Congress makes H-P investors nervous

Congress makes H-P investors nervous

 

By Jon Markman

Hewlett-Packard (HPQ, news, msgs) employees have suffered through one set of bonehead executives after another in recent years and yet have accomplished a stellar and historic turnaround.

Now H-P's revival faces yet another challenge: a high-profile grilling of its executives in Washington, as Congress looks into a harebrained attempt by former Chairman Patricia Dunn to ferret out the identity of a board member who leaked secret board deliberations to the media.

General Counsel Ann Baskins resigned Thursday just before a congressional hearing on the company's snooping into the telephone records of some board members and journalists. Baskins asserted her Fifth Amendment right against self-incrimination, refusing to answer questions from a House of Representatives Energy and Commerce subcommittee. Dunn and Chief Executive Mark Hurd testified later Thursday.

At the hearing, Lawmakers compared H-P's actions to Watergate and the demise of Enron, with Rep. John Dingell of Michigan saying the operation would "make Richard Nixon blush were he still alive."

Dunn, who resigned under pressure last week, said she had been assured that phone records had been obtained lawfully and that she regretted so many people had been let down by her reliance on that advice.

H-P's problem is that rather than employing straightforward, legal means to discover the chatty chump, Dunn hired and managed a private investigator who used techniques to obtain directors' and reporters' phone records that were questionable at best, illegal at worst, and embarrassing either way.

Dunn's behavior was way outside the bounds of normal corporate behavior, as I'll show you in a moment. But was it bad for shareholders? Probably not. The episode proves that H-P's higher-ups were in over their heads when it came to a corporate investigation. It doesn't say anything about their ability to make and market computers.

Shareholders forgive, for now

Investors have given the company a get-out-of-jail-free card on this matter, as shares are just about where they were when The Wall Street Journal started uncovering these events three weeks ago. This is a measure of the respect that investors reserve for Hurd, who issued an uncomfortable apology late last week and has used the turmoil to consolidate his power. The turnaround specialist, who restored growth and pride at H-P in the two years since taking over from flame-out CEO Carly Fiorina, has taken on the role of chairman.

To be sure, you have to wonder whether investors are being too generous with their Hurd behavior, since the CEO admits he knew about the ill-fated investigation for months and failed to comprehend that it was ethically out of bounds, potentially illegal and, let's face it, just plain stupid. If Hurd didn't realize that using spies and lies to obtain personal info on directors, the media, employees and their spouses was wrong, then what other character and judgment flaws lie more deeply buried beneath his stony façade?

Maybe nothing. H-P shares have risen 65% since April 2003 -- five times the market's pace -- because investors adore the CEO and appreciate the hard work of employees under his watch to cut costs, ramp up innovation and drive longtime rival Dell (DELL, news, msgs) to despair with brilliant marketing. Investors will lose their patience if earnings growth, which is still only in the mid single digits, slips amid this needless distraction. Yet for now, they're betting H-P will lose face -- not customers.

Zealous extremes

The sad thing is that this never would have happened if Dunn, the ousted chairman, had not gone to zealous extremes to find the boardroom rat. To determine exactly how far out on the spectrum she went, I talked to a couple of corporate security experts this week.

Kent Perkins, partner at Diversified Risk Management, a Los Angeles-based private investigation firm specializing in Fortune 500 work, said he has rarely spoken to the press in his 30 years in the business but in this case wanted to make sure the public understood that H-P's actions were "extraordinary" and "not legitimate."

He said there was a simple, legal way for H-P to handle the matter: The chairman should have hired a firm like his to address the board and ask directors to sign a form that released their personal phone records over the past 90 days. Perkins would have told directors that the company could not force them to comply, but failure to release the data would have signaled that they were unwilling to cooperate with a reasonable request by management. The chairman and CEO should have signed the release on the spot in a dramatic flourish.

Perkins said he has used this technique with large companies in similar situations, and it works. "H-P got bad advice from the wrong consultants," he said. "We tell our clients everything we do is legal. We do not use pretexts or take any shortcuts. What's the point of having information if you can't use it in court? I have no idea how anyone as intelligent as the people at H-P were persuaded that pretexting or covert spying is standard industry practice. It is not. We wouldn't use those techniques for a million dollars."

Private security forces

Multinational companies are similar to countries in their law-enforcement efforts. With more than 100,000 employees and tens of thousands more contractors and vendors, most deploy private security forces and investigation units that are run by retired FBI agents, police chiefs or generals.

They're good at handling theft and perimeter protection, Perkins says, but often trip up when forced to deal with delicate matters involving upper management. "They tend not to understand human psychology -- and resort to using covert, tough-guy stuff when a disarming dose of kindness inevitably works far better. It may be counterintuitive, but even in an intense investigation you need to treat people the way you would want to be treated. People discover that it feels good to confess, and you need to lead them there with compassionate interviewing technique."

If the phone records ploy and interviews don't work, Perkins said the next step is to file a "John Doe" lawsuit against unknown parties who illegally spilled company secrets, and then persuade a judge to issue a subpoena that allows investigators to show up at directors' homes with a search warrant and armed marshal empowered to seize personal computers and records. He said he has done this many times, and the courts permit fast action. "Companies have enormous reserves of legal remedies to solve problems without resorting to illegal activities that subject themselves, in turn, to litigation," Perkins added.

Ken Springer, a former FBI agent who founded and runs Corporate Resolutions in New York, likewise told me he would have recommended an aboveboard investigative plan that started with one-on-one interviews with trained interrogators, and progressed to polygraphs, computer forensics and legal surveillance. "Sometimes corporations want to push the envelope, but you need to stay well within the bounds of the law," he said. It might sound like Big Brother, but individuals who have signed confidentiality agreements should not object to the scrutiny demanded by an investigation of a betrayal of trust.

The bottom line is that H-P managers resorted to measures that had more in common with a divorce case driven by jealousy and emotion than to a corporate investigation driven by fact-finding and prudence. They showed bad judgment and let their work force and shareholders down. As more facts come out amid SEC and state investigations, and fired employees fink on their bosses, the H-P board may succumb to pressure to clean house.

A well-entrenched business recovery is pretty hard to knock off line, however, so my guess is that patient investors will use any dips in H-P's stock as buying opportunities. If they survive this scare, shareholders can send a thank-you note to the employees and hope that the next management team prints out a more mature game plan.

Fine Print

To learn more about Kent Perkins' company, visit the Diversified Risk Management Web site. To learn more about Ken Springer's company, visit the Corporate Resolutions Web site. … To get up to speed on the entire H-P mess, check out this timeline at CNET. ... Corporate security companies are often the next career step for retired FBI agents. To learn more about them, visit the Web site of the Society of Former Special Agents of the FBI. … To learn more about Mark Hurd, visit his page at the H-P corporate Web site.

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Jon D. Markman is editor of the independent investment newsletters Strategic Advantage and Trader's Advantage. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jon.markman@gmail.com; put COMMENT in the subject line. At the time of publication, Jon Markman owned shares of Dell.