Where's the Shareholder Outrage at Hewlett-Packard?

Michael Douglas as Gordon Gekko in the 1987 film, "Wall Street" Photograph by 20th Century Fox Film Corp/Everett Collection

Here’s a vastly boiled-down refresher on corporate governance: A public company’s management is accountable to its board of directors, which in turn answers to shareholders, who are, after all, the “owners” of said public company. These holders keep executives and directors honest by casting votes based on tens of millions of shares dispersed across individual brokerage accounts, pension plans, and mutual funds. A management that consistently does wrong by shareholders is liable to be evicted from its seat at the mahogany table. For elaboration, please see Gordon Gekko’s speech in the movie Wall Street.

How then have Hewlett-Packard shareholders largely remained so silent while board infighting, botched multi-billion-dollar acquisitions, multiple strategic false starts, and high C-Suite turnover have combined to lop off more than $90 billion of market valuation—the venerable tech company is now worth just $28 billion—since the end of 2009? After management asked on Wednesday for yet further patience as it restructures HP’s sprawling lines of business, shares plunged to where they traded 10 years ago. One prominent analyst observed in the New York Times that HP was the cheapest big-cap stock in 25 years. And that was before its Oct. 3 plunge.

Aggrieved shareholders, unite! (Cue crickets. …)

What gives?

Increased shareholder vigilance can only do so much to combat the bad business trends that are hitting HP all at once. Its personal computer business is losing out big in the broader trend of iPad and iPhone substitution. The profit pool of overpriced toner cartridges is shallower, and companies’ growing adoption of cloud computing—out of sight, out of mind—makes it harder to convince them to shell out for square-foot-hogging hardware.

But so much of what now ails HP has been self-inflicted—lots of it needlessly. Chief Executive Officer Meg Whitman is the company’s sixth CEO since 2005, a stretch that has seen its culture of corporate governance suborn hacking into the phone records of journalists—and even those of its own directors. With the board’s blessing, management in 2008 paid $13.9 billion to take out EDS, an acquisition so disastrous that HP recently had to write down $8 billion of its value. Mark Hurd, the CEO who sought that deal, got paid $43 million in fiscal 2008, en route to getting fired for questionable human-resources behavior two years later.

The HP board’s ham-fisted handling of that episode might have been forgivable had the directors not then hired a new CEO who hastily made a nearly $12 billion software acquisition and signaled to Wall Street that HP was looking to jettison its PC business. Leo Apotheker lasted less than a year as CEO; the (revamped) board wasted no time in lamenting the decision to hire him.

Meg Whitman, HP’s current CEO, has since been explaining the struggles brought on by Apotheker’s ill-spent billions for Autonomy, not to mention HP’s having squandered its $1.2 billion acquisition of Palm, a false start that has left it without a smartphone or tablet that can compete with Apple. Meanwhile, come to think of it, you can rest assured that HP is keeping the PC business it wanted to sell when it was in better shape.

And the board? Earlier this year, in one of the more surreal pieces of business journalism I’ve ever seen, writers James Bandler and Doris Burke chronicled: “Dr. Phil could fill a month’s worth of shows just examining HP’s board, whose dynamics have resembled those of rival junior high school cliques more than what is supposed to be a sage guiding force. At times … HP directors have refused to be in the same room with one another and have accused each other of lying, leaking, and betrayal. Time and again they’ve failed in their choice of CEO—their most important task—selecting a new leader whose most salient trait is that he or she is the opposite of the last one.”

Again, where is the shareholder indignation? HP shares are down 44 percent this year, while the S&P 500 index is up 15 percent and tech-benchmarking Nasdaq is up 20 percent. That is precisely the kind of underperformance that should prompt bloodied shareholders to think board uprising.

According to Bloomberg data, San Francisco mutual fund house Dodge & Cox is the biggest institutional holder of HP stock, accounting for just under 140 million shares, or 7 percent of what’s outstanding, as of the latest filing date. Per company policy, and consistent with what you hear from just about every fund shop, Dodge & Cox won’t comment on individual holdings.

Fair enough. Shareholders can—and obviously have, in droves —vote with their feet on HP. If you don’t like it, don’t buy it, right?

At the same time, some of those holding shares must figure you cannot spell hope without HP. “Many investors are still hoping that we are looking at the early days of Lou Gerstner’s IBM rescue in 1993 or Anne Mulcahy’s rescue of Xerox in 2001,” says Jeffrey Sonnenfeld, a professor at the Yale School of Management. “I believe that informed investors appreciate that the board is finally much better, with key new directors and a revered chairman in Ray Lane.”

HP’s board already has restless blood—or the potential for it—coursing within. Director Marc Andreesen famously instituted a New York Times Deathwatch to convey his displeasure with the newspaper’s family-based management. HP director Ralph Whitworth, the activist investor who shook up Home Depot, has his hedge fund, Relational Investors, in 35 million shares of HP, according to regulatory filings. How long will he tolerate this era of reset after reset?

“HP seems like exactly the type of company that should have attracted the attention of activist investors,” says Jonathan Cohn, a finance professor at the University of Texas, Austin, who has studied (PDF) the new shape of activism. “I do think that its size might have made it difficult to target.” Cohn says that perhaps the addition of Whitworth to the board last year is a sign that shareholders will play a more active role in the company now, though he says Relational’s apparent agreement not to seek HP’s sale “takes away an important source of leverage.”

Activism requires time, money, and overhead that the investing world decreasingly wants to pay up for. Last year, HP retained Goldman Sachs to help it deal with activists or hostile bidders. The biggest single impediment to a shareholder revolt at HP could be the passive mandate of its now-dominant owners: cut-rate index funds and ETF heavies such as Vanguard, State Street (SPDRs), and Blackrock (iShares). That style—be the market, don’t beat the market—has been killing the old business of active management. According to Morningstar, mutual funds whose managers pick domestic stocks experienced redemptions of $497 billion in the five years ended June 30, while index funds took in $117 billion.

Like it or not, you and I and most American investors increasingly have no choice but to own a piece of HP as it is currently run, boardroom dysfunction and all.

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