Ouster of HP’s Hurd: A Shot Across the Bow of Overpaid Cost Cutters?

The sudden departure of HP’s CEO Mark Hurd didn’t add up. Ethical lapses by CEOs demonstrating at least adequate performance get buried unless unfavorable media coverage won’t go away, or the internal damage is so great that his authority is impaired. Neither seemed to be the case with Hurd.

I hadn’t given the Hurd case much thought, and Joe Nocera has offered a persuasive two factor explanation. First was that the board had been put off by Hurd’s conduct in HP’s pretexting scandal of 2006 and was waiting for an opportunity to retaliate, made sense. Then the company, keen to stop leaks that appeared to originate with the board, hired consultants who then hired private detectives who engaged in impersonation to obtain phone records. Congressional investigations and state and Federal indictments followed, with the most visible casualties being HP chairman Patricia Dunn and its general counsel, Ann Baskin. However, Hurd was deeply involved in the pursuit of the leakers, and accelerated Dunn’s departure by threatening to quit if she didn’t leave (one must assume to make sure the bad PR stayed focused on her).

So per Nocera, the board saw at close range that Hurd was a viper in their midst, and they were on the lookout for a reason to be rid of him. And it appears he provided one, and it was more fundamental than expense violations. From the New York Times:

The consensus in Silicon Valley is that Mr. Hurd was despised at H.P…..“He was a cost-cutter who indulged himself,” was one description I heard. His combined compensation for just his last two years was more than $72 million — a number that absolutely outraged employees since their jobs were the ones being cut.

Rob Enderle, a well-known technology consultant, noted that in recent internal surveys, nearly two-thirds of H.P. employees said they would leave if they got an offer from another company — a staggering number. ….

Charles House, a former longtime H.P. engineer who now runs a research program at Stanford University, openly rejoiced when he heard that Mr. Hurd was leaving….As Mr. House saw it — indeed, as many H.P. old-timers saw it — Mr. Hurd was systematically destroying what had always made H.P. great. The way H.P. made its numbers, Mr. House said, was not just cutting any old costs, but by “chopping R.&D.,” which had always been sacred at H.P. The research and development budget used to be 9 percent of revenue, Mr. House told me; now it was closer to 2 percent. “In the personal computer group, it is seven-tenths of 1 percent,” he added. “That’s why H.P. had no response to the iPad.”

Mr. House was also offended by Mr. Hurd’s dictum that H.P. executives had to resign from all civic boards, as well as his decision to cut off many of H.P.’s philanthropic activities. “H.P. has always been a model corporate citizen,” Mr. House said.

Yves here. Nocera points out that the board didn’t want to cross Wall Street, since Hurd was delivering its vaunted numbers. But Gordon Smith at Conglomerate, along with others, criticizes the board for cowardice:

Apparently, the board was unwilling to make that case to its investors and the public, so they exaggerated his expense manipulation and paid him a bundle of cash to go away.

This isn’t the way the corporate governance system is supposed to work. The board is supposed to supervise the officers, make judgments about their performance, and act on those judgments. Traditionally, boards have not done this very well, often, we are told, because they are beholden to the CEO or because they just don’t care enough. The HP directors didn’t suffer from either of those shortcomings, and, to their credit, the directors acted. But if Nocera is right, their unwillingness to be forthright about the reasons for their action deprives us of an object lesson in good corporate governance and creates questions about their ability to lead the company in the future.

I’m a teeny bit more hopeful. The HP case admittedly presents special circumstances, a common executive failing (delivering short term results by consuming a company’s seed corn) in combination with a board unusually willing to look past his PR. And even though for the most part, the media is dutifully replaying the party line on why Hurd left, the real reasons are likely very well understood in the comparatively small circle of people who sit on large company boards.

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18 comments

  1. Francois T

    This isn’t the way the corporate governance system is supposed to work. The board is supposed to supervise the officers, make judgments about their performance, and act on those judgments.

    Supposed to…

    yeah!

    Revealing anecdote: In an interview, the author of “Money For Nothing” (which is highly critical of the way BoDs work in America) was asked about the reactions of future MBAs and of his colleagues in biz schools.

    Their reaction: “You’ve betrayed your class! Why did you do that?”

    It’s fair to assume introspection isn’t the forte of these people.

  2. lark

    I used to work for HP and so I’ve followed the changes brought in by Hurd closely and talked also to former co-workers.

    Yes he was viewed with hostility, and Nocera’s analysis seems credible.

    But what is more interesting to be is HP as a bellwether. This is an iconic American company that represents mainstream American corporate culture and governance.

