The H-P way

When Jon Hoak was hired last year to the newly created position of chief ethics and compliance officer at technology company Hewlett-Packard, many viewed the role as a quick way to exercise damage control, in light of the board leak investigation scandal that saw several H-P executives ousted, including ethics chief Kevin Hunsaker.

Hoak’s position seems to be serving a more lasting function. Backed by his experience as general counsel for NCR from 1993 through 2006, where he supervised compliance, Hoak is at work building better processes and controls for any future crisis.

His mandate is broad and company-wide. He says he is working closely with the office of the general counsel, the board and the audit committee to put a reporting structure into place that will stand up in the heat of an investigation. He is also trying to establish a tone that makes employees feel comfortable revealing issues involving potential fraud, or worse, at the company.

In an interview with Corporate Secretary, Hoak reveals what he’s doing to improve compliance and recapture what he sees as H-P’s strong history of good governance.

Two halves make a whole

Hoak divides the daily issues he confronts as chief compliance and ethics officer, into two sections: compliance and business conduct. The ‘upfront piece’ is compliance and involves ‘the things that we’re doing to make sure that we’ve got the right structure, architecture and resources in place across the company.’ Next come issues relating to standards of business conduct including ‘the allegations of wrongdoing, the investigations that ensue … and corrective action.’

Although this role has only just celebrated its first birthday, and was born out of scandal, Hoak reminds skeptics of H-P’s strong and positive history on the ethics front. ‘There was a problem about a year ago as you may remember,’ he says, ‘as a result of that there have been a number of changes,’ including the creation of the ethics and compliance officer role, which elevated compliance to a higher level by linking it to the ethics function.

Hoak stresses H-P’s ongoing commitment to environmental issues and investment in the community. These efforts extend as far back as 1957, he says, with H-P being named one of the first to implement global corporate citizenship ‘as one of the seven company objectives.’
 
A team approach

It isn’t just the lead role that has expanded; the compliance department has ‘basically doubled’ in size, says Hoak, from six to 13 members who work on a global basis. Key additions include director of compliance, David Giza, and standards of business conduct director, Gaynelle Jones, who is revising the corporate code of conduct to ‘make it more values-based rather than a series of rules.’

Another position that has been elevated within the company is that of chief privacy officer, a title held by Scott Taylor, ‘partly in direct response to what happened last year and the aspects that involved privacy.’ The company was censured by the SEC and the California attorney general for spying on board members and journalists in an attempt to trace the source of board leaks. It also faces civil litigation in connection with the matter. Now, ‘[Taylor] is involved with us in any investigation that we do,’ says Hoak.

H-P has also hired on Jeanne Young as director, ethics and compliance HR, who operates on a global basis and has three people globally reporting to her who are also heavily involved in investigations, communications, training and other projects. Another critical position to be added, says Hoak, is communications officer. There will be a separate role for ‘tracking and reporting of cases … someone that’s involved in making sure that we’re getting visibility to all the issues under our SBC that come up on a global basis,’ he says. One goal he has is to ensure there are channels for reporting information to the board and CEO Mark Hurd no matter where they turn up within the organization.

The process

Processes have changed, too. ‘Our audit committee has the overall ownership oversight of our ethics and compliance program and they take that role very seriously,’ notes Hoak. In order to maintain the link between the compliance and audit functions, Hoak says he meets with them at least four times a year ‘to give them the status report of how we’re doing, talk about specific major cases that are pending … as well as the more programmatic aspects: What are we doing to improve our ethics and compliance?’

In addition to the traditional audit oversight function, a fixture common to many companies, H-P further ingrains the importance of a strong auditing department by singling out directors to serve highly specialized purposes. ‘One of our directors, Ken Thompson, who’s also the CEO of Wachovia, has a special role … of oversight in everything we do in all of our investigations.’ H-P also hired a new general counsel with a background in compliance, who had been a former outside counsel for the company. Hurd is also a strong force on the compliance front, says Hoak, since he is willing ‘to speak out on these topics.’

Frequent updates are integral to Hoak’s idea of a smoothly run compliance unit. Last year he met with the board three times to give status reports. He holds formal quarterly meetings with the general counsel and the CEO, though he says they meet ‘much more frequently than that,’ to discuss ‘individual matters that might come up.’

