Articles by Levick Experts
Directors Monthly
Private Blunders, Public Missteps: Lessons from H-P’s Two-Front Disaster
by Lawrence P. English and Richard S. Levick
In January 2005, a series of articles appeared in the Wall Street Journal revealing that the Hewlett Packard (HP) board of directors was considering a reorganization aimed at reducing then-CEO Carly Fiorina's responsibilities. The articles were based on information which originated at a confidential board discussion, and which was apparently revealed to reporters by a dissident director. Unilaterally, secretly, and selectively revealing confidential board matters is highly unethical and potentially illegal. While the perpetrator of this act has never been punished, the chain of events triggered by that action has caused the company and its shareholders immeasurable damage, destroyed the formerly impeccable reputations of several people employed by or associated with the company, and led to the criminal indictment of the former board chair.
The story of what happened has already been analyzed in depth, but what still bears analysis is why it happened, and how the corporation compounded its mistakes in the court of public opinion-both during and after the Wall Street Journal got on the case. This twofront debacle has posed many questions about what HP's management and board could have done differently from the outset, and how they might have handled public communications more effectively once the story broke.
The Long Downward Spiral
Dissension at the highest levels of HP was apparent as early as 2001 when, after HP and Compaq directors unanimously approved a merger of the two companies, HP's founding families waged a bitter battle to block the deal. The merger was effective in May 2002, but the dispute put enormous pressure on Fiorina and her board to fully integrate the two companies and deliver the promised benefits.
Two years later, investors were still waiting for results. The third-quarter 2004 earnings target was missed, and the share price had stagnated. In late 2004 and early 2005, the HP board's independent directors, in the proper execution of their role in evaluating the CEO's performance, met privately and discussed a number of options, including the possibility of reorganizing the top management. A group of directors met with Fiorina and shared their concerns and suggestions with her. These concerns and organizational suggestions were further discussed at a board meeting in January 2005.
First Mistake: The Board Tried to Do Management's Job. According to Fiorina's account, the board was clearly dysfunctional by late 2004, and she resented their usurpation of her responsibilities as CEO. A properly functioning board would have discussed the CEO's performance, and if the majority had lost confidence, they would have taken steps to replace her. However, instead of devising an orderly succession plan, the HP board began doing Fiorina's job for her by developing organization changes and executive assignments. This usurpation was indicative of a serious lack of decision-making on the part of the board.
Second Mistake: Play Me or Trade Me. By her own admission, Fiorina was too docile in her response to the HP board. A more resolute CEO would have thanked board members for their suggestions, but reminded them that organizational decisions and executive assignments were up to her. She should have told them to let her do her job or to let her go-after all, she was protected by a lucrative severance arrangement and was a much sought-after executive.
Third Mistake: Breaching the Duty of Confidentiality. Board-proposed organization issues were further discussed at a meeting in January 2005, but according to Fiorina, a final decision on these proposals wasn't reached. Although it's unclear exactly what transpired at this meeting, one thing is clear: someone relayed what the board discussed to the Wall Street Journal, violating the duty of confidentiality that directors of a public company are required to uphold.
Fourth Mistake: Creating a Lame Duck CEO. A fundamental principal of good governance dictates that, until a CEO is removed, that person deserves full public support from the company's board. By discussing organization matters with Fiorina's subordinates, HP's board weakened her position and raised questions about her authority. Leaking the substance of these discussions to the media drastically undermined her position with employees, customers, and investors-an egregious breach of fiduciary responsibility. Not surprisingly, Fiorina was soon removed as CEO, Patricia Dunn was appointed board chairman, and the search that led to the eventual appointment of Mark Hurd as CEO began.
Fifth Mistake: Letting the Breach of Confidentiality Fester. With Dunn's appointment as chairman, events could have taken a very different turn. However poorly the Fiorina matter had been handled, she was gone, and the search for a new CEO was underway. Now was the time to create board unity.
When an internal investigation made it clear that no one would admit culpability for the breach of confidentiality, a stronger board might have locked itself in a room until the matter was resolved in a way that would preclude future leaks. The board's failure to do so was a dereliction of duty.
Sixth Mistake: Launching a Second Investigation. Late in the summer of 2005, the investigation launched by Dunn still had not determined the leaker's identity. Hurd had become CEO, the company seemed back on track, and the board had another opportunity to reconvene and restore trust. But that opportunity came and went. In January 2006, additional leaks surfaced, and a second investigation began.
Instead of contemplating why another investigation was necessary-especially in light of the fact that Fiorina was long gone, HP's business was going better, and the new leaks were inconsequential-Dunn and Hurd decided to look backward. It's unclear whether Dunn and Hurd really thought it was in the best interest of shareholders to know the identity of the new leaker, or whether personal anger, distrust, and animosity kept them from making a sound business decision. If the former, they were grievously mistaken. If the latter, they were as blameworthy as the leaker.
