Scandal May Have Been an Excuse for HP to Dismiss Mark Hurd

When HP (HPQ) CEO Mark Hurd resigned -- really was forced to leave by the board -- last Friday, all the attention was on charges of sexual harassment and "a profound lack of judgment that seriously undermined his credibility", as HP General Counsel Michael Holston said.

As the days have progressed, the situation has become complex, with more details, an additional dismissal of a Hurd aide, Hurd publicly defending himself, and the news that Hurd was widely disliked at the company. Maybe all of that went into the board's decision to send him packing. But I think there was a further factor: HP's financial state wasn't as robust as might seem at the surface.

First, let's review some of the sordid business developments:

• Caprice Fimbres McIlvaine, a top Hurd aide, left HP on Monday, three days after her boss. McIlvaine was apparently the one who brought in Jodie Fisher, the contractor who accused Hurd of sexual harassment, which started the whole chain of events.
• Fisher has a past that would be considered unsavory in many corporations, having posed for Playboy and acted in softcore porn movies, as well as other types of productions.
• Hurd fought back in public against the ouster, including hiring a high-profile crisis communications firm, though apparently both sides have decided to cease a public feud.

It's an unscientific survey, so you have to bring your own shaker of salt. However, according to Chuck House, executive director of Media X, Stanford University's Industry Affiliate research program on media and technology, Hurd had a terrible reputation with the nickname "Mark Turd":

The Voice of the Workplace, HP's thirty-five year historic 'measure' of employee feelings (done every five years) showed in April an astonishing finding -- more than two-thirds of HP's employees would quit tomorrow if they had an equivalent job offer. Not a raise, not a promotion, simply an alternative. That number never used to be in double digits. Other companies in the Valley have reported an amazing rate of HP resumes being submitted; one large company saying, "we didn't know they had that many people working there".

I looked at the following key performance measures from HP's annual reports over the last few years:

• net revenue (money in)
• earnings from operations ("profit" strictly from operations and before depreciation, amortization, and other income and expenses)
• net earnings (actual profit)
• R&D spending (innovation investment)
• cash and cash equivalents (liquid assets easily turned into cash for necessary spending)
• long term financing receivables (essentially money owed the company long-term for sales made to customers)
• long term debt (money the company borrows for extended periods)
• goodwill (an attempt to account for value a company supposedly has that isn't tangible in nature, like strong brands)
• purchased intangible assets (intangible assets -- including goodwill, patents, and non-compete agreements)
• stockholders' equity (how much of the value of the company rests in shareholders' hands)

Revenue climbed until 2009, and a drop there makes sense, because of the overall economy. Earnings were low in 2005 because of restructuring costs. However, they leaped quickly in rate of growth ahead of revenue. That suggests the major cost cutting that Hurd was known for. However, was it just waste? I've noted in the past how HP's investment in R&D had gone down as a percentage of revenue over a couple of years. Here you can see the bigger and longer pattern. One of the key areas for a company that points to innovation as a major success factor is putting money into R&D. But it became decreasingly important in terms of what percentage of resources were devoted to the activity.

Over 2008 and 2009, long term financing receivables went through the roof, suggesting a push to get "sales" by providing more generous terms. Anyone who has managed a business can tell you that the longer you push out terms, the riskier the chance that you'll get all the money.

Goodwill and purchased intangible assets ballooned, and they are areas where value becomes extremely subjective. And yet, cash and cash equivalents were lower in 2009 than in 2005, when Hurd took over a troubled organization. During that same period, net earnings more than tripled, goodwill almost doubled, and assets almost doubled. However, the debt to equity ration went from 5.5 to 7.0 and stockholders' equity rose by only 9 percent. In 2005, stockholder equity stood at 48.1 percent of the balance sheet. In 2009, it was 35.3 percent.

Over the years, much of the "improvement" of HP seems to have been in cutting costs and the acquisition of transfer of equity from shareholders to the company, largely in the form of intangible assets whose value is hardly objective. Aggressive cost containment and cutting can help grow earnings, but can also harm potential future growth if the result has been to reduce inventiveness and company morale.

Hurd's relationship with Fisher, whatever its nature, could have been an embarrassment. Had he continued to deliver solidly for the company over time, at least from the view of the shareholders, the board would have found a way to deal with the issue in private. But the performance combined with a poisonous atmosphere among employees could have been enough to make the board use the incident as an excuse to remove Hurd without shouldering the responsibility of leaving him unchecked for so long.

Related:

• The HP CEO Scandal: The HP Board Was Engulfed in Fear
• The HP CEO Scandal: Six Lessons Every Company Should Learn
• HP's Latest CEO Embarrassment: Mark Hurd Resigns In Sexual Harassment Scandal
• Why Federal Civil Fines Can't Deter Tech Companies like HP
• HP Shows Foreign Bribery Can Bite U.S. Companies at Home