Corporate Governance Hewlett-Packard Case - PowerPoint Presentation

Slide1

Corporate Governance

Hewlett-Packard CaseSlide2

Agenda

Introductory Summary including Questions

Character Sketches

Basic Facts

Quotes on Corporate Governance

An Outline on Corporate Governance: Leading CategoriesSlide3

Basic Questions

Who embodies the best approach to corporate governance?

Dunn who takes a compliance approach best outlined in the Law of Agency

Perkins who takes more of a stewardship approach that places less emphasis on compliance

Perkins and Dunn have different takes on the leaks of information made by board members to the press

For Perkins, leaks performed the function of a “release valve” that allowed frustrated insiders to vent concerns about company policy

For Dunn, leaks were, first and foremost, violations of company confidentiality, ultimate damaging because they undermined relations of trust necessary for board deliberationsSlide4

Hardware Software

Physical Surroundings

People, Groups, and Roles

Procedures

Laws

Information and Information Structures

Pretexting

Tools:

Telephones, cell phones,

Internet,

PowerPoint Presentations

Silicone Valley (Home

of Venture Capitalism)

Director of HP Board

HP Board Members

Tech Board

Finance Reporters

SEC

HP Mgt (CEO)

Public Relations

Private

Investigators

Speaking

with Press (On/Off Record)

Electing Board Members

R/ Board-Mgt

Procedures for

Pretexting

Model for Corp Gov (Agency

vs

Stewardship)

Identity authenticating Procedures

Post-Enron:

Sarbanes

/ Oxley

Fed Sentencing Guidelines

SEC

Regs

Privacy

Legis

Law of Agency

Company records (Employee Info)

Tele

info (Call records)

Emails (stored info)

Project Kona I

Project Kona II

Confidentiality

M

M

V

X V

X V

X V

Privacy

M V

M V (Press pierces

privacy)

M

V (Press Procedures / Role Conflict)

M

V (Transparency of Law)

M

V

Trust

M

V

M

V (Maintained by mgt but vulnerable to Board Members

M V

Undermined by transparency

of law

Supported by keeping

information confidentialSlide5

STS Highlights

Confidentiality

Protected under law of agency. General expectation that information on BOD deliberations is confidentiality. This preserves trust

Hardware, software and procedures protect confidentiality

Leaks to press considered violation of confidentiality (relation to press and procedures = vulnerability)

Privacy

Protected piece-meal by law. However, as case progressed,

pretexting

became illegal because it bordered on ID theft and invasion of privacy

Pretexting

involves a deception

Privacy and Confidentiality are in conflict with transparency mandated by Sarbanes-Oxley and Federal Sentencing GuidelinesSlide6

Pretexting

Enabled PIs to track reporter and board member movements by hacking into email exchanges and phone records

Used SS#s of Board members to open false email accounts

Sent emails to reports posing as potential leakers. Emails had Trojan Horses to access computer files and emails records

“it involved investigators requesting information from operators orally, over the phone, pretending to be someone else if necessary.” (

DeLia

quoted in Stewart

)

“created a fictitious disgruntled employee named Jacob to make e-mail contact with Kawamoto. “ E-mail has a Trojan HorseSlide7

Corporate GovernanceSlide8

Lawrence and Webber on CG

“The system of allocating power in a corporation that determines how and by whom the company is to be directed.” 557

“The term corporate governance refers to the process by which a company is controlled or governed. Just as nations have governments that respond to the needs of citizens and establish policy, so do corporations have systems of internal governance that determine overall strategic direction and balance sometimes divergent interests.” 320Slide9

Stewart on Corporate Governance

“a term that technically refers to all aspects of running a corporation but in recent years has come to emphasize issues of fairness, transparency, and accountability.”

Questions:

How does transparency required by corporate governance fit in with the confidentiality required for Board of Director Deliberations Slide10

Dunn on corporate governance

“The most fundamental duties of a director—the duties of deliberation and candor—rely entirely upon the absolute trust that each director must have in one another’s confidentiality. This is true for trivial as well as important matters, because even trivial information that finds its way from the boardroom to the press corrodes trust among directors. It is even more critical when discussions can affect stock prices….Leaking “good” information is as unacceptable as leaking “bad” information—no one can foretell how such information may advantage or disadvantage one investor relative to another.” (quoted by Stewart, 156)Slide11

CG Models

Agency Theory

Managers act as the agents of the

corporation

Problem = keeping managers faithful to the

interests of the owners / investors

Stakeholder theory

Corporation is run, by its managers, for the sake of the stakeholders

Managers are not just faithful agents of

stakeholders. Instead of faithful agency, they are responsible for balancing conflicting stakeholder stakes

corporation

Stewardship theory

Starts from premise that manager and owner interests are

more or less the same

Managers

act, not as agents, but as stewards

for

stakeholders

Stakeholder interests are aligned with the long term wellbeing of the corporation. Managers facilitate this alignment. Slide12

Agency Theory (Dunn)

Owners/directors

set the central objectives of the corporation.

