A Perspective on the HP Witch Hunt

Posted by Rob Enderle, Principal Analyst, Enderle Group

Last week the news broke at HP about an investigation into a board leak at that company which may have been done improperly. In looking into this, I personally think this is an attempt to cover up what the big problem was and to misuse political influence. Since I'm writing this on September 11th, I'm very sensitive to the whole concept of cover your ass politics right now and feel it is worth while to provide what I think is a clearer perspective on the HP problem which, I think, has more to do with a misguided power play on HP's board than anything else right now.

It Started with Carly

The cause of the initial problem was an out of control CEO who was also the Chairman of the Board at HP and a Board who didn't have sufficient authority to direct her properly. To address this problem, one board member, George Keyworth (who coincidently had worked for the US Government in a senior political roll) leaked information to the media out of a confidential board meeting. The leak may have actually triggered a series of events which eventually led to the successful replacement of Carly Fiorina by the much more capable Mark Hurd.

The Missing "Why" Behind the Leak

From everything I can discover about this, the board was incredibly frustrated with Carly Fiorina at the time the leak occurred. She was both CEO and Chairman and apparently was spending a great deal of her time with the Republican Party, she had refused to replace Michael Cappellas as COO and he went on to turn around World Com. HP's stock was floundering, key people were leaving or getting fired, and the company was starting to look more and more like the Titanic with a captain who neither wanted to do the navigation herself nor allow someone else to do it for her.

I can only imagine the level of frustration the board, largely made up of senior executives, felt as they struggled to deal with this no win situation. George Keyworth, evidently, choose to act in a way consistent with his government background and used the press as an effective tool to change the status quo and that change helped precipitate the removal of Carly and her replacement by Hurd. The only problem was that he violated his confidentiality agreement. To come clean and offer his resignation was the right thing to do.

Given the positive benefit resulting from the leak, he might have been allowed to stay on yje board. But he would have had a long, and uncomfortable, talk with HP's legal department. Mark Hurd, however, mentioned that he would have fired any HP employee who would have leaked such information to the media.

The Forgotten Crime

With all of the focus on Patricia Dunn, it appears to have been forgotten that it is the resulting violation of trust that caused so much pain at HP. Had Keyworth admitted to what he did and taken his lumps, perhaps with silk gloves, we probably would never even have known or cared who leaked the information. Because he did not, an investigation was undertaken to locate the cause of the leak.

While this leak may seem trivial, in the current environment, it ended up in SEC action. And if insider trading is determined, people on the board could end up in the Martha Stewart room at a federal facility. And the person doing the leaking could, at that point, be anyone; even an HP employee observing the event. It simply had to be stopped.

So Patricia Dunn requested HP to do an investigation. At this point, there is no evidence she gave any guidance as to how that was done and there is substantial evidence that the board asked, and got, legal advice saying what was done was legal.

Pretexting

The process used was "Pretexting" or getting records by exploiting the weaknesses in the current security programs in place at most institutions. While it does appear to be illegal in some situations involving financial institutions, its legality as HP's agents used it that is currently unclear.

Part of the reason this is believed to be legal is the laws in California at the State Level, and in the US at a Federal Level had not yet been enacted (the California Law is ready for signing by the Governor and the Federal Law has stalled in Congress). Pretexting is a common practice used by a number of companies and government agencies. It also has been used for identity theft which is why it should be outlawed but progress in that regard has been difficult to make.

Through the use of pretexting not only were board members phone records accessed but the records of reporters which is incredibly stupid. There is no one, including her detractors that say Patricia Dunn has a history of being stupid. But it was through this process that Keyworth's activities were discovered. And the HP board did vote to remove him consistent with HP employee practices. He refused to leave and that is part of the cause of the recent unfavorable media coverage.

California's Grandstanding Attorney General Weighs In

Now the US Attorney General is suddenly all over this, indicating several laws were violated. But it is unclear who actually violated them and why we are hung up passing a new law, if we have several that already make pretexting illegal.

Now, also remember, whether what HP did is legal or not still needs to be decided in a court of law as does who is actually accountable for it should the action prove to be illegal. None of this has actually been done yet and the California Attorney General, Bill Lockyer, has a bit of a history being a grandstander http://www.jonathanbwilson.com/2005.08.01_arch.html (wanted to sue fast food restaurants for French Fries being unhealthy for instance). Currently he is running for State Treasurer - something that makes the decision to focus on HP's investigation over the leak itself more than troubling.

HP's Board Change Unfair But the Right thing to Do (UPDATE)

While it is unfortunately that Patricia Dunn had to step down given her contribution to HP and her impressive fight to get to her current position, her orders have resulted in a problem for HP that clearly grew out of control. While unfair, she did the right thing and stepped out of the job indicating (unlike some others) she still held the company's interests before her own. It is without surprise that the guy who was caught, Keyworth, wanted her fired. But this really smells like a set up job to me as there is no apparent evidence Dunn was aware of the pretexting and the activities were coordinated though HP legal who, evidently, assured their legality.

In a decade that has been marred by boards that have kicked back and let CEOs do really bad things I find it both refreshing and critical that folks on HP's board want to roll up their sleeves and help get the job done. With no evidence that any member of the board even knew about the pretexting and only broad agreement that it was stupid, not illegal, it would seem a shame to change something that seems to be working in the best interest of the HP employees, the HP investors, the HP customers, and the State of California.

In the end, I think it is our frustration with a US administration which has regularly crossed legal lines to access private information without due process that we are truly upset about. Personally, I feel we focus on making all of this truly illegal rather then venting on someone who, so far, has not been proven culpable and who has been doing a solid job despite conditions which others would have found impossible to overcome.

Rob Enderle is principal analyst for the Enderle Group. He can be reached at renderle@enderlegroup.com.