Leadership by Geoff Colvin

HP's board shakeup: Apotheker's master plan?

January 28, 2011: 11:07 AM ET

It's not unusual for a few board members to head for the exit when a CEO gets the boot. But HP's recent board shakeup raises concerns about CEO Leo Apotheker's influence on the board.

By Eleanor Bloxham, contributor

HP CEO Leo Apotheker

It's a familiar corporate tale. After some hand wringing, one CEO is ousted and another is appointed. The new CEO arrives with a few PR challenges as welcoming gifts. Shortly afterward, the company will put out a press release explaining that a handful of board members will step down or not stand for re-election, and new directors are then appointed.

Morgan Stanley (MS) and HP (HPQ) have all of this in common. At Morgan Stanley, the ousted CEO was Phil Purcell. At HP, it was Mark Hurd.

The challenges for Morgan Stanley's replacement CEO at the time, John Mack, related to the SEC's investigation of insider trading at Pequot Capital Management. For HP's Leo Apotheker, it was the Oracle vs. SAP lawsuit.

Three directors left Morgan Stanley's board shortly after Mack's appointment and now four will be leaving HP's.

To be sure, several companies have gone through major board turnovers in the recent past. At Bank of America (BAC), after shareholders stripped Ken Lewis of the chairman's title, seven directors stepped down. After the Tyco (TYC) board gave Dennis Kozlowski the boot and appointed Ed Breen as CEO, all nine directors did not stand for re-election.

And in a more unusual move than a mere CEO change of guard, shareholders ousted five of six board members at the Take-Two Interactive (TTWO) board in 2007.

Morgan Stanley's John Mack recruited some of his new board directors from his golf club. But what about HP? How did the company find its new directors?

Unsurprisingly, the company has kept mum.

Ray Lane, the first new director at HP since Marc Andreessen, was appointed as a member of the board effective November 1, 2010, the same date that Apotheker became CEO. Lane was also formally elected chair of the board on September 30, the same date of his director election, but before his effective date as a new director.

The timing of these votes raises questions about the independence of the directors. Who identified Lane as a candidate? Who suggested that he be placed for election by the board? Who suggested he lead the board?

HP would not comment and have not, to date, provided any answers to these questions. But Lane and Apotheker have had a relationship that spans five years, if not more. (HP would not comment on the length or nature of their relationship or when they met.)

Certainly, with a friendly chair in place, Apotheker is better positioned than most new CEOs to control the board's next moves. According to the Wall Street Journal, Lane said that the four departing board members volunteered to leave and that he "couldn't single out someone who should go."

It's unclear why Lane would have considered the possibility of singling out a board member to leave. HP's 2010 proxy explains that the nominating and governance committee, chaired by Lucille Salhany, is in charge of identifying board openings and candidates. The proxy also explains that the committee hires a professional search firm to help it perform these tasks. Salhany, as it turns out, is one of the four board members who will not stand for re-election to the newly constituted board.

Upon his appointment as director and chair, Lane was not assigned to any of the board committees. Yet, in announcing the new board nominations, Lane, the newest director, seems to have taken on a larger role in director succession than the proxy's description of this process would suggest.

In a CNBC interview, Lane said the board members volunteered to leave because "they said they had served this board a long time." Maybe it has felt like a long time for those volunteers but, according to HP's proxy, two of the directors have only been on the board since 2007 -- quite short in board years -- and they are among the newest of the HP board members. The other two directors have served since 2002 and 2004. As Lane later noted, "this process over the last four or five months can take a lot out of you."

According to his interview, Lane personally called the prospective new directors during this process. HP would not discuss how the individuals were identified as prospects, but Lane said, "Most of these names were known to Leo or myself. We have a lot of experience with these individuals. I don't think we are doing anything new here or surprising because we've known these individuals so long."

The number one priority on the agenda for the board, Lane says, is "to support Leo, to support Leo in forming his leadership, his strategy for the company, so right now to support Leo."

Whatever happened, it doesn't seem to match the process described in HP's proxy. Technically, changes in board processes do not need to be reported by the company until it releases its next proxy statement, but it's clear that this kind of information would be critical to some investors.

Aside from the board's processes and its independence, what has HP lost and gained?

It has lost the chairs of its nominating and governance, audit and public policy committees. It has gained directors who, according to Lane, have specific skills the new board needs. As the SEC investigates the Hurd ouster, HP has also gained seasoned directors with experience in tough spots and SEC investigations (Pat Russo at Lucent and on the Xerox (XRX) board) and in controversial situations (Meg Whitman on the Goldman Sachs board and in her run for California governor).

When HP puts out its next proxy filing, shareholders ought to closely examine how the company describes its succession process and the chair's role.

Certainly, rather than this sort of upheaval, shareholders may want to suggest that HP consider the approach that Richard Breeden took at WorldCom as a court-appointed monitor: Designate one board member to leave each year. That way, there is ongoing refreshment and a solid succession process under board control with less reason to have individuals exit en masse.

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (http://thevaluealliance.com), a board advisory firm.

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About This Author
Eleanor Bloxham
Eleanor Bloxham
Contributor, Fortune

Eleanor Bloxham, an authority on governance and valuation, is CEO of The Value Alliance and Corporate Governance Alliance, an independent board and executive educational and advisory firm she founded in 1999. She is author of the books Value Led Organizations and Economic Value Management: Applications and Techniques, and publisher of the Corporate Governance Alliance Digest and her blog The Bloxham Voice.

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