Since beginning his role at H-P, the company has created a non-board ethics and compliance committee, which he chairs. The committee includes the general counsel, CFO, controller, head of HR, head of H-P’s largest business group, technology solutions group and the chief administrative officer. Serving a ‘hands-on role’ in compliance the committee gets involved in everything from ‘training and communications’ to the ‘development of additional processes’ in the ethics arena. H-P also created a compliance council, ‘with very senior people in the company, just one level below those people on the ethics and compliance committee, which ensures that we’ve got the right structures in place for compliance with laws and regulations on a global basis, … the right resources dedicated to those functions and [that] we’re actually implementing in the appropriate way.’ Hoak says H-P also performs company-wide risk assessments and gap analysis to determine wherever there’s need for improvement.

Safety in numbers

Some of H-P’s oversight comes from outside. As part of its settlement of claims in the board leak investigation with the California attorney general, H-P agreed to retain an expert in the field of investigative practices to undertake a comprehensive review of its investigative practices. H-P was able to keep lawyer Bart Schwartz, whom the company hired for its own internal investigation of the board leak controversy since the AG deemed him a ‘qualified authority,’ says Hoak. Schwartz is former head of the criminal division in the Southern District of New York, where he worked for Rudy Giuliani. Though some companies could see the input of someone with such an intimidating record as a threat, Hoak says the relationship between H-P and Schwartz has been ‘very teaming and collaborative,’ even considering that his brief is to ‘do an assessment of everything we’re doing, and have been doing, in terms of our processes related to investigations.’

Hoak says that ‘working with him, we’ve been able to come up with a number of improvements.’ The main advance arises from a meeting of the minds on an investigator procurement program. The company’s massive size and far-reaching operations mean the computer company is frequently going ‘outside with a lot of investigative firms,’ and as such, worked harder to hire the top firms, ‘rather than just improve the contracts.’ The procurement program helps ensure investigations are ethical and lawful via assessments of investigative consultants in areas including qualifications and accountability.

Talk to me

Hoak believes that the compliance department and the general counsel’s office have to be ‘approachable to be effective.’ In fact, just prior to this interview he had been discussing how to communicate approachability within the company. He has determined it requires ‘communication and training and creating the right value system where you’ve got that kind of openness.’ These, he says, have become ‘our core values’ at H-P. He encourages calls to his department and the extended compliance network: ‘I think it’s an area we’ve got some room to improve but I don’t know of any company that shouldn’t be saying that.’

But he also sees approachability as something that is contingent upon the relationship between general counsel and compliance officer. ‘We work hand in glove on these issues,’ says Hoak, touting the virtues of general counsel Mike Holston, whom Hoak says sees it as a crucial part of his own role that H-P acts in an ‘ethical and compliant’ manner. ‘Mike is very supportive of what we’re doing, encouraging that openness,’ he says.
 
What works for one company

When Hoak was general counsel at NCR, the ethics and compliance function reported directly to him. ‘We actually created that function back in 1997 so I was involved in it right from the start.’ Other lessons he has brought in to play at H-P are communications, having good people in the organization and ‘building the relationships out into the company.’ With over 160,000 employees operating in over 170 countries, ‘it makes everything pretty complex,’ confides Hoak. And that’s where the extended network comes in. ‘We’ve got both the horizontal and the vertical, where we build these liaisons both with business people and in what we call our global functions, or, our compliance functions of our controllership, our HR, our legal and we’ve got people at a local country and sub-region basis.’ Though these employees don’t necessarily have compliance as a full-time job, they serve in a training and monitoring capacity.

After last year’s board-leak debacle, H-P makes sure to maintain a bird’s eye view of areas that could pose conflict in the approaching year. Though he couldn’t speak to specific cases, Hoak said areas that are currently actionable include ‘training to some of our most senior country managers on what we consider the higher profile or higher risk areas facing the company.’ Some of the more contentious of these issues are the bribery elements of the Foreign Corrupt Practices Act, also a real focus for the Department of Justice.

‘Another is the treatment of competitors’ confidential information,’ he says, ‘we take a lot of steps to protect the confidentiality of our own intellectual property and we want to make sure that we’re being equally respectful of our competitors.’ Lastly, he mentions, conflicts of interest. It may seem obvious, he continues, but as a big company, it’s integral to stay aware of ‘people being in a position of conflict of interest’ since there are so many familial connections and existing business relationships.

‘We’re going to expand on that list in 2008,’ he says, potentially adding ‘issues around privacy and data protection, issues around competition law; the list could go on and on.’ With this all-encompassing effort, the company is making a good case to restore the luster around doing things ‘the H-P way.’