leadership challenges at hewlett-packard: through the looking glass

8/3/2019 Leadership Challenges at Hewlett-Packard: Through the Looking Glass

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stanford closer look series 1

Leadership Challenges at Hewlett-Packard: Through the Looking Glass

IntroductIon

Te board o directors has a long list o obligations

that includes responsibilities to ensure the strate-

gic direction o the company, hire qualied man-

agement, monitor their perormance, design their

compensation, oversee the establishment o risk

management controls, ensure the integrity o nan-

cial reporting, oversee the work o the external audi-

tor, ensure compliance with all legal and regulatory

requirements, disclose material inormation to the

public, oversee the acquisition and disposition o

corporate assets, and communicate eectively with

shareholders and stakeholders. Despite the length

o this list, however, many believe the undamental

obligations o the board are quite simple and distill

down to two: 1) evaluate and approve the corporate

strategy and 2) hire and re the CEO.

carly FIorIna (1999-2005)

In 1999, the Hewlett-Packard Company hired Car-

ly Fiorina, ormer senior executive o Lucent ech-

nologies, as its CEO. It was a striking announce-

ment in many regards. Fiorina was the rst external

CEO in the companys history. She was also the

rst emale CEO o HP and the rst without a

background in engineering (she oversaw sales and

marketing at Lucent). Te decision to bring in an

outsider was championed by none other than out-going Chairman and CEO Lewis Platt, a 32-year

veteran o HP who himsel had been promoted to

the top job in 1992. Platt believed that the compa-

ny had grown complacent in recent years and that

an outsider with a resh perspective was required

to bring about needed change. Te companys con-

sensus-driven culture, long a source o pride or en-

couraging collaboration among workers, was now

By dv f. l B ty

ob 11, 2011

seen as an impediment to growth. Although HP

revenues were increasing at a double-digit rate, thi

was still below the hyperbolic growth rates o ellow

Silicon Valley companies Cisco, Oracle, and Sun

Microsystems.

Fiorina moved quickly to reenergize the compa

ny. She reduced the number o reporting units rom

83 to 12 and consolidated back-oce unctions

She replaced the companys prot sharing program

with a perormance-based compensation system t

encourage individual productivity. She revamped

the companys sales and marketing unctions.

In the process, she drew plenty o attention. For

tunemagazine put her at the top o its list o the 5

Most Powerul Women in Business, a position sh

held or ve years. Te Wall Street Journaldescribe

her as epitomizing an alluring, controversial newbreed o chie executive ocers who combine gran

visions with charismatic but sel-centered and de

manding styles.1 o many inside the company, th

changes were extreme. One executive explained

Te eeling was, here was Carly, who wasnt a long

time in the HP culture, who doesnt understand ou

business and the HP Way, and doesnt understand

our strengths, particularly in businesses that wer

viewed as so successul or so long.2 Another stated

simply, Te HP we know is gone.3

Fiorinas most disruptive move came in 2001when she announced a deal to acquire Compa

Computer or $25 billion in stock.4 At the time

Compaq was the second largest producer o per

sonal computers, ater Dell, and a major supplie

o servers. A combination o the two companie

would establish HP as a market leader in compute

hardware, which Fiorina believed would give HP

the leverage it needed to compete successully with

Topics, Issues, and Controversies in Corporate Governance and Leadership

S T A N F O R D C L O S E R L O O K S E R I E S


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Leadership chaLLenges at hewLett-packard: through the Looking gLass

competitors such as IBM in the enterprise systems

market.

Te deal, however, was controversial in two

regards. First, analysts were not convinced that

it made strategic sense. HP was seen as doubling

down on the commoditized business o hardware

manuacturing at a time when many believed it

should ocus on higher-margin activities such as

sotware, services, and printing. According to one

analyst, wo losers dont make a winner.5 As a re-

sult, HP stock traded down by 30 percent on the

news (see Exhibit 1). Second, the deal was contro-

versial in that it drew public opposition rom Wal-

ter Hewlett, son o company co-ounder William

Hewlett and a member o the companys board o

directors. Although he had originally voted with

other board members to approve the deal, he subse-

quently changed his mind. In a written statement,

Hewlett said that, Given the lack o stockholder

benets, I believe the extensive integration risks

associated with this transaction are not worth tak-

ing.6 Shortly thereater, David Packard Jr., son o

second co-ounder David Packard, also came out

in opposition to the deal: For some time I have

been skeptical about managements condence that

it can aggressively reinvent HP culture overnight

a culture that developed over many years and was

thoroughly tested under all kinds o business con-ditions. While change is necessary and inevitable,

it does not ollow that every innovation is an im-

provement.7

Opposition by these two men was signicant

not only because they were sons o the companys

ounders but also because the two oundations

which they controlledthe William and Flora

Hewlett Foundation and the David and Lucille

Packard Foundationtogether held 15 percent o

HPs stock. In an escalation o the matter, Walter

Hewlett led a proxy ght to terminate the deal.Te controversy led to a rare, public squabble

