Relational Investors

A hint of hope at HP

November 18, 2011: 11:48 AM ET

The designation of a lead independent director and the appointment of an activist investor to sit on HP's board bodes well for the long-troubled tech giant.

By Eleanor Bloxham, CEO of The Value Alliance and Corporate Governance Alliance

FORTUNE -- Not that we should get ahead of ourselves, but two significant announcements from HP on Thursday show the faint glimmer of a rainbow at the end of a very long corporate storm.

One was the designation of Rajiv Gupta as lead independent director. The appointment fulfilled a promise made two months ago when Meg Whitman was appointed CEO and Ray Lane became executive chair of the board. Gupta has been on HP's (HPQ) board since 2009.

Why did the board pick Gupta? For one, he was not among the four new board members chosen in January, a process that was led by Ray Lane. Nor was he one of the three HP board members that ISS recommended against this proxy season. In that way, Gupta may have been a safer choice for this role than some of the other members of the board. Lane did, however, determine who would stay on the HP board earlier this year and thus did re-select Gupta for the board.

It will be interesting to see how active a role Gupta assumes as lead independent director and the scope of his job description. HP did not offer much of a description in their announcement of his appointment. Gupta has been serving on HP's compensation committee and shareholders voted against HP's compensation practices this year.

HP also announced yesterday that it had entered into a letter of agreement for activist investor Ralph Whitworth of Relational Investors to join the company's board. The move will increase the board's total membership to 14, but the increase may be temporary. Buried in the company's 10-Q filing was a notice that, "On September¬†8, 2011, Dominique Senequier notified the Board … that due to her other professional commitments … she will not stand for re-election at HP's next annual meeting of stockholders." Senequier had just been appointed to the board in January and elected by shareholders for the first time in March.

The agreement HP has struck with Whitworth, who is well-known and respected by active shareholders, represents a bold defense by the company against shareholder concerns.

Whitworth will serve on the compensation committee, which will need to address shareholder concerns raised in this year's vote against the company's pay practices. His appointment may help bolster shareholder support for any changes the company makes.

The agreement also bars Whitworth from aiding any campaign to institute shareholder nominations of candidates for board elections or other proposals. HP had been a prime candidate for a shareholder nominations proposal next year. Whitworth's appointment may dissuade active HP shareholders from pursuing this avenue, at least for now.

But hopefully, Whitworth's appointment is more than just a defensive move and represents a real interest in better governance practices by executive chair Ray Lane, Gupta, and the other members of HP's board.

In a wide-ranging discussion with me in 2006, Whitworth articulated some of his views on governance. Whitworth said that he thought being an active shareholder was important because "it comes right out of the concept of stewardship, and the contract essentially that you have with the company as a shareholder." The capital markets system, he said at the time, "doesn't work without accountability, and the accountability, of course, ultimately has to be driven by the owners…. So, you have to be active. You have to be vigilant to be a good steward of the assets that you own and to encourage excellent stewardship by those that represent you, in this case the board of directors."

Whitworth said every board should "make sure that [they] have a couple of prickly devil's advocates around the table".  He also proposed that every board needs a designated person to  question a board's actions, someone who is "very independent" and will "speak their mind."

Here's hoping that Whitworth will be that role model and voice for significantly stronger governance practices at HP. If he is, HP's decade-long corporate governance troubles may have a happy ending after all.

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

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