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Aug 27, 2012

Hewlett-Packard's journey to better governance

Concerns about succession planning raised.

We’ve all heard the old saying, ‘Start as you mean to go on.’ It’s usually true, but it may not be the best advice for the future of corporate governance at Hewlett-Packard (HP).

When Meg Whitman was announced as the new CEO in September last year, a lot of governance ‘experts’ and commentators cried foul. Such a reaction was not that surprising, as those groups are rarely satisfied, especially not with companies that have as dramatic and checkered a recent history as HP. But many shareholders also joined the chorus of unrest in voicing concern over the former eBay CEO’s appointment.

What were those investors concerned about? Most observers felt that from a strategy perspective, Whitman was a solid choice. She has a long and successful history as a senior executive at some of the largest companies in the United States, including leading eBay from a small 30-person company in 1998 to an $8 billion behemoth ten years later. She also held senior roles at Disney and Procter & Gamble.

A lack of superstar CEOs has never been HP’s problem, however – in fact, many a governance expert would argue that dominant CEOs are the exact reason HP got into trouble in the first place.

Following the dramatic exit of Mark Hurd and the short tenure of replacement Leo Apotheker, Whitman had to take decisive action. She quickly addressed issues in the PC division, and analysts responded well. But things are less clear from a governance perspective.

An inauspicious start?

Some investors, like Eleanor Bloxham, CEO of the Value Alliance, and Eric Jackson, president of Ironfire Capital, have expressed concerns about the way Whitman initially joined the board. She was appointed in January 2011, nine months before becoming CEO, by chairman Ray Lane, a move that is said to have circumvented HP’s regular nomination process. It was also revealed after the fact that Whitman would be working with Kleiner Perkins Caufield & Byers, a venture capital firm owned by Lane. This lack of openness and disclosure raised the hackles of the investment community and harkened back to the ‘bad old days’ of the HP board. It was not the start people were hoping for.

It is interesting, then, that a mere nine months later, some – but certainly not all – investors are changing their tune. Whitman, for her part, is aware of the issues and is certainly not shying away from them.

Speaking at a Council of Institutional Investors (CII) event earlier this year, Whitman explained her take on the situation and her plans for fixing some of the past governance failures.

‘I am not in it for the short term,’ she said. ‘I am in it to fix HP and get it strong for the future. I see the heritage of the company every day and reminders of what made it great. I am trying to fan those embers.’

HP is a well-run, professional company. It has good managers and leaders throughout the organization, making strong collective decisions. The reason for its ongoing success in the past few years has not been its various CEOs – in fact, it has been in spite of them. In some ways the board has not really contributed to the success of the company, but has held things back.

What will be interesting to see is whether, under Whitman, this trend will be reversed. She certainly seems determined to change the perception (and reality) of the board as a hindrance to the overall success of the company.

While Whitman’s initial appointment to the board may have occurred under something of a shadow, her tenure as CEO seems to have gotten off on the right foot – at least, that was the feeling among some of the larger institutional investors at the CII event.

‘Focus and courage’

Whitman admitted HP ‘was a company that was in desperate need of leadership. We needed focus and courage. We are going to turn this around and make HP great again. When you go through four CEOs in less than ten years, it is hard on the staff, on customers, on shareholders. I want to get HP out of the news for the drama and into the news for the products we make.

‘The first couple of months of my tenure were all about decisions that had to be made right away – for example, the decision whether or not to spin off our PC division. And perhaps most importantly, we had to reaffirm what HP is. Customers and shareholders were confused. A question I got all the time was, What is HP? First and foremost we are a hardware company.’

Few people question that there are issues in the make-up of HP’s senior management, and concerns remain about the composition of the board and its ability to function effectively. Recently fired CEO Apotheker appointed five new directors during his brief tenure, while three others departed. That’s a lot of turnover for a board that now has 11 members.

As the CEO, Whitman explained, ‘I have to create the environment for the board to work together as a team. Everyone needs to play their positions.’ With so much change and so many new directors, her task is not an easy one. The complexity of the company – with almost 320,000 global employees – and the many problems it has faced over the years mean it is hard for directors to really get their heads around the challenges faced by the company. With this in mind, Whitman has implemented a system that ensures directors get to know the company and the senior leadership.

‘My first board meeting as CEO was at the time of the global sales strategy meeting in Las Vegas,’ she recalled at the CII event. ‘I took the entire board to the meeting and made them get out there and attend meetings to see what was going on. I created a system of board buddies. Every operating executive and functional head has a board buddy, and the objective of this is to understand what business your buddy is in, what function they are running and how it relates to the rest of the business.’

