Case 3-10

Accountability of Ex-HP CEO in Conflict of Interest Charges

How could a CEO and chairperson of the board of directors of a major company resign in disgrace over a personal relationship with a contractor that led to a sexual harassment charge and involved a conflict of interest, a violation of the code of ethics? It happened to Mark Hurd on August 10, 2010. Hurd was the former CEO for Hewlett-Packard (HP) for five years and also served as the chair of the board of directors for four years. On departure from HP, Hurd said he had not lived up to his own standards regarding trust, respect, and integrity.

HP hired Playboy model Jodie Fisher to be a hostess at several HP events in California. Fisher was paid $30,000 to appear at six events, plus she received other benefits like first-class travel. The purpose of these events was for Mark Hurd to sell HP to chief information officers or other companies. On one occasion, Hurd invited Fisher up to his room, fondled her breasts, and asked her to stay the night. On another. he went to her room and forcibly kissed her. To gain her favor, over the next two years he passed her inside information, showed her his ATM balance of one dollars, and suggested he'd take care of her if she'd go away with him. At an event in Boise, Idaho, Hurd tried one last time to force her into having sex, but Fisher ran away to her room and never worked again for HP.

'J he board of directors of JIP began an investigation of Hurd in response to a sexual harassment complaint by Fisher. who retained lawyer Gloria Allred to represent her.

While HP did not find that the facts supported the complaint, they did reveal belvwior erate. Subsequent to I lurd's resit',nation. a severance package was negotiated g benefits. and stock options, for a total package of somewhere between $40 and

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In a letter to employees of HP on August 6. interim CEO Cathie Lesjak outlined where Hurd violated the "Standards of Business Conduct (SBC)" and the reasons for his departure. ^I Lesjak wrote that Hurd "failed to maintain accurate expense reports. and misused company assets." She indicated that each was a violation of the standards and "together they demonstrated a profound lack of judgment that significantly undermined Mark's credibility and his ability to effectively lead HP." The letter reminded employees that everyone was expected to adhere strictly to the standards in all business dealings and relationships and senior executives should set the highest standards for professional and personal conduct.

As for the complaint by Fisher, it was pointed out she was a "marketing consultant" who was hired by HP for certain projects. but she was never an employee of HP. Still, during the investigation, inaccurately documented expenses were found that were claimed to have been paid to Fisher for her services. Falsifying the use of company funds violated the HP's Standards of Business Conduct (SBE).

As for the sexual harassment claim, Allred alleged in the letter that Hurd harassed Fisher at meetings and dinners over a several year period during which time Fisher experienced a number of unwelcome sexual advances from Hurd, including kissing and grabbing. Fisher said that this continual sexual harassment made her uncertain about her employment status.

In August 2013, HP and former CEO, Mark Hurd, won dismissal of a lawsuit that challenged the computer maker's public commitment to ethics at a time when Hurd was allegedly engaging in sexual harassment.

HP did not violate securities laws despite making statements such as a commitment to be "open, honest, and direct in all our dealings" because such statements were too vague and general, U.S. District Judge Jon Tigar in San Francisco wrote.

As a result, shareholders led by a New York City union pension fund could not pursue fraud claims over Hurd's alleged violations of HP's SBC, the judge ruled."Adoption of the plaintiffs argument [would] render every code of ethics materially misleading whenever an execuLive commits an ethical violation following a scandal," Tigar wrote.

Shareholders led by the Cement & Concrete Workers District Council Pension Fund of Flushing. New York, claimed in their lawsuit that the share price had been fraudulently inflated because of Hurd's alleged activities.

They also claimed that HP's statements about its rules of conduct implied that Hurd was in compliance, and that Hurd ignored his duty to disclose violations.

At most, Judge Tigar said, such statements "constitute pufferyif the market was even aware of them."

Tigar also said Hurd's alleged desire to keep his dealings with Fisher secret did not by itself give rise to a fraud claim.

"Nothing suggests that Hurd thought that he could mislead investors with the statements the court finds were immaterial." the judge wrote.

Shareholders filed multiple derivative claims in the wake of the scandal, all of which were settled. HP made some promises regarding compliance and ethics. improving ethics and compliance training programs, and strengthening JIP's SBC. HP also promised to appoint a "Lead Independent Director" tasked with implementing and enforing the ethics standards and appointing a chief ethics and compliance officer to report violations of the code. It also promised to appoint and Ethics and Compliance Committee to oversee ElP's ethics activities. including in regard to whistleblowing.^[1]

Craig E. Johnson, Meeting the Ethical Challenges o! I eadership: Casting l.tghl or Shadow ( New York: Sage Publications, 2015).

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Questions

l. How can companies best protect themselves from claims of sexual harassment in the workplace?

2.How did the expenditures mentioned in the case affect the financial results at HP? Did financial fraud occur during the time Fisher was involved with Mark Hurd? Should their relationship have been disclosed to the shareholders? Explain.

3.Mark Hurd left HP with a compensation package between $40 million and $50 million. Do you think executives who resign from their positions or are fired because of unethical actions should be forced to give back some of those amounts to the shareholders to make them whole? Why or why not?

4.Despite hundreds of pages of policies, codes of ethics, organizational values, and carefully defined work environments and company culture, lapses in workplace ethics occur every day. Explain why you think these lapses occur and what steps might be taken by an organization to ensure that its top executives live up to values it espouses.