How HP can prevent another misfire

September 16, 2011: 9:00 AM ET

It's time for HP to examine its board's involvement (or lack thereof) in the development of the company's strategy.

By Eleanor Bloxham, contributor

FORTUNE -- HP has become the new go-to example in discussions among board members on how a company's board should -- and shouldn't -- behave.

Lately, the struggling tech giant has had to continue to publicly address what it prefers to call "some confusion" related to its recently announced plans to fundamentally change its business.

The company has suffered hits both to its reputation and its stock price due to its inability to clearly articulate its overall shift in strategy and its failure to demonstrate that its plan to buy software company Autonomy for approximately $10.3 billion makes business sense.

The confusion surrounding HP's future led to precipitous drops in the company's stock price last month, with shares plummeting on August 19, the day after it made its strategy announcement. As of yesterday, HP (HPQ) stock was down 40% over the last 12 months and 44% year-to-date.

While short-term stock price movements should normally not be a concern for boards, nearly halving the value of the stock in less than nine months warrants some attention -- and a look at the board's practices.

HP's market value has been cut in half during the tenure of new board members who were appointed at the beginning of the year. Those appointments came under fire earlier this year as it became clear that HP's newly appointed chair, Ray Lane, circumvented the board's independent nominations process by involving the CEO in identifying board candidates and deciding to oversee the process himself (although he had a long-standing relationship with the CEO and was not a member of the nominations committee). This process raised concerns about the appointments from ISS, a shareholder proxy advisor, and others.

When companies decide to announce major shifts in strategy, most boards leave the talking to the CEO and the company's communications team. In HP's case, however, members of the board were out defending and explaining the company's changing direction amid the stock fallout -- both in a Wall Street Journal op-ed and in conversations with investors.

To be sure, the particularly adverse reaction to the announcements may have made the board's involvement necessary in this case, but what was the board's role in strategy supposed to be in the first place?

When Lane was explaining the appointment of the new HP board members earlier this year, he offered several conflicting views of the board's role. In a January 20 interview on CNBC, he said that the top priority for the board was "to support Leo [Apotheker, HP's CEO], to support Leo in forming his leadership, his strategy for the company…."

Lane changed his tune less than a week later. In a January 26 BusinessWeek interview, Lane said the directors "are not there to support Leo or me … they are there to take independent decisions."

Then, in a February 13 report in the San Jose Mercury News, Lane flipped back to his previous set of talking points. "The board's top priority will be supporting Apotheker … in developing a strategy for HP to compete around the world."

HP's corporate governance guidelines say the board "oversees HP's strategic and business planning process," which includes "a Board review of HP's updated Corporate Strategic Plan."

Many boards are confused about their role in determining a company's strategy. A recent survey by McKinsey shows that many boards take a passive role. Based on the survey, however, and my own conversations with a wide spectrum of board members, U.S. independent directors are eager to change their passive roles and contribute to the formation of corporate strategy.

The McKinsey survey shows that North American boards currently take a more passive approach to strategy than their European and Asian counterparts. Almost 60% of directors surveyed at North American companies say the role of their board is to "review and approve management's proposed strategy." By comparison, this relatively low level of involvement in strategy can be found in fewer than 40% of European companies and slightly more than 30% of Asia-Pacific companies.

Reviewing, approving, and supporting a company's strategy unfortunately represent an all too common approach among many boards: rubber-stamping strategy by boards without testing underlying assumptions and reviewing alternatives.

Did HP's board "support Leo" as Lane initially outlined? Or did they adequately test the assumptions of the strategy and review alternatives to it? Did they identify potential communications issues to make sure the strategy would be clearly understood by investors, customers and employees?

Based on the aftermath of the announcements last month, if the board did ask questions, they were not of sufficient depth. Of course, all of this upheaval could have been predicted from Lane's mixed statements concerning the board's role in January.

As other boards use HP as a case study and learn from its trials, perhaps it's time for HP to also re-examine the board's level of involvement with the company's strategy -- before the company presents their ideas to the public. Hiring new board members will do a company little service if they do not put their best talents to work.

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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