The HP CEO Scandal: Six Lessons Every Company Should Learn

Last Updated Aug 12, 2010 4:54 PM EDT

When HP (HPQ) CEO Mark Hurd lost his position on Friday, that was only the beginning of the story. The initial flash -- sexual harassment charges by a former soft-core porn actress, alleged financial malfeasance, dismissal by the board -- is over, but the repercussions continue.

Although HP would like to move past all this, it can't. No matter how the board, the remaining members of the management team, or whatever crisis PR firm gets the contract, this isn't a simple anomaly. The incident is just the last in a series of problems that show how dysfunctional the company has been for years. The signs were there, only no one there paid enough attention, particularly when financial success made people want to forget. But if it can happen at HP, it can happen at any large corporation.

The problem is that HP's board and management, from the top down, has focused overly on what they could get personally from the company and not on their duty. The real rewards come as a byproduct of proper work. Unfortunately, someone has to be willing to do it.

The beginning of the problems go back at least to the hiring of Carly Fiorina. At the time, one technology analyst told me, "Carly was brought in to take a dysfunctional HP -- a country club but not responding to business opportunities -- and transform it." It's not as though the company had been smartly run all along.

Fiorina talked a good game -- and made some smart moves -- but then things began to come apart, which resulted in laying off 7 percent of the work force in 2001. Was it her fault? Most assuredly, particularly because she wouldn't delegate, particularly to people who understood operational issues far better than she did. However, the board took years to realize the problem and then to finally do something. By the time it finally sent her packing, stock price had dropped by more than half and revenue had stalled when competitors like Dell (DELL) raced along.

In came Hurd. Clearly HP needed significant turning about. Hurd did that, but uncomfortable issues reared their heads over time. There was the ugly episode of the board authorizing spying on board members and reporters because of leaks to the media about Fiorina. Board chair Patricia Dunn went packing over the episode.

That alone could have signaled that there was something seriously wrong with HP's board and governance. It wasn't the last sign. As Eric Jackson wrote in TheStreet.com a year ago, the board should have started to ask hard financial questions. The pay of executives quickly grew even as HP's fortunes slowed:
  • In 2008, Hurd became the fourth highest paid CEO at total compensation of $43 million, even though HP shares lost 29 percent.
  • The CIO's pay quadrupled to $28 million. Really, now -- the CIO?
  • Other top executives saw their pay increase from 31 percent to 263 percent.
What treatment did employees see at that time?:
What also raises eyebrows about these sharp executive raises, aside from it happening in the face of a sharp stock price drop for the year (and the general market uncertainty which remained at the end of the year), is that 2008 was also a year in which these same leaders imposed mandatory 10% pay cuts for other executives and 5% cuts for the rest of H-P's workforce. It hardly seems like this select group is shouldering the pain like the rest of the employees.
Then there were hundreds of thousands for Hurd's private security costs and private travel on the corporate jet.

Did the board directors shrug off the sums as immaterial to a company like HP? Like the roughly $50 million fine it has to pay the Feds to settle charges of participating in a kickback scheme to get government contracts? Or however much it might have to pay over allegations of bribery in Germany and Russia?

Or is the board too scared to rein in egregious behavior? Whichever the case, it's a problem, and getting a new CEO won't change a thing because it will be the same people applying the same standards and judgment. If HP's board really wants an end to such shenanigans, it should start acting sooner and more decisively, showing that such activity is not something it will tolerate. Here are six steps HP -- and any other company, for that matter -- could take now to help set things right:
  1. Add morals clauses to executive contracts or, if they already exist, use the damned things. In the media industry, employment contracts commonly have clauses that allow the company to fire people if they become public embarrassments.
  2. Demand that executives set the tone, rather than acting as though rules are only for the lesser folk in the company. Hypocrisy is one of the most corrosive elements in an organization.
  3. Undertake better pre-screening, maybe using an experienced psychologist to look for underlying characteristics that might cause a problem.
  4. Perform periodic unscheduled spot check audits of executive claims. Let they prove themselves for a while.
  5. Reconsider executive compensation practices and align pay with performance.
  6. Institute claw back provisions when an executive goes for cause. And then use them.
With the economy as shaky as it has been, there is no longer a swelling flood to lift all boats. Companies must use resources wisely and get back to the basics of running companies.

Related: Image: Flickr user carulmare, CC 2.0.
  • Erik Sherman On Twitter»

    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.

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