Bloomberg News

HP Board Revamp Gives CEO Chance to Shake Off Troubles

April 05, 2013

Ray Lane

Ray Lane, Hewlett-Packard's chairman. Photographer: David Paul Morris/Bloomberg

Hewlett-Packard Co. (HPQ)’s board shakeup, including Ray Lane’s exit as chairman, gives Chief Executive Officer Meg Whitman a clearer path to revive growth and shake off years of tumult at the world’s largest computer maker.

A former president of Oracle Corp. (ORCL), Lane failed to use his extensive experience in enterprise computing to help Hewlett- Packard’s turnaround. His public gaffes -- including being photographed using an Apple Inc. (AAPL) computer -- also sometimes served as an embarrassment to the company.

Lane, 66, instead bore the stain of the disastrous 11-month tenure of former CEO Leo Apotheker and the company’s acquisition of software maker Autonomy Corp., which led to an $8.8 billion writedown and accusations of accounting fraud. To build on the momentum that Whitman has begun to show, the board is seeking a new chairman with global experience and who can devote more time and energy to revival efforts, Pat Russo, a company director, said in an e-mailed statement. Until then, Ralph Whitworth will serve as interim chairman.

“Somebody has to be symbolically accountable,” said Jeffrey Sonnenfeld, a management professor at Yale University in New Haven, Connecticut. “The hope is that it puts this behind them so it doesn’t become a governance sideshow.”

In addition to Lane’s move, directors G. Kennedy Thompson and John Hammergren are departing, Palo Alto, California-based Hewlett-Packard said yesterday in a statement. Lane “decided to step down,” Whitworth wrote in a blog posting.

Lane and Whitworth didn’t respond to requests via telephone and e-mail for comment.

Shares Fall

Hewlett-Packard declined 1.5 percent to $21.97 at the close in New York. While the shares had rallied 54 percent this year amid tentative signs that Whitman is making headway in her efforts to reignite growth, the stock has lost half its value since the departure of Hurd.

Lane, a distinguished-looking, gray-haired elder statesman of Silicon Valley, is known as something of enterprise computing’s Mr. Fixit. He helped repair Oracle’s relationships with its customers in the early ’90s and disciplined the company’s freewheeling sales culture during his seven-year tenure there. He then stepped in alongside Apotheker after the departure of CEO Mark Hurd, who left in August 2010 after the board said Hurd violated Hewlett-Packard’s code of business ethics.

Lane and Apotheker weren’t able to make a transition from the lower-profit personal computers and other hardware the company traditionally sold, to more lucrative software, despite a mandate to expand in that area.

Narrow Majority

Lane is giving up his chairmanship two weeks after investors re-elected him in a narrow majority of votes, issuing a rebuke of his oversight of the botched Autonomy acquisition.

“It’s not typical to get a withhold vote, and if you do you’d usually resign,” said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “Lane deserves credit for stepping down. If he’d stayed on he’d become the issue.”

After the March 20 vote, during the company’s annual shareholder meeting at the Computer History Museum in Silicon Valley, Lane believed he wasn’t given sufficient credit for remaking the company’s board and ousting Apotheker, a person familiar with his thinking said. Shareholder unrest was also making it difficult for Hewlett-Packard to attract additional, high-quality directors to its board, this person said.

Shareholders’ Dissatisfaction

The second board overhaul in two years underscores shareholders’ dissatisfaction with the company’s performance and the takeover of Autonomy. The writedown of Autonomy in November capped three years of management upheaval, strategy shifts and slowing growth that hammered the shares and complicated Whitman’s turnaround efforts.

“Lane is clearly the fall guy for the botched Autonomy acquisition,” said Bill Kreher, an analyst at Edward Jones & Co. who rates Hewlett-Packard a sell. “When he was announced as the chairman, we were pleased with that decision, but at this time it’s in the best interest of the company to move on.”

Hewlett-Packard and its investors looked to Lane -- a former No. 2 at Oracle with deep roots in enterprise technology and venture capital -- to bring stability and help navigate a transformation away from personal computers into products and services for corporate customers.

‘Horrible Years’

His reign instead came to be associated with the ill-fated tenure of Apotheker, who was ousted after 11 months on the job; strategy shifts, such as a flip-flop over whether to sell the PC division; and acquisitions, including Autonomy, that did little to revamp Hewlett-Packard.

There were also occasional remarks that came across as condescending to Whitman. After the former EBay Inc. (EBAY:US) CEO took the helm, Lane told employees that he was ready to “take Meg’s training wheels off,” according to an article in Fortune.

“It’s the right thing, even if a little late,” said Erik Gordon, a professor at the Ross School of Business at the University of Michigan. Lane “was just barely re-elected to the board and was chairman during HP’s most horrible years. His legendary status didn’t do anything for HP.”

Dismay with Lane came to a head in March when he, along with Thompson and Hammergren, were re-elected in slim majorities at Hewlett-Packard’s annual shareholder meeting.

Board ‘Evolution’

Lane, who will remain on the board, received significantly more compensation in Hewlett-Packard shares than other directors during his tenure. In fiscal 2011, Lane received a special equity award of 1 million shares in connection with his appointment as executive chairman, in lieu of the equity retainer of $175,000 that other directors received.

Hammergren and Thompson’s tenure will end after a board meeting scheduled for May, and the board has begun a search for new directors, Hewlett-Packard said.

“In the coming months you will see further evolution of our board,” Whitworth wrote in the blog entry posted on the “HP Next” website set up to chronicle turnaround efforts. “We will recruit a world-class chairman to take my place as soon as possible, and we also hope to recruit at least two other outstanding directors before the end of this year. While sooner is better, rest assured we will not allow the rush of time to compromise our focus on recruiting the best of the best.”

Revival Efforts

In the run-up to the annual meeting, shareholder advisers had said that board failed to properly vet the acquisition of 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 Thompson received 55 percent support and Hammergren received 54 percent. Last year, all three were backed by at least 80 percent of the vote.

“Each one of our directors considered the results of our recent shareholder meeting and made the personal decision to do what they felt was best for HP,” Whitworth wrote. “They, like all of us, are passionate about moving beyond the challenges of the past few years so we can focus solely on supporting the HP team as Meg leads us through this Herculean turnaround.”

Institutional Shareholder Services Inc. and Glass Lewis & Co. had faulted the board for the Autonomy writedown, which followed the discovery of accounting improprieties, and for depleting the stock’s value through years of mismanagement. ISS had recommended investors vote against Chairman Lane and long- serving directors Hammergren and Thompson.

Glass Lewis also urged shareholders to remove Hammergren and Thompson, as well as venture-capital investor Marc Andreessen and lead independent director Rajiv Gupta.

‘Great Track’

With Lane stepping down as chairman, Hewlett-Packard said the role of lead independent director is no longer necessary. Gupta, who held that position, will remain on the board and succeed Thompson as the chairman of the audit committee, the company said.

Director Gary Reiner will replace Gupta as chairman of the nominating and governance committee. After Hammergren’s departure, Whitworth will lead the finance and investment committee.

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

“The company is on a great track,” Sonnenfeld said. “Meg has a very good plan.”

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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