    The elevation of Hurd represents the complete victory of the idea that the only corporate aim to to maximize shareholder value. His destruction of HP labs is a case in point. He destroyed the R&D to deliver the quarterly numbers. Through layoffs, the end of profit sharing, etc, he also aroused the hatred of employees and even upper management.

    But why should those things matter? If shareholder value is all that matters, Hurd should never have been fired. HP reached the pinnacle of success in terms of share price and profitability.

    Perhaps this is the beginning (I hope) of a sea change in attitudes.

    HP used to be a real contributor to the community and it could be counted on to be responsible and thoughtful corporate citizen. That culture has been destroyed, as part of the ascendance of Wall Street values.

    It matters that the board fired him. It matters that they did it, even if they weren’t straight up about the reasons.

    1. readerOfTeaLeaves

      Wow, is this ever an interesting post. Like lark, I hope this signifies a sea change in attitudes. And if it is, then hat’s off to HP for being in the forefront.

      The HP case admittedly presents special circumstances, a common executive failing (delivering short term results by consuming a company’s seed corn) in combination with a board unusually willing to look past his PR. And even though for the most part, the media is dutifully replaying the party line on why Hurd left, the real reasons are likely very well understood in the comparatively small circle of people who sit on large company boards.

      Here’s hoping that the real reasons are indeed well understood, and reflect a sea change in attitudes.

      Intriguing.

    2. john bougearel

      Note the way HP made its numbers in the past 4 yrs was to cut R&D from 9% to 2%. Thus gutted, they can’t compete, and if the expand their R&D budget back out to 9% to catch up, HP ends up in an earnings recession in short order. Worse, it will make their earnings growth rate of the last 4 years over the last 4 yrs to look like illusory, achieved through short-term-ism policies from Mr. Hurd.

      What we learn is that Hurd screwed both shareholders and employees, and shareholders are soon going to find this out quite belatedly. Expect shareholders to experience a lot of long-term-ism pain for Hurd’s short term-ism policies.

  3. LeeAnne

    Corporate life seems to be creating little else than misery and hate along with shitty China products best for increasing waste and pollution.

    Corporate values have made the workplace a hostile and fear driven place; knives at your back when they’re not in your face.

    Only the fearless (see conscience) rise and survive (see psychopath).

    ohh, and killer.

    and Wall Street with the backup of universities set the unrules of the game.

    Just a few thoughts to begin a beautiful Sunday morning. The day will improve for sure.

  4. RueTheDay

    Yet he still walks off with around $40 million, and word is that he’s already being recruited by several private equity firms for a new position.

  5. LeeAnne

    These ‘hated’ fellas need all that separation money for their personal security teams -like former presidents.

    If you saw the article this weekend on the mystery purchaser of a $200 million dollar and change apartment adjoining the restaurant of the 5-star Mandarin Oriental Hotel in a London skyscraper (only 6 bedrooms), but with SAS security, you may see the trend. here

  6. Tom Crowl

    Yves,

    You sum it up here:

    “in the comparatively small circle of people who sit on large company boards.”

    Much of the problem in corporate governance across the Board (pun intended) comes down to this…

    The circle of people sitting on these boards come from a very narrow set of perspectives and interests…

    And for real fixes to be implemented what has to be recognized is that they’re doing what comes naturally.

    Oligarchy is a natural phenomena… as is cancer. “Cures” require recognizing the root of the problem.

    Paradoxically those roots lie in how biological altruism functions in scaled societies without compensatory structures.

    Compensation and the Social Network
    http://culturalengineer.blogspot.com/2009/10/compensation-social-network.html

    The Foundations of Authoritarianism
    http://culturalengineer.blogspot.com/2009/05/foundations-of-authoritarianism.html

    (I’ll be happy to sit on some of these Boards to help them clear this issue up… I’ll even work for much less compensation than is normally expected. I’m waiting with baited breath for their calls!)

  7. rd

    I am hopeful that one of the major outcomes of our “Lost Decades” (I think there will be two and we are just starting the second) will be the de-Wall Street-ization of the entire economy.

    US companies had gotten bloated and inefficient in the “American Century” so the cost cutting etc. that occurred through the ’80s and ’90s was frequently necessary. However, companies and nations do not become or stay great just by cutting costs. In the end, we need to create, grow, and make things.

    There has been a massive focus in public companies in making quarterly and annual numbers. However, PE ratios are, by definition, a look at how investors view the long term prospects of companies. PE multiples of 20 imply that you are willing to buy a company for 20 years worth of its current annual earnings. That requires a corporate strategy with a similar timeframe.