She continued: ‘One thing that I think is true is that boards are only as good as the CEO – and one of the things the board has to decide is, Do we have the right CEO?

This is an excellent point, and one that Jackson believes is a perfect example of the HP board’s problems. In several recent blog posts and articles he has expressed his feeling that the fact that the board has fired three CEOs in the past few years proves it does not have a clear picture of what the company needs and is not steering the company in the right direction.

Succession planning and compensation

Anne Sheehan, director of corporate governance at the California State Teachers’ Retirement System (CalSTRS) and board member at the CII, asked Whitman about HP’s failures. ‘To say that HP has had a few issues with succession planning – especially with the CEO spot – is an understatement,’ she said. ‘What have you done to improve the situation?’

Whitman responded: ‘The company that does succession planning the best in the world is Procter & Gamble. They start succession planning almost the day you walk in the door, and it is a discipline for the top 60 or 70 executives. What is remarkable is that if something happened to [chairman, president and CEO] Bob MacDonald, there would be three or four “ready now” people to step into the role. That is what I aspire to at HP.

‘My aspiration is that the next CEO has to come from within HP, and it is my job to make sure that happens. It is really not a good thing for a company to not have that disciplined internal succession planning.’

Beyond succession planning, Whitman’s other major change is addressing compensation issues. HP famously failed its say-on-pay vote last year, in what was a major wake-up call for the board.

‘We took it very seriously,’ Whitman told the CII attendees. ‘I asked, What are some of the changes that we can make right away to fundamentally link pay to performance? The first thing was to standardize severance packages regardless of what level you are in the company. This is set when you join the company and there is no negotiation when you leave.

‘The second thing is making sure our compensation practices really are in line with how we [perform] as a company. We restructured our equity awards to make sure that a lot of the equity is at risk. Eighty percent of my equity is at risk, for example. My interests are perfectly aligned with those of shareholders. I had to lead by example because this really does start from the top.’

Those changes have been met with praise from many shareholders, but perhaps the most popular governance change among CII members is HP’s decision to allow a shareholder vote on proxy access in 2013.

‘Amalgamated Bank had come to us with a proxy access initiative that we examined and it didn’t seem like an unreasonable proposal,’ Whitman explained to the attendees. ‘We felt that rather than being reactive we could be proactive and figure out what is in the best interest of the company over time. In many ways proxy access is debatable. For every shareholder that says it is a good thing, there are those that do not support it, and my attitude is Let the shareholders vote.’

Whitman’s focus is squarely on the long term. ‘You can’t just ignore the short term – you need a balance,’ she stated. ‘But I believe managing for the short term at HP over the past four or five years has in fact mortgaged the future. We have to continue to deliver value for investors but at the same time invest in things that will set the company up for the long haul. HP will be 75 years old in 2014, and I feel that I need to set the company up for the next 75.’


Key moments at Hewlett-Packard since Meg Whitman became CEO

• February 22, 2012: Whitman urges investors to be patient and talks of a ‘multi-year journey’ for a turnaround. She says she has a good sense of what the company needs to do, but it will take time to fix HP’s internal operations and make investments to grow in areas such as security services, information management and cloud computing.

March 21: HP says it will combine its PC and printers businesses. The move will save an unspecified amount of money as the company expects improved productivity and efficiency and streamlined customer support and supply chain.

April 11: Estimates from research groups Gartner and IDC suggest that HP has regained much of the PC business it had lost during the period of indecision.

May 23: HP says it plans to eliminate 27,000 jobs, the largest payroll purge in its 73-year history. The reductions will affect about 8 percent of its nearly 350,000 employees by the time the overhaul is completed in October 2014. HP hopes to avoid many layoffs by offering early retirement packages. The company expects to save as much as $3.5 billion annually from the job cuts and other austerity measures.

May 30: Bill Veghte is promoted to chief operating officer, just four months after he was tasked with shaping HP’s strategy. HP has named an outsider to replace him as head of its software division.

Source: Associated Press, ‘Key moments in Hewlett-Packard’s recent history’, May 2012

Brendan Sheehan

Brendan Sheehan is the former Executive Editor at Corporate Secretary magazine, and is a leading expert in public company governance and compliance. He regularly lectures on cutting edge governance, risk and compliance issues and is a regular...