Tech Check

Breaking News from HP - UPDATE


Update 2:
So that was embarassing. We get word that there's been a major development in the HP boardroom spy scandal case and that they want me in the chair to report it right away.

The initial report, from our partners at the Wall Street Journal, and then later reported by the Associated Press and Reuters, said former chairwoman Patricia Dunn would plead guilty to a single misdemeanor in this case. Three other executives connected to it would also plead guilty to a misdemeanor charge and face community service. Dunn would escape community service because of her ongoing health issues and cancer treatment.

That's essentially what I reported. But as it happens sometimes when a story breaks and events are fluid, it turned out not to be right. Meaning, I was wrong.

About 20 minutes later the real story came out: All charges against Dunn would be dropped. She would plead to nothing. And the three other executives would plead "no contest" to a single misdemeanor charge that would be dropped if they complete 96 hours of community service by September.

This is a monumental win for Dunn who released a statement: "I have always had faith that the truth would win out and justice would be served -- and it has."

Her attorney James Brosnahan told reporters outside the San Jose courthouse that "The system does work. This is the right result today. This is the right thing. It should happen, it did happen. The (Caifornia) Attorney General, the new administration, came to this view. The judge came to this view. And as for Patti Dunn, she can live the rest of her long life, I hope, without this problem."

The legal proceedings may be dissipating, but the tarnished image of this company still lingers. How quickly the image problem goes away will now largely depend on whether shares continue to perform so well (up 18% over the past year) and whether CEO Mark Hurd, now chairman too, can keep his boardroom in check.

As for breaking news, it's hardly a perfect science, and as soon as the corrected version of the "news" was disclosed, I got right back in that chair and got it on the air. Right, this time.

We'll do better next time.

See Original Post

Update 1:
Word is just coming out that all charges against former HP Chairwoman Patricia Dunn have been dropped, and that three others connected to the boardroom spy scandal have pleaded no contest to their charges. And those charges will be dropped as well by September if they complete 96 hours of community service.

Original Post:
This break in the case comes on a rather appropriate day. Why? Shareholder meetings don't tend to break a lot of news. Boards of Directors tend not to make a lot of news.

Such is NOT the case when it comes to Hewlett-Packard , and that's the reason why the company's annual shareholders meeting in Santa Clara, Calif. later today is generating so many headlines.

"Proposition 3" may have a nondescript name, but this shareholder initiative that HP investors will vote on today is being very closely watched by boards of directors all over the country.

In a nutshell, the proposal dramatically changes the way HP board members get nominated, letting shareholders who have owned at least 3% of HP shares for at least two years, nominate up to two board candidates.

Why such a change? Well, it appears HP shareholders are fed up with the boardroom scandals and shenanigans that at best have thrust the company into turmoil, and at worst tainted one of the greatest names in American business history.

A little history: Five years ago, Walter Hewlett (son of HP co-founder Bill Hewlett) launched a blistering proxy battle to torpedo then CEO Carly Fiorina's $25 billion buyout of Compaq Computer. I covered that proxy war and it was brutal for all parties involved, particularly shareholders.

Then, a few years later, Fiorina is shown the door, and when her $42 million severance package is disclosed, shareholders take another hit.

And then of course there was last year's massive boardroom spy scandal that made international headlines, cast a pall over the company despite a miraculous financial turnaround, and ultimately took down former Chairwoman Patricia Dunn who had faced felony identity theft and conspiracy charges in that embarrassing turn of events.

Shareholders have had enough and want more of a voice in who sits on the Board, which up until recently, had been one of big-business' most respected positions.

"The best reflection of what we are looking to get is shareholder democracy," says Russell Read, chief investment officer of the huge California pension fund Calpers, which owns 16.5 million shares of HP stock. "We are not looking for rubber stamping, we are looking for effective representation. We think without having effective access to the proxies, there can be a danger of board members becoming insular and not reflective of the interest of the shareowners. Some of the history of HP certainly shows that."

And Calpers is not alone: the New York State Common Retirement Fund, the Connecticut Retirement Plans and Trust Funds and the North Carolina Equity Investment Fund Pooled Trust have joined Calpers and the California State Teachers' Retirement System in supporting Prop 3.

"I think HP is the perfect example of a dysfunctional board, where potentially shareholders' input could be helpful," says Bob McCormick, the director of investment proxy research at Glass, Lewis & Co. "You have a board that was leaking information, classified, confidential information. You have an investigation that was using the method of pretexting, in effect, lying about the identity of certain investigators to elicit information. It is sort of the perfect example of a board that may require some outside input."

In a statement to shareholders, CEO Mark Hurd disagrees with that assessment.

"While HP has faced a number of serious and very public challenges over the past year, the HP board already has acted decisively to address those challenges.

"The directors involved have resigned and we believe that the board is now functioning effectively."

He also says that changing the way the board members are nominated runs the risk of "the election of special interest directors" and "divisive and expensive proxy contests."

But that's something McCormick at Glass, Lewis disagrees with.

"Companies are very concerned about directors who are agenda-driven or beholdent to a small group of shareholders being placed on the board, and either being divisive or really acting to the benefit of themselves or to the benefit of small groups of investors. I think that's an overstated concern."

Supporters of Prop 3 say it's unlikely they'll get the 2/3 of the vote necessary to pass. But a sizeable percentage in their favor could send a very clear message to companies all over the country: shareholders are becoming far more active in the day-to-day operation of the company, and with a stock market so crazy -- and the behavior of HP's board with some major contoversies, these shareholders are no longer comfortable merely sitting idly by.

Questions?  Comments?