between the company and its major sharehold-

ers, with HPs directors joining the ray. Richard

Hackborn, ormer executive vice president o HP

and board member, deended the deal, stating,

Te board thoroughly analyzed this transaction

and unanimously concluded this is the very best

way to deliver the value our shareholders expect.8

He admitted, however, to originally sharing Wal

ter Hewletts skepticism: We all had reservations

None o us was convinced that Compaq was th

exact right answer at the start. Philip Condit, an

other director, said that the merger is certainly no

without risk, but I think the opportunity outweigh

the risk. Director Robert Knowling said that at rs

he was neutral to the idea, but over time came to

believe it was an important way to improve HP

competitive position. According to board membe

George Keyworth, Very good people have tried t

transorm this company through organic growth

targeted acquisitions and the old way. I believe, thi

board believes, we have to take a big step.9 Fol

lowing several months o vigorous lobbying o in

stitutional shareholders by Fiorina, the merger wa

ultimately approved by a razor-thin margin, with

51.4 percent o shareholders in avor and 48.6 per

cent opposed.10

Te Compaq acquisition, however, did no

prove to be the transormative event that Fiorin

and the board envisioned. HP had orecasted in th

merger prospectus that the PC division o the com

bined entities would generate an operating margin

o 3.0 percent in 2003. Te actual gure came in

at 0.1 percent; in 2004, it was 0.9 percent.11 Fol

lowing a string o disappointing earnings reports

the board o directors asked Fiorina or her resignation. Robert Wayman, chie nancial ocer o HP

served as interim CEO while the board undertook

a ormal search or a successor. Fiorina made th

statement, While I regret the board and I hav

dierences about how to execute HPs strategy,

respect their decision.12 She let the company with

a severance package valued at $21 million.

Mark Hurd (2005-2010)

Te search or Fiorinas successor was led by non

executive chairman Patricia Dunn and directorGeorge Keyworth and Tomas Perkins. Accordin

to Dunn, the board is rmly committed t

the business strategy that is in place.... Lookin

orward, we think the job is very reliant on hands

on execution, and we think that a new set o ca

pabilities is called or. When asked whether th

company would consider internal as well as externa

candidates, Dunn responded, We are not rulin


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anything out, but we are committed to a very thor-

ough search or the most qualied candidate. We

anticipate that that is an external candidate, but we

dont know or sure.13

Ultimately, the company named Mark Hurd,

ormer CEO o NCR, as chie executive. While

a relative unknown in Silicon Valley, Hurd had a

reputation or strong operations management and

strict cost cutting. Although he had never managed

a company o HPs size (NCR had $6 billion in rev-

enue at the time, compared to $80 billion at HP),

he had a long-track record o success. He described

his management style in an interview: I believe

in very engaged management. I personally like to

understand how the businesses work. Youve heard

the term management by walking around. I like to

move through multiple levels o the company and

I like my management to do that. Great companies

have boards, CEOs and management that all have

one script.14 Separately, he said, I live by a code

that I got taught very early in my career, that its the

company rst, the employees second, and youre

last.15 Te press labeled him the un-Carly.

Hurd made aggressive changes to the companys

operations. He announced a broad restructuring,

including the layo o 14,500 employees. He re-

duced management layers and eliminated the cor-

porate sales group, reassigning workers to divisionalgroups (PC, printing, and enterprise) so that they

would have deeper knowledge o the products they

sold. o improve accountability, he gave executives

more control over their budgets, and held them

strictly accountable or perormance. Te company

used the cash fow generated by reduced operat-

ing costs to und a series o acquisitions, primarily

in the sotware and services space. Tese included

Mercury Interactive, Peregrine Systems, Palm, and

Electronic Data Systems. Te approach paid o.

Over the next ve years, HPs operating marginsincreased rom 4 percent to 9 percent (see Exhibit

2).

Stability at the company, however, did not last.

In 2006, Patricia Dunn was orced out as chair-

man o the board. Since 2004, the company had

struggled to contain the release o condential in-

ormation regarding boardroom discussions that

was being leaked to the press. Tis included private

discussion among board members and manage

ment regarding strategy, leadership, and corporat

structure. o identiy the source o the leaks, Dunn

hired a rm to investigate the matter, which in turn

hired a second rm. Te detectives o that rm used

a questionable technique called pretexting (pre

tending to be someone else) to obtain the privat

phone records o both HP directors and report

ers. Although Dunn was unaware that the tech

nique was being used, she resigned rom the board

George Keyworth was identied as the source o

the leaks and not renominated at the ollowing an

nual meeting.

