The Hindu Business Line : HP's board flexes its muscles

THE NEWS reports on February 10 were sharp and direct. The board of Hewlett-Packard Co. (HP) had fired its CEO, Ms Carleton Fiorina. Moreover, the company said that the ousting was `without cause'. That does not mean that they did not have a reason to fire her. It only means that she qualifies to get the severance payment.

The cause for her firing has been a poorly guarded secret. It was poor performance. After her five-and-half years as head of the computers and technology company, the stock price was only 50 per cent of what it was when she began her tenure. While the company's revenues had risen significantly due to the acquisition of Compaq Computers three years ago, profits had not. It was widely believed that the goals she had set for the merger had not been achieved, and the company was underperforming in relation to similar competitors.

Much of the media focus in the US has been about what Ms Fiorina did and did not accomplish, and her personal style of management. As a woman heading a major corporation, she naturally attracted attention, and that continues to be so following her departure, and nobody believes her gender had anything to do with the decision to fire her. But there is another interesting story in the HP episode, namely, an active board that seems to want to be in charge of things.

Boards have become activists of late. While most have lain dormant for long, a few have woken up recently. Disney Co.'s puppet board, for example, got courage when 45 per cent of the shareholders voted last year to strip Mr Michael Eisner of his Chairman's post and leave him as only the CEO. They have now started actively looking for a successor.

HP's board has begun to flex its muscles to show who is the boss. In 1999, the board sought and got an outsider for the post when it hired Ms Fiorina. The objective was to get a change agent, someone who would shake up the company out of its stagnant performance. Other boards have done that successfully.

For example, when the IBM board hired Mr Lou Gerstner, the company was in trouble and IBM broke two traditions, by hiring an outsider and one who had no experience in the computer industry. Mr Gerstner worked out well for them. Ms Fiorina, similarly, was an outsider and with no prior computer experience. Her previous position was in sales with Lucent, a telecommunications company.

One of her early moves was a major reorganisation of the company, reducing 83 operating units to four groups, and centralising major functions including strategy in a company that valued decentralisation and independence for unit heads. She was trying to rein in a company to sharply focus on its future, faced with a slowing of the PC markets.

While the reorganisation was in process, Ms Fiorina undertook an acquisition of Compaq, the personal computer company, in 2002. The author said (Business Line, September 17), it was not a good idea to try to manage an acquisition when such gut-wrenching changes in the company were in progress. There was also no grounds to believe that larger size was what it took to generate margins in personal computers. I regret to say (for I hold shares in the company) that I have been vindicated.

One of the members of the board, the son of co-founder Hewlett after initially agreeing to the acquisition, began publicly opposing the move. Yet, as the shareholders approved the merger, the dissenting director had to quit. The majority board stood by her new strategy and its execution although it resulted in major layoffs and shook the company's long-standing credo referred to as `The HP Way'.

As performance did not get better and the company continued to be in a churn, the board seems to have decided that it needs to get into the act. But what is interesting in the HP situation is that the board was acting against its leader. For Ms Fiorina was both the CEO and Chairman. That has been a no-no among governance experts for a long time because of the enormous concentration of power that it affords the holder of the post.

As Chairman, the individual leads the board, who represent the owners. As CEO, the individual leads the management which is being supervised by the board. So here is a closed loop; the individual is supposed to supervise himself! In addition, without a President or a Chief Operating Officer for the company, she was managing strategy and operations, no easy task for an $80 billion (Rs 3,60,000 crore) company going through restructuring.

The board seems to have tried to signal her late last year that she share responsibilities with other senior managers. She initially resisted the move, but was said to have reluctantly agreed. Yet, soon after, the board seems to have been provoked to hand her an ultimatum. Apparently a group of three directors met with her last month and `read out' a four-page memo analysing her poor performance and failure to meet performance targets.

The board's mutiny (after all, this is a board that rebelled against its leader) essentially means various individuals on the board, as members or heads of important committees, decided to confer without the Chair and initiate action. It has proven that even if the Chairman and CEO are one and the same person, a board need not feel impotent.

HP's board has definitely moved into the driver's seat. In the first place, after selecting Ms Fiorina and giving her five-and-a-half years to run the company, it had the courage to admit, tacitly, that it had made a wrong choice by firing her. What is surprising is that the board has followed up the firing with statements that it does not foresee major changes in strategy. But that is what HP needs at this time. Ms Fiorina's assumption that scale of operations, apart from offering a full range of products is what was needed to do well in the personal computer industry, has not been borne out.

The board has appointed one of its own as an acting Chairman (Ms Dunn, the same Director who seems to have taken the lead in ousting Ms Fiorina), and a former Director, Mr Wayman, as interim CEO, signalling that it would separate the two functions into the future. Ironically, while announcing that both internal and external candidates would be considered for the post of CEO, the new Chairman also added that she thinks an external candidate would be selected.

This is enough to dampen the spirits of aspiring internal candidates, and could lead to a further loss of talent as they polish their resumes and start looking for jobs elsewhere. Moreover, Ms Dunn is also reported as saying that the board does not think there is any need to change the company's portfolio of business and would find a CEO who agrees with that view. So, the board wants a CEO to whom it will hand a ready-made strategy? I wonder how many candidates would be willing to put their reputation on the line without the freedom to make their own changes.

Ms Fiorina must be leaving with mixed feelings. It certainly does not look good on her resume to say that news of her departure led toan increase in the value of the company (market capitalisation) by $4billion (Rs 18,000 crore).

Yet, although CEOs may fail their company, in this winner (and sometimes loser)-take-all society, they always do well by themselves. Her severance package is estimated at $21 million (Rs 95 crore) and, among other things, the right to keep her computer!

It seems a bargain when you compare it to what Disney Co. paid Mr Michael Ovitz in the mid-90s when it fired him as President. Mr Ovitz was expected to take over from CEO, Mr Michael Eisner, but was sent home one fine day with a check for $140 million (Rs 630 crore). Mr Ovitz does not seem too unhappy at that, but Disney's shareholders are, and there is a case going on in the Delaware courts where shareholders are suing the Board of Disney for not doing their job in granting Mr Ovitz such a lavish severance. But that is another story.

(The author is professor of international business and strategic management at Suffolk University, Boston, US. He can be reached at cgopinat@suffolk.edu)

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