Bloomberg News

HP Directors Rebuked in Re-Election by Slim Majority

March 21, 2013

Hewlett-Packard Co. (HPQ:US) Chairman Ray Lane and two other board members were re-elected in slim majorities in a referendum that demonstrates growing dismay over the company’s performance and acquisition of Autonomy Corp.

Shareholder advisers had said that the board failed to properly vet the acquisition of software maker Autonomy, and recommended that investors vote against Lane and some other members of the 11-person body. Lane garnered 59 percent of votes cast, while director G. Kennedy Thompson received 55 percent support and John Hammergren received 54 percent. Last year, all three were backed by at least 80 percent of the vote.

An $8.8 billion Autonomy writedown, disclosed in November, capped a three-year stretch of management upheaval, strategy shifts and slowing growth that hammered the company’s stock price and complicated the turnaround effort by Chief Executive Officer Meg Whitman. The directors’ failure to win support from a bigger majority leaves Hewlett-Packard little choice but to revamp its board, said Erik Gordon, a professor at the Ross School of Business at the University of Michigan in Ann Arbor.

“If the company wants to put on more than a cynical charade of listening to its stockholders, the directors will resign,” Gordon said. “Negative votes in the 30 and 40 percent range are a giant ‘no confidence’ message.”

The shares declined 2.6 percent to $22.32 at the close in New York. Hewlett-Packard today increased its quarterly dividend by 10 percent for the second straight year. The dividend will rise to 14.52 cents, though the payout on April 3 will remain at the current level of 13.2 cents.

At the meeting yesterday, held at the Computer History Museum in Mountain View, California, Ernst & Young LLP was ratified as Hewlett-Packard’s outside auditor with 85 percent of the vote, and the company’s executive pay plan also passed, gaining 75 percent approval.

Board Faulted

In recent weeks, Institutional Shareholder Services Inc. and Glass Lewis & Co. faulted the board (HPQ:US) for the writedown, which followed the discovery of accounting improprieties, and for depleting the stock’s value (HPQ:US) through years of mismanagement. ISS had recommended investors vote against chairman Lane and long- serving directorsHammergren andThompson. Glass Lewis also urged shareholders to remove Hammergren and Thompson, as well as venture-capital investor Marc Andreessen and lead independent director Rajiv Gupta.

Whitman, addressing the assembled shareholders, said Hewlett-Packard needs to invest more in research and development and rebuild its network of resellers.

“Certainly the last three or four years have been tough,” Whitman said. “My view on the board of directors is they are helping turn Hewlett-Packard around.”

Investor Dissatisfaction

Even though the recommendations didn’t lead to the ouster of directors, they underscored dissatisfaction with oversight of a company beset by slowing growth and upheaval in executive ranks.

“What the shareholders and proxy advisers are suggesting is accountability,” said Brent Bracelin, an analyst at Pacific Crest Securities LLC in Portland, Oregon. He has a sector perform rating on the shares, the equivalent of a neutral recommendation. “When you have tech companies that are struggling, people want a scapegoat.”

The company has shown early signs of progress under Whitman, Hewlett-Packard’s fourth CEO in three years. It forecast fiscal second-quarter profit that topped analysts’ estimates last month amid cost cutting and rebounding demand for enterprise services.

“Despite what you may have read in the headlines, we are on a solid financial foundation,” she said yesterday, adding that she expects the company to grow in 2014 and 2015. “We have to get revenue growing again.”

Lane’s Role

The push to step up growth was hampered in November, when Hewlett-Packard disclosed that it had discovered accounting irregularities at Autonomy.

Lane is the former president and chief operating officer of Oracle Corp. (ORCL:US), the largest maker of database software. He brings to Hewlett-Packard decades of experience in business computing, an area it’s counting on to reignite growth. Given his position and closeness to former Hewlett-Packard CEO Leo Apotheker, who orchestrated the Autonomy deal, Lane should have been more vigilant in assessing the purchase, according to ISS.

“Shareholders reasonably expected Lane to exercise good judgment and oversight; in that respect he may bear the most responsibility in the boardroom with respect to the Autonomy failure,” the advisers said in a March 4 report.

Chief Financial Officer Cathie Lesjak also opposed the deal, Glass Lewis pointed out in its March 1 report.

Autonomy Letter

The former executive team of Autonomy, led by founder and ousted CEO Mike Lynch, sent a letter to shareholders calling HP’s allegations of accounting impropriety “aggressive and unusual.”

The group published a list of five suggested questions to investors that call for Hewlett-Packard’s board to provide evidence of its claims and details about how it calculated the impairment charge from the acquisition. Lynch and his team have consistently denied that they mishandled the company’s finances and point to audit reports from Deloitte LLC that found no irregularities.

“The problem with the Autonomy acquisition by HP lies in the mismanagement of that business by HP under its ownership, making it impossible for Autonomy to deliver on HP’s expectations,” the team said in the letter. “We refuse to be a scapegoat for HP’s own failings.”

Lane, who wasn’t opposed by either of the two advisers last year, was re-elected with 96 percent of the vote at the 2012 shareholder meeting.

CtW’s Response

After vote results were announced yesterday, CtW Investment Group, which advises pension funds affiliated with the labor group Change to Win on corporate governance, called on the board to meet with investors to choose replacements for Thompson and Hammergren. CtW had met with Lane and other directors last month to push for the two directors’ removal.

Yesterday’s vote was “a challenge to business as usual for the HP board following a decade of failures at HP,” Dieter Waizenegger, executive director of the CtW Investment Group, wrote in an e-mailed statement. “The board needs to consider significant changes to its membership to restore investor confidence in the turnaround, and rekindle the company’s reputation for in-house-creative culture, and not high-risk acquisitions.”

Hewlett-Packard Director Ralph Whitworth said there may be changes coming to the board, and investors can expect some evolution in the coming years or months.

“This board is among the best I’ve seen,” Whitworth told shareholders. “Having said all that, all boards should evolve, especially when they’ve had the recent past this one has.”

Stock Decline

Even after a 68 percent rally in Hewlett-Packard shares since Nov. 19, the day before the Autonomy writedown was announced, the stock has lost half of its value since Aug. 6, 2010, the day Mark Hurd departed as CEO.

Hurd’s exit, after the board said he violated the company’s standards of business conduct, kicked off a three-year period of management upheaval and strategy shifts that included Apotheker’s troubled 11-month tenure.

Whitman has said that turnaround will take half a decade, and Hewlett-Packard is projected (HPQ:US) to report declining sales for the next three years, according to data compiled by Bloomberg.

“You will not have to wait until 2015 to see results,” Whitman said at yesterday’s meeting.

To contact the reporter on this story: Aaron Ricadela in San Francisco at aricadela@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net


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