At HP, a scandal that's good for investors

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Oh, how the press revels in embarrassments like the boardroom-spying scandal at Hewlett-Packard. Myself included. Yet no matter how damaging the brouhaha is to HP's image, investors seem quite pleased with the way the whole matter has played out.

The latest twist is the announcement that Chairman Patricia Dunn will relinquish her post in January, a decision reached at an HP board meeting on Monday. CEO Mark Hurd will replace her. That minuet follows an intriguing chain of events including leaks to the press by director George Keyworth; a spying scheme, possibly illegal, in which investigators impersonated board members in order to obtain their phone records; the subsequent protest resignation of one board member; and now, inquiries by at least four state and local law-enforcement agencies. Not exactly a marketing brochure for one of America's most esteemed companies.

But while the press has been hyperventilating, investors have remained calm. On September 4, the day before any of this news began to unfold, HP's stock closed at $36.53. On September 12, after the chairman announced her resignation, the stock closed at $36.92, a minor gain over the course of the week. The stock has remained stable because, no matter how distasteful, the entire affair solves a problem that has plagued HP over recent months.

The press loves a whistleblower, which is one reason Keyworth, who has now admitted he leaked information to the press, has gotten light treatment by the media. But press leaks in 2005 and 2006 made it seem there was major dissension on the board regarding HP's future strategy. By most accounts, that was indeed the case. But presenting a divided front foretells confusion and instability, which Wall Street of course hates. It rattles employees, too. Regardless of what's going on in the boardroom, most stakeholders want to hear a company speak with one voice, especially if it's the voice of an iron-willed autocrat who has the board members under control. Dissent, unfortunately, is a money-loser.

Chairman Dunn, a tough and decisive leader who helped depose former CEO Carly Fiorina–herself no pushover–oversaw an investigation to finger the leaker and halt boardroom chicanery. That she accomplished. It took the resignation of two directors–Keyworth and his ally Tom Perkins–and will probably involve criminal investigations, but Dunn found the leaker and finally helped show him the door.

Of course Dunn is headed the same way–surely not a tradeoff she had in mind. But the market is shrugging off her departure.

"They're happy she did this," says Eric Johnson, who teaches operations management at Dartmouth's Tuck School of Business, and used to work at HP. "Hurd is probably happy with what she did." It helps that Hurd, an outsider who replaced Fiorina as CEO last year, has earned confidence on Wall Street and is viewed as a capable replacement for Dunn.

The stew will continue to simmer. Investigations by the California attorney general, and possibly others, will probably generate a drip-drip-drip of embarrassing revelations for some time, which HP will have to muddle through. A congressional committee has requested documents, a possible prelude to hearings (although such exhibitions often make the members of Congress look worse than the subjects of their interrogations). And it's too early to tell if the board will settle into a state of brotherly love. An HP news release on recent board changes, in fact, is nearly comical in its forced language about "honor" and "courage" and "principles." How refreshing it would be if HP were to acknowledge whatever legal wrangling and jackbooting went into resolving the ugly mess.

Patricia Dunn will also stay on as a director–unless the scandal boils over further, in which case she may have to relinquish that job, too. But CEO Hurd is probably hoping he can keep her around, since she's already done him and the company a valuable service.

There's one other reason for investors to be cheered. As part of the whole dance, HP has designated director Richard Hackborn, a much-admired old-schooler who has been at HP for 33 years, as "lead independent director," as of January. HP hasn't explained how a lead independent director is different form a plain-old director, but it may not have to: Simply mentioning Hackborn's name, and affording him a status boost, is likely to calm employees and reassure longtime HP watchers.

"It's a signal that they're going back to the HP way," says Johnson. Wouldn't that be nice–a technology company focused on technology instead of damage control.

--Rick Newman

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Hewlett-Packard
  • Rick Newman

    Rick Newman is the author of Rebounders: How Winners Pivot From Setback to Success and the co-author of two other books. Follow him on Twitter or e-mail him at rnewman@usnews.com.

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