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HP's Lousy Record of CEO Recruitment Becomes a Proxy Issue

Heaven knows, the HP (HPQ) board has had experience in recruiting outside CEOs -- and having choices blow up in its face. Now some institutional shareholders, tired of the results, are trying to push the company into adopting more regular, rigorous, and transparent succession planning by going straight to an investor vote. But HP has petitioned the Securities Exchange Commission to block the procedure.

The Massachusetts Laborers' Pension Fund, the Tides Foundation, the Needmor Fund, and the Connecticut Retirement Plans and Trust Funds had filed a stockholder proposal:

Resolved: That the shareholders of Hewlett-Packard Company ("Company") hereby request that the Board of Directors initiate the appropriate process to amend the Company's Corporate Governance Guidelines ("Guidelines") to adopt and disclose a written and detailed succession planning policy, including the following specific features:
  • The Board of Directors will review the plan annually;
  • The Board will develop criteria for the CEO position which will reflect the Company's business strategy and will use a formal assessment process to evaluate candidates;
  • The Board will identify and develop internal candidates;
  • The Board will begin non-emergency CEO succession planning at least 3 years before an expected transition and will maintain an emergency succession plan that is reviewed annually;
  • The Board will annually produce a report on its succession plan to shareholders.
It's a strong measure and one that shows significant dissatisfaction with the HP directors. A quick review of CEO succession shows why. In general, companies are best off developing management talent internally to have someone who already knows the industry, strategy, and issues facing a business, should the board need to find a new CEO. Hire outside, and you spend far more than you otherwise would, and you're left with someone who has a significant learning curve.

There are two basic reasons why a company would go outside of its own developed talent to find a new CEO. One is that the company or the industry in which it operates is undergoing changes so significant that only someone with an entirely different background and experience might succeed.

That isn't the case for HP. It falls into the second category: failure to develop internal candidates. However, it didn't make this mistake once, but over and over again. Carly Fiorina? Gone. Mark Hurd? Gone -- and off to competitor Oracle (ORCL). And, in the process, even a previous chairman of the board had to resign for having the company spy on reporters and some of its own directors.

Now HP's new CEO, Léo Apotheker, has had to dodge Oracle process servers to keep from being pulled into Oracle's lawsuit against SAP for allegedly stealing code and, with it, customers. Actually, allegedly may be moot. SAP has already admitted to the facts and its lawyer said that the company's board knew of the theft from the time it acquired TomorrowNow, the company that actually undertook the action. That means Apotheker had to know of this from the very beginning.

It smells of another disaster. No wonder some big investors wanted to push HP's board, which has had more than enough time to rectify its actions. So the investors filed a proposal to put its measure to a stockholder vote at the annual meeting. What does the board do? Invoke SEC Rule 14a-8(j) to omit the proposal from the company's proxy statement. Here's the board's rationale:

We believe that the Proposal may be excluded from the 2011 Proxy Materials pursuant to Rule 14a-8(i)(l0) because the Company's Board of Directors (the "Board") will on November 18,2010 consider approving amendments to the Company's Corporate Governance Guidelines (the "Guidelines") to address the elements of the succession planning policy requested by the Proposal. In addition, the Company will report on its succession plan annually in the Company's proxy statement, beginning with the 2011 proxy statement. Together, these actions will substantially implement the Proposal, as discussed below. We are submitting this no-action request at this time to address the timing requirements of Rule 14a-8. We will notify the Staff supplementally to confirm that the Board has taken the action described in this no-action request.
However, this wasn't some long-standing plan that HP finally put into play. Nope, the change of direction came after it received on August 11, 2010 what is a stinging rebuke, as the changes proposed by the investors go to one of the fundamental responsibilities of a board of directors. To put it differently, the investors effectively said that the board had been derelict in a basic duty.

HP's board is trying to bury this proposal because it doesn't want to be embarrassed. I can understand, as that sort of public review of one's shortcomings is unpleasant. And yet, the choice was made only when the board's collective nose was pushed into its own mess. There's a legitimate question of how sincere the directors are about changing the board's clearly askew culture. The institutional investors also can challenge HP's action, so it may be that this proposal will still surface at the annual meeting.

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