In 2010, the company aced another scanda

with the resignation o Mark Hurd. A compan

contractor had accused Hurd o sexual harassment

Although the charges were determined to be un

ounded, the investigation revealed that Hurd ha

submitted inaccurate expense reports, purportedl

in an attempt to conceal his relationship with th

woman. Director Marc Andreessen called Hurd

resignation a necessary decision.16 Tis opinion

however, was by no means universal. Board mem

bers Joel Hyatt and John Joyce advocated tha

Hurd remain at the helm until an orderly transi

tion could be arranged. Tey argued that an abrup

resignation was a reckless way to make a change

that would cause damage to shareholders.

17

Otherelt that Hurd had not been entirely orthcomin

with the board and thereore could not be truste

to continue. Te board split six to our. Although

uninvolved, Larry Ellison, CEO o Oracle, ex

pressed his own opinion: Te HP board just mad

the worst personnel decision since the idiots on th

Apple board red Steve Jobs many years ago. In

losing Mark Hurd, the HP board ailed to act in

the best interest o HPs employees, shareholders

customers, and partners.18 Less than one month

later, Ellison hired Hurd to be president o Oraclehardware division. Hurd let HP with a severanc

package worth $35 million. CFO Cathie Lesja

was named CEO on an interim basis.

lo apotHeker (2010-2011)

Te search committee or Hurds successor includ

ed Marc Andreessen, Lawrence Babbio, John Ham

mergren, and Joel Hyatt. Unortunately, the proces


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was plagued rom the outset. First, the dispute over

Mark Hurds resignation lingered to such an extent

that it impeded the search committees eorts. Ac-

cording to one director, Tere were so many hard

eelings. It became dicult to conduct business in a

civil manner.19 Second, board members were not

in agreement whether an internal or external can-

didate was preerable. Tird, despite the prestige o

the Hewlett-Packard name, several highly talented

external candidates were not interested in the job.

According to some reports, the search committee

approached executives at NCR, IBM, and Micro-

sot only to be rebued because they did not want

to ollow in Hurds ootsteps.

When the company named Lo Apotheker as

CEO in October 2010, the announcement was

greeted with a lackluster response. A native o

Germany, Apotheker was the ormer CEO o SAP

where he had overseen somewhat unremarkable re-

sults. Its not something I would have expected,

said one analyst about the appointment.20 An opin-

ion piece in the Wall Street Journalhighlighted the

unsettling reality that Mr. Apotheker has never tru-

ly run his own show, having been SAPs solo CEO

or less than a year beore his abrupt resignation.21

More striking was the news (not made public or

another year) that not all members o the board

had interviewed, or even met, Apotheker beore hewas given the position. One director explained: I

admit it was highly unusual, but we were just too

exhausted rom all the inghting. According to

another, among the nalists, he was the best o a

very unattractive group.22 Shortly thereater, our

members o the board resigned (Joel Hyatt, John

Joyce, Robert Ryan, and Lucille Salhany). Tey

were replaced by ve new directors: Shumeet Ba-

nerji, Gary Reiner, Patricia Russo, Dominique Sen-

equier, and Meg Whitman.

Apothekers tenure at HP was brie and disap-pointing. At rst, he committed to continuing the

strategy that Hurd had put in place. Later, he re-

versed course and announced dramatic changes:

the company would terminate its recent oray into

tablet computing, sell or spin o its PC division,

and purchase business-analytics company Autono-

my or $10.25 billiona price that was ten times

revenue. Te news triggered a one-day 20 percent

decline in HPs stock. Recognizing the tremendou

investor dissatisaction, the board o directors ter

minated Apothekers employment. He was given

severance package worth $9.6 million, ater only 1

months (see Exhibit 3).

Meg WHItMan (2011- )

Tis time, the board o directors did not orm

search committee or name an interim CEO. Im

mediately ollowing Apothekers resignation, th

board named director Meg Whitman as CEO. Di

rector Ray Lane became executive chairman. Whit

man promised to continue the basic strategy o th

company, although she would review the decision

to spin o the PC division.

Many in the investment community were puz

zled by the sudden appointment. Although Whit

man was well known in Silicon Valley or her tenur

at eBay and her unsuccessul run or the Caliorni

governorship, she did not have experience manag

ing a company in the enterprise technology space

nor had she managed a company o HPs size. Ray

Lane deended the decision: I we thought ther

was a better choice outside, we would have con

ducted the search. When asked whether the board

would make urther changes to shore up investo

dissatisaction, Lane replied: Tis is not the board

that was around or pretexting. Tis is not the boardthat red Mark Hurd. Tis is not the board that did

everything you want to write about. Its just lik

open season to write about this board. Its not thi

board, okay?23

WHy tHIs Matters

1. Te two primary responsibilities o a board o di

rectors are the approval o the corporate strategy

and the selection o a CEO to rene and execut

that strategy. Has the board o HP settled on

corporate strategy? Do they understand the skilland experiences required or a CEO to manag

the company? What are the necessary skills and

experiences to guide HP over the next three to

ve years?