    Our future corporate leaders need to be able to clearly enunciate and execute strategies that are measured in multiple years with R&D and personnel development to match the time frame that “investors” claim to be looking out. HP was one of the companies that used to do that but it appears to have lost its way over the past decade. Hopefully, it and many other US companies will re-learn how to think long-term as we wallow through the wilderness of the next decade.

  8. Kate

    I learned over 20 years ago that an admin with a harassment complaint gets nowhere UNLESS the other big dogs want to bring one of their own down. THEN it matters.

    Also @rd well said! ” …companies and nations do not become or stay great just by cutting costs. In the end, we need to create, grow, and make things.”

  9. scraping_by

    “…the comparatively small circle of people who sit on large company boards. ”

    Rakesh Khurana, in Searching for a Corporate Savior: The Irrational Quest for Charismatic CEOs, has a lot to say about the absurd and frankly evil process of handing out these hyperpaid positions. The one section that I like the best is his discussion of the job search vs neoclassical economics.

    Neoclassicals say that the external CEO labor market is a market like any other. Then he goes to point out that the boards are not a large number of autonomous buyers, free to compare all candidates with perfect information, but a small group operating primarily through social networks restricted by search services. Free markets are sacred to the owning class unless we’re talking about the owning class.

    One of the criteria Khurana collects is the comment that board members want someone “who looks like the job.” Central casting, for sure. As a secondary consideration, there’s having a position that sounds like this one. How they got that job and what they did in it can be tarted up by writers in public relations (true!). I would suppose that once a pretty person gets the job on looks, and the Peter Principle, he/she has to do something executivish to justify the pay. The easiest is cost cutting.

    With twenty years of reengineering experience, with the McKinsey brothers and their ilk ready to charge six or seven million to make the specific suggestions, cost cutting is simple and easy. With captive boards and unions that live under the threat of federal assault, there’s no resistance outside calls for decency, humanity, and the long term good of the company. In other words, the vision thing and the people perishing and all that, which doesn’t stand much chance.

    The best run company I ever worked at had a group of vice presidents who did what needed to be done while the CEO drank himself into a coma every day. Khurana posits the normal economic solution of broadening the pool of potential candidates to drive down the cost and improve the performance. We do agree that charismatic CEOs are a board’s way of avoiding responsibility and a company’s performance is not improved by the man/woman/child/group on a white horse.

    1. jumping

      “Free markets are sacred to the owning class unless we’re talking about the owning class.”

      EXACTLY. Hire some Chinese or Indians who can do the job for less. I think they could pay 1/10th the money and get a better cost cutter who could ship more jobs overseas.

      Those high salaries might make sense if somebody actually has a vision and creates a company, or invents and pioneers new industries. But a psychopathic cost cutter is overpaid in m mind. Lets see him/her grow businesses, new products, and organic revenue.

  10. maynardGkeynes

    The Nocera story sure looked like a plant from the PR guys for the HP BOD. Hurd obviously rubbed some management people the wrong way. That explains the motive behind the plant to Nocera, but it also undercuts the reliability of the tale they they told to Nocera. Cutting R&D might have been totally correct — think about it: 9% R&D spending when the PC business has basically become a generic appliance industry? But if you’re living a nice cushy life in the R&D section Hurd looks like a major villain. Ending the quiet life for management, when it comes at the expense of investors, is exactly what the shareholder value movement is about. At best, it’s a very complicated dynamic here, with no heroes or villains.

  11. bolangi

    Shot across the bow?? Didn’t he get a $40m severence package? That hardly seems like a “shot”.

  12. bob99

    @maynard:”Cutting R&D might have been totally correct — think about it: 9% R&D spending when the PC business has basically become a generic appliance industry?”

    i guess that’s why Apple is so unsuccessful/unprofitable/stagnant.

  13. Komori

    @maynardGkeynes

    The company I work for was recently purchased by HP. I can state that upper management is already despised by pretty much everyone I work with. We’ve already lost a number of good people, and as the integration with HP continues, we’re on track to lose a lot more. I’ll be one of them as soon as we have to move into one of HP’s horrendous “collaborative workplace environment”s.

    Hurd liked to cut costs, but the Nocera story is correct. One of his big cost cutting measures was to largely eliminate IT. Shows a great short-term savings, but I can guarantee we’ve already lost more money on people with high-level salaries wasting time trying to cram our business process into HP’s monolithic one-size-fits-all IT system than they’ll ever save by doing things this way.

    I can only imagine what the people who were around when HP did real R&D are thinking. Between Carly, Dunn and Hurd, I’m just waiting to hear when HP starts asking for bailouts under to big to fail considerations.

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