It's tempting to assume that the imbroglio over Hewlett-Packard's (HPQ) potentially illegal tactics in its probe of boardroom leaks is largely a referendum on the vaunted "HP Way." For a good chunk of the company's 67-year existence, HP's famous code of business—calling for "trust and respect for individuals" and "conducting business with uncompromising integrity"— represented the gold standard for ethical corporate behavior. Yet the seamy picture of gumshoes spying on journalists' and HP directors' personal phone records seemed to make a mockery of the whole thing.
But for many longtime Silicon Valley businesspeople, the HP mess is emblematic of a bigger clash—one that reverberates well beyond Chairman Patricia Dunn's boardroom battles and what they say about the HP Way. And that clash won't end with HP's half-steps toward cooling the furor, which include Dunn ceding the chairman job to Chief Executive Mark Hurd and longtime director George Keyworth—the acknowledged leaker—leaving the board (see BusinessWeek.com, 9/12/06, "Charges on the Way at Hewlett-Packard?").
Rather, Dunn's differences with Keyworth, a close friend of co-founder David Packard, and his friend, former HP board member and pioneer venture capitalist Thomas Perkins, is, in a sense, a collision of Dunn's button-down governance with the old guard's just-do-it pragmatism. What it exposes is nothing less than a battle for the soul of Silicon Valley.
FAST AND LOOSE. Even as the Valley is properly credited with embodying innovation, entrepreneurship, and growth, its shoot-from-the-hip, push-the-edge culture that grew out of the HP Way has always drawn frowns from the mainstream business world—and the regulatory and legal machinery behind it. More than ever, that latter half of the Silicon Valley Way is under attack.
Valley vets worry that all the incoming regulatory and legal broadsides will blunt their edge—and endanger the industries that account for much of the economy's growth. "We aren't going to do our economy any favors spending the next few years prosecuting all these people ... for the excesses of the '90s," says longtime tech investor Roger McNamee of Elevation Partners in Menlo Park, Calif.
The rebellion against the Valley's means, if not its ends, has been building for years. After the dot-com crash, regulators finally gained the upper hand on their longstanding battle to count stock options as real expenses, with new rules from the Financial Accounting and Standards Board. That has done a number on profits of companies, from newly minted startups to established giants.
BACKLASH AGAINST REGULATION. Then came Sarbanes-Oxley, which required more stringent accounting and reporting. Valley startups are still crying that the new regulations add millions of dollars a year in costs, favoring large, less innovative companies that can better afford them. Indeed, Valley folks blame the spate of tech buyouts in the last couple of years on the difficulty and hassle startups see in going public under the weight of regulatory costs. "Nobody wants to be a public company if they don't have to," says McNamee. "Government policy is more biased against growth than at any time in decades."
Most recently, regulators have seized on options again, this time targeting alleged backdating of options grants to attract executives and other prospective employees who could hold out for instant riches. Even amid potentially egregious examples of backdating at Brocade Communications Systems (BRCD), Pixar, and other companies, the Valley's old guard complains that regulators are punishing them for simple accounting miscues. "It's become a witch hunt," Daniel Warmenhoven, CEO of the computer storage maker Network Appliance (NTAP), told BusinessWeek recently (see BusinessWeek.com, 8/15/06, "Witch Hunt in the Silicon Valley").
HP's response to its scandal—essentially demoting Dunn, the champion of good governance, and giving her job to the CEO, in opposition to governance experts' calls for keeping the chairman and CEO spots separate—might be seen as a victory for that old Silicon Valley guard. That would be misleading (see BusinessWeek.com, 9/12/06, "Patricia Dunn's Apology").
STIFLING CREATIVITY? The HP scandal involves a company always considered upstanding—"the GE of the West,"as veteran Valley marketer Regis McKenna puts it. So some Valley leaders fret that yet another volley from prosecutors and regulators, this time on such a Valley icon, will just accelerate the beginning of the end of a frontier in business: the most freewheeling culture in the mainstream American business world.
Should we worry that the erosion of that culture could dim the Valley's ability to remain an innovation engine? Or was that culture just a sideshow, one to which it's best to bid good riddance? No one knows the answer for sure.
But change seems inevitable. "There's a demise of the way things were done in the past," says John Thompson, vice-chairman of Chicago-based executive search firm Heidrick & Struggles International (HSII). "The tide is changing." As Silicon Valley contends with the new realities of business, attempting to keep its edge while not stepping over it, its true mettle will be tested.
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