Managers

executing

these.

Corporate governance = procedures to control management and restrict to carrying out owner directives.

Managers

cannot be trusted to remain faithful

to interests

and goals of the owners/directors.

Human Nature = Egoistic pursuit of self-interest

The

owners/directors

= principal.

Originates

the action and bears primary moral and legal responsibility for it.

Principal delegates executive authority to agent, often because of a lack of knowledge of details pertinent to execution

Develops compliance structures to compel agents to be faithful to interests in executive function.

Managers = agents

.

Responsibility: serve

as faithful executors of the goals and interests of the

principals

Positively this assumes the exercise of due care (proper exercise of professional judgment)

Negatively: avoiding conflicts of interests and maintaining confidences

Bound and Free Agency

Corporate Governance Focus

Primary

emphasis is placed on compliance, i.e., enforced conformity to rules that constitute minimum thresholds of acceptable behavior.

(1

) rule based codes, (2) systems of monitoring to detect violations, and (3) punishments and rewards to deter non-compliance and reward

complianceSlide13

Stewardship Theory (Perkins)

Managers

and employees can be trusted to act as stewards or guardians of the corporation.

A

steward is a caretaker who looks after the owner's property and interests when the owner is absent

Corporation modeled on conception of a social contract

Corporation is a

cooperative, collaborative enterprise.

Individuals transcend narrow self interest and find

meaning

in concerns of corporation

Managers can, to a certain extent, act on altruistic motives

CG consists of build

trust and social

capital.

Owners

still establish the cardinal objectives for

corporation

But

they

must provide

managers with an environment

conducive to meaningful

work.

Stewardship focuses on management by values

(

1) identify and formulate common aspirations or values as standards of excellence,

(

2)

encourage employees to adopt values as core aspirations through training programs, ethics audits, corporate codes, and so forth

(

3) respond to values "

gaps“ by means of moral support

Training programs

DPO procedures

Proactive performance evaluations

Empowering leadershipSlide14

Sarbanes-Oxley

Provide

increased protection for whistle-blowers

Adhere

to an established code of ethics or explain reasons for non-compliance

Engage

in "full, fair, timely and understandable disclosure"

Maintain“ honest

and ethical" behavior.

Report

ethics violations promptly

Comply

with "applicable governmental laws, rules, and regulations"

Quoted

from

Dyrud

, M.A. (2007) "Ethics, Gaming, and Industrial Training," in IEEE Technology and Society Magazine. Winter 2007:

36-4.

Dyurd

cites: ELT, Ethics and Code of Conduct,

n.d

.; http://

www.elt-inc.com/solution/ethics_and_code_of_conduct_training_obligations.htmlSlide15

Federal Sentencing Guidelines

Establishing

standards and procedures to prevent and detect criminal conduct

Promoting

responsibility at all levels of the program, together with adequate program resources and authority for its managers

Exercising

due diligence in hiring and assigning personnel to positions with substantial authority

Communicating

standards and procedures, including a specific requirement for training at all levels

Monitoring

, auditing, and non-internal guidance/reporting systems

Promoting

and enforcing of compliance and ethical conduct

T

aking

reasonable steps to respond appropriately and prevent further misconduct in detecting a

violation

Dyrud

, M.A. (2007) "Ethics, Gaming, and Industrial Training," in IEEE Technology and Society Magazine. Winter 2007: 36-44. Slide16

Characters / ParticipantsSlide17

Patricia Dunn

Board member and supported ouster of

Fiorina

Specialist in corporate governance with impeccable reputation

Advanced through ranks of Wells Fargo Investment Advisors (later acquired by Barclays) to become CEO of BarclaysSlide18

Carly

Fiorina

CEO of HP until ousted by board

High profile corporate executive

Considered a good salesperson but a poor manager by members of the board

Later Republican candidate for US senate from CaliforniaSlide19

Jay Keyworth

Longest-standing member of HP BOD

Physics division at Los Alamos National Laboratory

Developed close relation with CNET report, Dawn Kawamoto

When identified as source of leaks was forced to leave HP BODSlide20

Tom Perkins

Close relation with HP founders and family

Venture Capitalist

Author of “Sex and the Single Zillionaire”

“Heather was nude upon the bed and Kim, above, was also nude, but wearing some sort of complicated black leather harness…” (It goes on from there0

Resigned from board in protest over removal of

Keyworth

.

