Hewlett Packard scandal shows governance gone awry.

September 29, 2006 06:21
3 minute read.
computer 88

computer 88. (photo credit: )


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Some scandals are dismaying, but understandable. Enron was operating for years on the edge of the law, but on the other hand the principals in the company were raking in tens of millions of dollars, and perhaps they thought it was worth it. Besides, once they started they seemed to have little to lose. The Hewlett Packard scandal, by contrast, arouses not so much indignation as astonishment. How could so many people, at such a high level, have acted so unethically, with so little at stake? The HP scandal story starts with a secluded retreat for board members in January 2005. Fairly mundane details of the supposedly secret meeting, which discussed reining in CEO Carly Fiorina, were reported to the Wall Street Journal, which cited "people familiar with the situation." These revelations may have violated a commitment of confidentiality among board members, but it is hard to make a case that they violated the board members responsibility to act in the company's interest. Soon after, chairman and CEO Fiorina was replaced by the duo of Patricia Dunn as chairman of the board and Mark Hurd as CEO. Dunn was upset by the leaks and began an investigation of board members. The investigation picked up steam after a similar leak in January 2006. In order to figure out who leaked details of board discussions, HP began spying on its own board members. Hoping to discover who was in telephone contact with reporters, they hired private investigators who obtained confidential phone records of board members using a technique known in the profession as "pretexting." In everyday parlance, this is known as "lying" - the investigator calls up the phone company and identifies him or herself as the person being investigated, including providing personal information. The technique was successful and HP's security department obtained extensive lists of phone calls made by key board members, as well as those of a number of reporters. I don't think readers need a professional ethicist to tell them that obtaining private information like this is unethical even without lying. You would probably suspect that such outrageous behavior is also illegal, and you would be right. While a number of transgressions can be involved, there is a prominent federal law in the US, the Graham-Leach-Bliley Act, which explicitly makes this a crime. Yet, adding insult to injury, a leading HP lawyer wrote his investigation team reassuring them that "the practice of pretexting phone companies to obtain information is not unlawful." Ultimately, the board was apprised of the investigators' findings. George Keyworth, the member fingered by investigators, was asked to resign but declined. However, another board member, Tom Perkins, resigned in protest over the outrageous investigation tactics. HP reported his resignation to the Securities and Exchange Commission, but did not report the reason for his departure. This tangled the web further, as this probably violates financial markets regulations. How did this saga begin? With some annoying but relatively harmless information leaked to the financial press. How will it end? Nobody knows, but already it has resulted in the resignation of Chairman Dunn and at least two other senior executives, a criminal investigation and a Congressional probe. A SEC investigation is probably in the cards too. Obviously, shareholders are not impressed with the competence of managers either. The case could even rattle customers. One of HP's biggest businesses is personal computers, and if end users feel this is a company that doesn't care about data security they might have second thoughts about the company's wares. How was so much lost by so many with so little at stake? Viet Dinh, the lawyer for Perkins, recently speculated that Patricia Dunn is a "governance perfectionist." In Dinh's view, Dunn's commitment to the highest ideals of business ethics were what ultimately led her to stumble on the most elementary details of ethical behavior. She explained that the conflict arouse because of HP's move towards being "process driven and capable of upholding today's highest governance standards." A less "process driven" chairman probably would have dealt with the problem differently. Perhaps she would have just ignored it, or rebuked the board. Perhaps she could have just politely asked who spoke to the press. Dinh cites a report that when asked about the results of the investigation, Keyworth stated: "I would have told you all about this. Why didn't you just ask?" But all this is not "process driven." The book of Ecclesiastes tells us, "Don't be overly righteous." The eve of Yom Kippur is a good time to remind ourselves that in our zeal to uphold and advance higher values, we should never allow ourselves to trample the fundamental principles of ethical behavior. The writer is research director at the Business Ethics Center of Jerusalem (, an independent institute in the Jerusalem College of Technology.

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