September 22, 2006

Hewlett-Packard: Oh My!

I don’t know how you felt, but I had the sinking suspicion that the Hewlett-Packard story would continue to dominate the headlines as more sordid details emerge. Another lesson in how not to manage a crisis. It’s so critical for a company to maintain its credibility during a crisis so that shareholders and other stakeholders can believe management when they say they have a handle on it. Come clean quick and take the actions necessary to show that you have the situation under control. Should be quite an interesting House hearing next Thursday!

For a description of the latest developments, here is a:

– WSJ article intimating that H-P CEO Mark Hurd knew more about the investigation than has been previously disclosed

– Washington Post article providing a graphic description of a February report that details the investigation activity, which targeted wives and other relatives of H-P directors and reporters and even included obtaining Larry Sonsini’s phone records. Apparently, the code names for the H-P investigations were “Kona 1” and “Kona 2”; Chair Patricia Dunn has a house in Kona, Hawaii.

– NY Times article saying that H-P conducted feasibility studies on planting spies in news bureaus of two major publications – and that H-P officers supervising the investigation (the company’s chief ethics officer) knew of the use of phone ruses at least as early as January 2006 and raised questions about their legality.

The Art of Boardroom Etiquette and Confidentiality

Many members are talking about legal issues implicated when a board is faced with a leak. There are a myriad of corporate, securities, and privacy law issues as well as listing standard and contract considerations (e.g. codes of conduct). I am putting together a webcast on these issues that will be announced shortly.

Here are a few musing on this topic that I have received from members:

– The fiduciary duty includes a duty to maintain confidentiality. In addition to that, most corporate codes of conduct include confidentiality restrictions and are applicable to boards. Lastly, some companies make their directors sign confidentiality agreements to emphasize the seriousness of their confidentiality obligations.

– I can imagine scenarios where the director believes his duty of loyalty in fact requires him to disclose information to protect the best interests of the compnany/shareholders. It will be interesting to see how the various lawsuits play out in the HP matter as there have been suggestions that the disclosures made by the HP director did not violate his fiduciary duties and thus the mere initiation of the investigation was ill-advised (in addition to the methods used).

– When it comes to leaks, my research suggests that it would simply be a duty of care/loyalty breach of fiduciary analysis – but it becomes interesting when you think about the fact that Boards owe their obligations to shareholders and as a result, there could be instances where directors would feel the need to discuss information shared by the board in order to satisfy those obligations.

– Where we have seen confidentiality issues come up is in the context of contested director elections where the company tries to get the dissident to sign a confidentiality agreement as a condition to coming on the board. The fiduciary duty is one of doing what is in the best interests of stockholders, and if it is in the best interest for confidentiality not to be maintained, then…

– Under Delaware corporate law, there are two fundamental fiduciary duties for directors: the duty of care and the duty of loyalty. There is no duty of confidentiality per se under Delaware corporate statutory or case law. Nonetheless, the duty to keep company information confidential is generally considered part of the duty of loyalty, and disclosure of a company’s confidential information by a director could constitute a breach of the duty of loyalty. And, even though not an explicit part of Delaware corporate law, the importance of board confidentiality is generally recognized as a matter of good corporate governance, because of the potential implications that disclosing confidential information can have under insider trading laws and its potential impact on the company’s business generally.

Harvey Pitt’s Take on Boardroom Leaks

Check out this Forbe’s commentary from Harvey Pitt entitled “Looking For Leaks In All The Wrong Places.” Here is an excerpt:

“The failure of the HP board to address what the rest of the business community had long seen festering reflects a critical lack of pragmatic board leadership. Dysfunctional boards almost always erupt into internecine warfare if nothing is done to allow the causes of dissension and disagreement to be addressed and, hopefully, amicably resolved. Appropriate opportunities should be afforded for concerns to be raised. Time at meetings is one useful vehicle, but sometimes concerns need to be raised in one-on-one conversations, so directors don’t feel intimidated or embarrassed.

Boards can and must be collegial without being required to proceed unanimously. The goal is an atmosphere that permits and encourages frank debate and the exploration of different viewpoints. This doesn’t mean boards should be comprised of “yes” men and women. But thoughtful directors should agree that differences of view are a positive factor, as long as they can be resolved rationally and collectively. Anyone who fails to accept that as an operational credo should be disqualified from serving on boards altogether.

At HP, the leak problem should have been raised with all the directors, at a face-to-face discussion around the boardroom table. Directors should have been solicited for their views on how to achieve greater collegiality and stem future leaks. Leaks can’t be condoned. But most people who try to identify leakers discover it’s almost impossible unless unethical or illegal means are employed.

If there had been a general consensus on HP’s board that the leaker should be identified, the simplest approach would have been to ask all directors, again at a face-to-face meeting, to make their telephone and e-mail records available to a third party investigator. If one or two directors refused, but the others were prepared to permit their records to be reviewed, that would have been a fairly good indication of the identities of the responsible parties.”

Director Survey on Priority of Confidentiality describes this interesting survey, as written up by “The Ponemon Institute claims that 85% of 226 directors responding to a survey place a higher priority on corporate confidentiality than shielding their personal information from prying eyes. Just over half of the surveyed directors said they have served on corporate boards that have authorized the use of “aggressive” surveillance techniques to address a potential leak, according to a press release regarding the survey, taken just days after Hewlett-Packard confirmed details of a corporate investigation into apparent leaks from their board. Half the surveyed directors said they would endorse a ruse similar to the one used by HP’s detectives to obtain phone records, as long as the deceptive tactics aren’t deemed illegal.”

Reminder: Don’t Forget to Register for Huey Lewis & The News

For those attending the “14th Annual NASPP Conference” in two weeks, don’t forget that registration for the NASPP Conference doesn’t automatically register you for the Huey Lewis & The News bash at the Mandalay Bay on October 10th. For Conference attendees, there is no charge to attend the concert, but you must register for the concert separately by the end of next week, September 29th.