Later, claimed he was victim of invasion of privacy by HP investigation. Responsible for information of investigation becoming public outside of HPSlide21

Ron DeLia

Private Investigator

From Boston firm, Security Outsourcing Solutions

Firm uses

pretexting

to get information on board members to advance leak investigation

Were these methods an invasion of the privacy of board members? Were they illegalSlide22

Basic Facts / Case NarrativeSlide23

Basic Facts

Carly

Firoina

became CEO of HP and sought to reinvent the company

“

Fiorina

had a vision, and she did a phenomenal job acquiring Compaq and

comgining

the assets. But we had to make the assets deliver. We had an execution problem. The stock took a bit hit. She was a better saleswoman than a manager.” (Stewart 156)

Fiorina

was fired by the BODs in a very political manner

Rumors of board discontent were leaked to press in advance of decision

Leaks also occurred about a strategic planning meeting held by

Fiorina

with HP board (source talked about long days and imparted strategic plans of HP that could affect stock prices)

Fiorina

: It was probably

Keyworth

and Perkins two board members who felt that HP should return to its more aggressive, venture capitalist culture who were the sources of the leaksSlide24

Back to Basic Facts

Dunn became “on-executive” chairperson of HP Board of Directors

Board appointed Mark

Hurd

CEO of HP to take place of

Fiorina

Top priority: stop board leaks to the press

Two investigations were eventually carried out called the Kona files after a vacation retreat in Hawaii used by DunnSlide25

Basic Facts

First investigation yielded no concrete results

Not clear who leaker was

Second investigation used more aggressive techniques

Hired PI firm (Ronald R.

DeLia

from Security Outsourcing Solutions from Boston)

In second investigation, firm used a method called

pretexting

“it involved investigators requesting information from operators orally, over the phone, pretending to be someone else if necessary.” (

DeLia

quoted in Stewart)

“created a fictitious disgruntled employee named Jacob to make e-mail contact with Kawamoto. “ E-mail has a Trojan HorseSlide26

E-Mail (Quoted from Stewart, 160)

Hello, I am a senior level executive with a high tech firm in the valley and an avid reader of your columns.

My real name is not used, you might understand why. Not quite sure how to approach you on this, but I’ll attempt anyway.

In short, tired of broken promises, misguided initiatives and generally bad treatment.

Have some information that I would be interested in passing along.

Felt it might be appropriate to contact you.Slide27

Basic Facts

Board Meeting held to inform them about results of leak investigations

Jay

Keyworth

was identified as source of leaks

Apologized to board; thought he’d only get a slap on the wrist

But Board voted to request his resignation

Perkins objected: “Jay is the longest serving director on this board!” (Stewart 163)

Perkins resigns in

protest

Because

Keyworth

was fired or because of

pretexting

?Slide28

Basic Facts

Resignations of Board members must be reported to the SEC

No reason given initially

Perkins gets message from ATT that it had to lock his online account. But he had not set up such an account. This was done as part of

pretexting

used during leak investigation.

Perkins: “My personal phone records were ‘hacked’”

“I am now legally obliged to disclose publicly the reasons for my resignation. This is a very sad duty.

Perkins states as his reasons his objections to the violation of his and other board members’ privacy by the leak investigationsSlide29

Leaks: A “steam valve” or a violation of trust?Slide30

Perkins on leaks

“Leaks don’t happen in stable, happy companies. They’re a steam valve. People talk. They’re a symptom of something else.”Slide31

Leaks or press handling?

Message to

Keyworth

(HP board member) about how to handle press

“Please transition to

Carly

and her skill set. Specifically, her brilliant strategic mind and her confidence—illustrated by her deep engagement of the board….This is an opportunity for us to reset

Carly’s

image to show the

Carly

we all know and love.”

Keyworth

talked to press, specifically to Dawn Kawamoto, a reporter fro CNET

He felt conversations were continuation of public relations directives in above e-mail and not leaks although the information printed in Kawamoto story was not common knowledge.

This was, he felt, a way of getting positive press for the company and building up good will with an influential reporterSlide32

Keyworth on Leaks

“I apologize for any discussion I had with the reporter in question that may have resulted in any of my colleagues on this board losing trust with me.”

“All I did was take advantage of a lunch with a reporter to say some nice things about Mark

Hurd

. I thought the worst that might happen would be that they’d slap my wrist.”

Quoted by Stewart 163Slide33

Fiorina on Leaks

“It is hard to convey how violated I felt. Until a board makes a decision, its deliberations are confidential….Trust is a business imperative. No board or management can operate effectively without it.…I sent an e-mail message to the board. I informed them of the leak. I said this was completely unacceptable behavior by a board member. I convened a conference call for Saturday morning. I was as cold as ice during the call. I said the board could not operate in this way and I would not.…Jay [

Keyworth

] Dick [

Hackborn

], and Tom [Perkins] all acknowledged that the reporter had contacted them. They all denied they had spoken with her.”

Fiorina

, Tough Choices. Quoted by Lawrence, 504.”Slide34

Conclusion

Hewlett-Packard, a company with outstanding ethics reputation, suffered as a result of invasive investigation

Dunn was targeted for federal prosecution

Did she properly supervise investigation?

Dunn and Perkins embody different approaches to corporate governance

Agency and Stewardship approaches respectively

Case shows how shifting government environment of organization has altered traditional business practices

Emphasis of Sarbanes-Oxley on transparency undermines internal corporate confidentiality and trust built on it.