Sucheta Dalal :HP's Hurd Gets a Hearing
Sucheta Dalal

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HP's Hurd Gets a Hearing  

September 24, 2006

At today's press briefing, the beleaguered CEO apologized and admitted he knew more than he had previously let on. Next stop: Washington


SEPTEMBER 22, 2006


By Robert Hof and Lorraine Woellert


As Hewlett-Packard sought to douse a firestorm around its investigation of board leaks, it announced on Sept. 22 the resignation of Chairwoman Patricia Dunn, the central figure in the scandal. Sources also said that two other figures involved in the probe—Anthony Gentilucci, manager of HP's global security, and HP Senior Counsel Kevin Hunsaker—will soon leave the company as well. Advertisement


At a press briefing at HP headquarters in Palo Alto, Calif., Chief Executive Mark Hurd, who takes the additional title of chairman, apologized for actions he said are "very disturbing to me." For the first time, Hurd also admitted that he knew about some questionable aspects of the probe.


The briefing represents HP's fullest explanation to date of the controversial hunt for the source of information leaks. The probe was set in motion by Dunn in 2005 and involved methods that the California Attorney General says are illegal. Reports suggesting Hurd sanctioned aspects of the investigation have weighed on HP (HPQ) shares. HP's stock slumped 5.2% on Sept. 21 and made up only part of the decline the next day. The stock finished the week at $35.11.



At the briefing, Hurd said complete details of the probe may never be uncovered. But he conceded that as early as July, 2005, during the first phase of HP's probe, he briefly attended a meeting where early results were discussed. And in February, 2006, after Dunn asked to use HP resources to step up the probe, Hurd said he was told that investigators planned to send an e-mail to a journalist with false information intended to identify the source of the leaks.


Hurd, who strongly defended HP's right to stop leaks, also took pains to dodge direct blame in at least two instances. News reports have revealed that HP investigators fabricated a disgruntled HP executive named "Jacob," who would send an e-mail to CNET journalist Dawn Kawamoto containing software that would track where she sent it, in hopes that she would forward the e-mail to the leaker. At the briefing, Hurd said he approved the "naming convention" in the e-mail but said he did not recall seeing or approving the use of tracer technology.


Hurd also said he attended a meeting in March, 2006, where a verbal summary of the probe's second phase was provided, including the identity of the leaker—since revealed as George Keyworth, who recently resigned from the board. "I understand there is also a written report of the investigation addressed to me and others, but I did not read it," he said. "I could have, and I should have."



Sources close to HP's own probe of the investigation say Hurd began to become uneasy with some tracking methods starting in July, 2006, when he asked outside counsel Larry Sonsini to do a review. When that review proved inconclusive, Hurd on Sept. 8—three days after HP's leaks probe came to light—himself hired Morgan, Lewis & Bockius to do a deeper examination. The law firm reports to Hurd, not the HP board.


Hurd's briefing, at which he did not take questions, was intended to clear the air. But given Hurd's long reputation as a hands-on manager, his contention that he did not participate in key aspects of the probe may end up leaving some questions unanswered: If he approved the name of the fabricated HP employee in the tracing scheme, why does he not recall seeing plans for the controversial tracer technology? And why didn't he read the key report in which the leaker was revealed?


Hurd will have to answer those questions and many more on Sept. 28, when he is due to appear—along with Dunn, HP outside counsel Larry Sonsini, and others—before a U.S. House of Representatives subcommittee looking into HP's probe. The subcommittee wants to know whether employees at HP or its outside investigation firms did anything illegal.



California Attorney General Bill Lockyer contends that "pretexting," the method HP used to impersonate directors and journalists to obtain their personal phone records, is illegal. At Hurd's briefing, Mark Holston of Morgan, Lewis & Bockius, the law firm that Hurd retained, confirmed that two current HP employees, seven former or current directors or their family members, and nine journalists or their family members were pretexted.


Holston also said Morgan Lewis uncovered one instance in which Gentilucci provided Social Security numbers to Security Outsourcing Solutions, one of at least two outside investigators HP used, to do pretexting. Also, Social Security numbers were used for four journalists, three current or former HP directors, and one HP employee. HP also engaged in physical surveillance of one board member and a journalist and also may have searched an unidentified individual's trash.


The press briefing left some corporate observers unsatisfied. "You can't send a worse signal than not allowing questions," says Nell Minow, editor and co-founder of The Corporate Library, a governance adviser. "That is the single most boneheaded decision you can make." Others, however, said Hurd had to hold off answering questions in advance of the congressional probe.



Moreover, the counsel, Bart Schwartz, appointed by HP to do an independent review of the company's methods, may not be as independent as some would like. Governance expert Charles Elson, a University of Delaware professor, found it problematic that Schwartz will report to Hurd and Chief Financial Officer Robert Wayman, rather than to the entire board and to the public.


At least one customer was not impressed, either. John Minnihan, founder and CEO of Freepository, a hosted software development company in Denver, said he has bought about $15,000 worth of HP gear in the past seven years. Now he has decided not to buy any more because he doesn't like HP's behavior in the probes. "There's a lot of people like me who have budgetary discretion," he says. "HP is definitely not going to get any more business from me."


Even so, some of the principals in the probe had praise for Hurd. "Mark Hurd has shown that he is the right man to take HP to new heights," said former HP director Thomas Perkins in a statement. Perkins was prompted to resign in May and ultimately make the probe public after the HP board disclosed his friend and fellow director Keyworth was the source of the leaks. Perkins' attorney, Viet Dinh, founding partner of Washington (D.C.)-based Bancroft Associates, added: "Based on all the evidence I've received, I believe that Hurd's involvement was tangential. He deserves the benefit of the doubt."



In particular, Dinh praised Hurd's announcement that he has hired Schwartz as counsel. Hurd said Schwartz will review HP's investigative methods "so we can be assured that this type of situation can never occur again."


One consultant who once worked for Hurd at NCR said he thinks the CEO will now remain fully involved in trying to deal with the crisis. "He'll stay involved now," says Bob Prosen, a management training consultant in Dallas. "He'll take the heat. He'll keep the employees focused on the business."


But the probe still leaves Hurd in a dilemma. "If he had nothing to do with this scandal, then he's disconnected from the board—or he's involved," says BusinessWeek columnist Kerry Sulkowicz, a psychoanalyst and founder of the Boswell Group, a firm that advises executives on psychological aspects of business. "Either way, it's a lose-lose." If Hurd wants to win back the confidence of employees and investors, he may have a lot more work yet to do.



Hof is BusinessWeek's Silicon Valley bureau chief, and Woellert is a correspondent in BusinessWeek's Washington bureau With Catherine Holahan, Jena McGregor, Peter Burrows, and Kathy Rebello



-- Sucheta Dalal