Seventh Mistake: Assuming It's Right Because It's Legal. Over the course of the second investigation, Dunn sought extensive legal advice from internal counsel and counsel for the third-party investigators-a fact that suggests the undertaking was dubious at best. More importantly, the question of technical legality doesn't take into account ethical and moral considerations and whether those actions are consistent with company values. History is rife with examples of executives who hid behind the opinion of advisors, only to find that the advice was a woefully thin shield in the marketplace.
Eighth Mistake: Public Hanging. The situation utterly deteriorated when Dunn insisted on revealing the results of her investigation at an open board meeting. She humiliated one director and caused another to resign in anger, triggering the extremely public revelation of just how dysfunctional this board was, and just how far this company had strayed from its values, traditions, and history. Common sense should have dictated that with the revelation of the investigation, there was a significant risk of a PR nightmare far worse than what any errant board member might have caused.
Ninth Mistake: Failure to Anticipate the Impending PR Disaster: According to the Wall Street Journal, the May 18, 2006 HP board meeting was chaotic. Dunn had the results of the investigation presented to the board. Director George Keyworth was identified as the source of the 2006 leaks. He was asked to resign and refused. Another director, Thomas Perkins, resigned in anger and left the meeting.
Anyone who has served on a public board knows that this amount of dissention is not going to blow over. Yet the only public statement made by HP was a routine May 22 announcement of Perkins' resignation. Nothing more was said until August, when Perkins forced the company to make further disclosures that led to the press feeding frenzy in the fourth quarter of 2006.
Best Practices for Worst-Case Scenarios
Let's take a closer look at the communications missteps that compounded the governance fiasco, and the lessons public companies must take away from those missteps.
First, Prepare a Strategy Before You Need One. The gaping deficiency in HP's level of preparedness for the September 2006 press debacle was obvious when there didn't seem to be any sort of a company spokesperson once the Wall Street Journal broke the story and the crisis unfolded. Crisis planning means identifying and training one or more executives before a crisis happens. Once a crisis happens, the process of prepping that spokesperson with specific message points can take place quickly and smoothly.
Second, Assign a Team Before You Need One. A corporate crisis team should be ready to deploy as needed, and it should include people who know each other's strengths, who trust each other's counsel, who have met regularly in the past, and who have the resources to gather information on a 24/7 basis.
Reporters loved covering the HP story because the company was in such disarray. Journalists had numerous sources and, as one confided to us, pitting one against the other was like "shooting fish in a tank."
Third, Have Internal Policies on What to Do if a Journalist Calls. There's probably no way to guarantee a leakproof ship, but something set down in writing does have influence simply because it is set down in writing. The document should direct all media queries to an in-house corporate communications professional who can either deal with the matter or direct it to a pre-assigned spokesperson.
Fourth, Say Something. HP only hurt itself by issuing so many denials and "no comments," especially as reporters were finding off-the-record sources anyway. By not responding, companies free up reporters to write what they want and publish what they have. At a point in history when corporate reputations are at an all-time low, "no comment" might as well be an admission of guilt.
Sixth, Consider Apologizing if You're Caught Red- Handed. Mea culpa worked for Richard Nixon in 1952, and it might have worked for Patricia Dunn in 2006. An apology-without admitting liability-is one way of running to the crisis, rather than fleeing desperately from a locomotive that's bound to catch up sooner rather than later.
Seventh, Don't Be a Poster Child. Companies need a healthier respect for just how well their adversaries manage the media. HP was just one more poster child set up as a warning to companies that cannot or will not ensure sound board/management dynamics. As a media case, it sent a negative "message" more compact and dramatic than a thousand D&O lawsuits. On the other hand, had the company created its own strong message-about remediation, and palpably focused on tomorrow rather than yesterday-it might well have spared HP the honor of being our latest national symbol for corporate disunity.
Eighth, You May Need to Offer Up a Sacrifice. Dunn's disastrous finger-pointing was exactly the wrong kind of sacrifice. However, at the same time, there was a readymade implicit sacrifice, as Fiorina's departure could have separated HP's governance future from its bleak recent past. Having made that sacrifice, the company under new management was given a second life-which it lamentably wasted.
Ninth, Seize Every Opportunity to Make Today's Story Yesterday's Story. It may be hard to imagine at this juncture, but there's no reason why this story had to stay in the media for so long. Had HP followed the best practices we've itemized, the story might well have started to suffocate after a week. HP's intransigence gave it plenty of air, however, and ensured months of follow-up coverage.
To some, it might seem as if these lessons learned on both fronts of the HP embattlement can only be gleaned from 20-20 hindsight. Quite to the contrary; if there is any single message that must be delivered to corporate leadership, it is that such problems are both preventable and remediable; that the best practices are known and proven; and that the marketplace is fully populated with companies and professionals who know how to implement those best practices.
That's the abiding good news, which tales of woe like HP's should not deceive us into forgetting.
Lawrence P. English is chairman of Lawrence P. English & Associates, a crisis and turnaround management firm, and he has served as a director of three public companies and three private companies. Richard S. Levick, esq., is president & CEO of Levick Strategic Communications, which protects brands and reputations during global crises and litigation.