. Malone, who wrote Bill & Dave, a book about the company's co-founders, William Hewlett and David Packard. "And where is the hard-charging innovator that is out there ahead of everyone else?"

In fast-growing areas such as mobile computing and cloud-based business software, HP has fallen behind. The company was once a powerhouse in the market for personal digital assistants, but the smartphone revolution has passed it by. That's a major issue, since HP is the world's largest PC maker; smartphone sales have already passed laptop sales and are expected to outpace total PC sales in 2012. Similarly, HP missed the early rush into tablet computing. Analysts estimate that roughly 100 iPad competitors were introduced at the Consumer Electronics Show in early January, but HP has yet to issue a serious response. The company's sluggishness in these areas is particularly worrisome given that consumers increasingly are shaping technology trends, even at the office.

In the area of cloud technology, HP didn't formally unveil a product lineup to customers until Jan. 25. Rivals such as Amazon.com (AMZN), Microsoft (MSFT), and Google (GOOG) have spent years wooing customers to use their wares, such as business software accessed through the Internet. "That's one area where HP's story is least understood" by customers, says Abhey Lamba, an analyst at ISI Group in New York. "They have more work to do."

HP could have done more to reassure shareholders by giving a board position to a gadget whiz or a cloud computing guru such as Salesforce.com (CRM) CEO Marc Benioff, says one longtime HP investor, who requested anonymity so as not to upset his relationship with the company. That would have addressed concerns about its ability to forecast technology trends and outflank competitors technologically, rather than rely on size and efficiency for success. "They are full of slow-moving dinosaurs," Malone says. "It's about time that [management] steps up and trusts people enough to take some risks."

The first glimpse of HP's risk tolerance under Apotheker and Lane could arrive in February. HP has scheduled an event to show off the initial fruits of its acquisition of Palm, the smartphone maker it bought last July. Photos and specification sheets for an upcoming Palm tablet have already leaked to the Internet and suggest that the company plans to unveil an iPad competitor. (HP won't comment on the authenticity of the leaked documents.) Apotheker is set to reveal HP's new strategy in mid-March; in the past, he's talked about providing more funding for research and development, which suffered under Hurd.

As for controlling the drama, Lane has vowed that the board he chairs will keep a lower profile. "The board needs to operate in privacy," he says.

The bottom line: HP says a recent boardroom shakeup gives it greater tech expertise and a break with the board's operatic past.

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