The lesson from H-P

Gordon Smith criticizes a Viet Dinh WSJ op-ed on HP that, he says, "reinforces the scapegoating of Patricia Dunn." I have been unconcerned throughout this affair with who in particular should be blamed for this affair. What has interested me, rather, is what it says about the movement toward "good governance" and, specifically, independent boards. My point has been that this case has illustrated the costs of board reform that the governance crowd often fails to take into account. For example, I have said:

Board independence introduces a barrier between the managers and the monitors. Such a barrier, with its attendant structure of liability and other rules, has both costs and benefits. We are learning here about the costs – a valuable lesson lest we begin to think of board independence as some sort of moral imperative

and

the essence of independence is to increase distrust among board members, which impedes the functioning of the board. Clearly a more collegial board would not have been sniping and leaking, which is what triggered the pretexting.

And on these points, at least, Dinh's article is illuminating. Whether or not Hurd deserved more blame, Dinh shows that much of the dysfunction stemmed from Dunn's insisting on process at the expense of wise business judgment.  Here's some excerpts:

Overlaying these minutiae is a broader morality tale for the modern era of corporate governance. Enron and WorldCom prompted Sarbanes-Oxley, SEC regulations and a host of corporate "best practices." These requirements emphasized internal controls, divided corporate authority and instituted checks and balances. Essential as these requirements may be to ensure technical compliance with the new rules, they cannot substitute for the guiding light of director conduct: business judgment.

Patricia Dunn reportedly is a "governance perfectionist." When Mr. Perkins's objections to Ms. Dunn's investigation surfaced publicly, she called the conflict "part of the board's progression from one that was more personality driven to one that is process driven and capable of upholding today's highest governance standards." Her supporters whispered that Mr. Perkins had challenged her proposal for a mandatory director education program on corporate compliance. And in resigning last week she emphasized, "I followed the proper processes by seeking the assistance of H-P security personnel." Left unanswered was whether the sub rosa investigation was a good idea or whether the reaction was reasonable to the infraction. * * *

On July 18, the same day that Tom Perkins formally confirmed his protest to the entire board, he wrote Mr. Hurd a personal email* * * :

* * *I worry that Pattie, as new chair of N&G, will 'pack' the board with the kind of directors she so admires -- ciphers from high cap companies, with no fast-cycle technology background, and certainly no Valley entrepreneurial genes. I worry that you will wind up with a 'blue ribbon' board that will be of zero, or even negative, value to you when the going gets tough. I don't wish you bad luck -- but life eventually delivers tough scenarios to CEOs of big companies -- and I doubt if H-P will prove to be the exception.* * *

There will probably be few cases of an independent board failing as spectacularly as this one.  But, particularly in this post-SOX era where internal controls trump entrepreneurialism, this sort of scenario is unfolding more subtly in many boards.  That's the really important lesson of H-P.

Comments

[save_the_rustbelt]

"...the essence of independence is to increase distrust among board members, which impedes the functioning of the board. Clearly a more collegial board would not have been sniping and leaking, which is what triggered the pretexting...."

That is bizarre, unless the board is composed of egomaniacs or me-firsters.

Is this the level of talent running corporate America? Have we baby boomers ruined everything in the entire country.

Gasp.

[Jeff Lipshaw]

1. Larry, I read the Viet Dinh piece, and had the same reaction about the trumping of business judgment. Process IS good - when it counterbalances an overemphasis on outcomes (which is what most Six Sigma or operational excellence programs tried to do). Indeed, "process focus versus outcome focus" is one of those unresolvable polarities we face all the time. Having a reductionist view of process primacy only substitutes another form of orthodoxy for thought and judgment, whether it is in operations or in the board room.

2. To the same point, proxies for independence, and particularly bad or meaningless proxies for independence (many of which are incorporated into the stock exchange listing standards), don't necessarily foster a lack of collegiality on the board, but if they trump the ability to balance intellectual independence (the important kind) and interpersonal effectiveness, then the point is well-taken. It doesn't take egomaniacs and me-firsters to undermine an effective board; you can be completely selfless in promoting an agenda that is detrimental to the effective operation of the company (hence the tricky position of union executives when placed on a board).

[Larry E. Ribstein]

Jeff-- I agree with both points. The problem with the HP board is not that the individuals were defective, but that the system forced or at least encouraged them to play roles that deemphasized and diluted the exercise of business judgment.

[Kevin]

I'm going to risk a comparison that could be taken too far and compare the new trends in corporate governance to the old trends in US intelligence that have lead to countless and enormous failures. Similar to the way the intelligence community became so focused on process that the outcomes were secondary (even irrelevant), the new mantra of corporate governance seems to be "The means justifies the ends." Not the right way to operate in a free market, to say the least.