2. Te hallmark o a well-governed company is

reliable system or the development o interna

managerial talent. For decades, HP had turned

inside or its chie executive ocers. Beginnin


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with Fiorina that changed. Why has HP since

only appointed outside executives as CEO?

3. In explaining why a company has decided to ap-

point an external CEO, boards oten claim that

there are no insiders who are ready now. How-

ever, every executive who becomes CEO at one

point had to make the transition having never

done the job beore, and it is the responsibility

o the board to mentor him or her through this

process. Is it appropriate or a company to re-

peatedly view internal candidates as inerior to

external candidates? At some point, shouldnt

the board look at the viability o candidates

rather than whether they are ready now?

1 As a case in point, whereas Platt had travelled by coach, Fiorina

asked HP to purchase a $30 million Gulstream IV or her use. See

George Anders, H-P Board Ousts Fiorina as CEO, Te Wall StreetJournal, Feb. 10, 2005.

2 David P. Hamilton, Soul Saver: Inside Hewlett-Packard, Carly Fio-rina Combines Discipline, New-Age alk, Te Wall Street Journal,

Aug. 22, 2000.3 Quentin Hardy, Te Cult o Carly, Forbes, Dec. 13, 1999.4 Te announcement came one year ater Fiorina abandoned an $18

billion bid to purchase the consulting arm o Pricewaterhouse, ol-

lowing a precipitous decline in HP stock. In 2002, IBM acquired the

business or $3.5 billion.5 Molly Williams, H-Ps Deal or Compaq Has Doubters As Value o

Plan Falls to $20.52 Billion, Te Wall Street Journal, Sep. 5, 2001.6 Brian Bergstein, Family, Foundation o HP Co-Founder Oppose

Compaq Deal,Associated Press, Nov. 6, 2001.7 Brian Bergstein, Rebukes rom Hewlett-Packard Sons Make Fio-

rinas Lie Hard,Associated Press, Nov. 7, 2001.8 Ibid.9 Steve Lohr, Its the Scion vs. the Board in Merger Fight, Te New

York imes, Feb. 4, 2002.10 Following the outcome o the vote, Walter Hewlett resigned rom

the board. Both the Hewlett and Packard Foundations sold the ma-

jority o their holdings in HP stock. See Hewlett-Packard, orm 8-K,

led with the SEC, April 18, 2002.11 Carol J. Loomis and Oliver Ryan, Why Carlys Big Bet is Failing,

Fortune, Feb. 7, 2005.12 Pui-Wing am, Fallen Star: HPs Board Ousts Fiorina as CEO, Te

Wall Street Journal, Feb. 10, 2005.13 Edited lightly or clarity. Hewlett-Packard Conerence Call-Finan-

cial Analysts, FD (Fair Disclosure) Wire, Feb. 9, 2005.14 Pui-Wing am, Boss alk: Hitting the Ground RunningNew

CEO o H-P Immerses himsel in Studying Company, Te Wall

Street Journal, Apr. 5, 2005.15Adam Lashinsky and Doris Burke, Mark Hurds Moment, Fortune,

Mar. 16, 2009.16Ashlee Vance, Hewlett-Packard Ousts Chie or Hiding Payments

to Friend, Te New York imes, Aug. 7, 2010.17 Ben Worthen, Justin Scheck and Joann Lublin, H-P Deends Hasty

Whitman Hire, Te Wall Street Journal, Sep. 23, 2011.18Ashlee Vance, Oracle Chie Faults HP Board or Forcing Hurd

Out, Te New York imes, Aug. 10, 2010.19James B. Stewart, Ouster o Hewlett-Packard CEO is Expected:

Most Voted to Hire Apotheker without Meeting Him, Te New

York imes, Sep. 22, 2011.20Ashlee Vance, Ex-Chie o SAP is Named to Lead H-P, Te Ne

York imes, Oct. 1, 2010.21 Role Winkler, Is Apotheker Right Potion or H-P? Te Wall Stre

Journal, Oct. 2, 2010.22James B. Stewart, loc. cit.23 Hewlett-Packard Names Meg Whitman President and Chie Exe

utive Ocer Conerence Call, Sep. 22, 2011. Available at: http:/

h30261.www3.hp.com/phoenix.zhtml?c=71087&p=iroirhome.

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exHIbIt 1 HeWlett-packard: stock prIce HIstory and selected events

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exHIbIt 2 HeWlett-packard: selected InForMatIon and board oF dIrectors

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exHIbIt 3 HeWlett-packard: ceo sIgnIng bonuses and severances

leadership challenges at hewlett-packard: through the looking glass

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