Case Overview In 2005, HP hired Mark Hurd as CEO, replacing Carly Fiorina. In contrast to HPs long company policy of employee retention known as The HP Way, Hurd embarked on a series of cost-cutting measures which included the retrenchment of 15,000 workers. Hurd was also widely credited for improving HPs performance, increasing HPs stock price twofold within two years. However, in June 2010, Hurd was alleged to have submitted inaccurate expense reports to conceal a personal relationship with an HP marketing consultant. This was deemed to have violated HPs standards of business conduct. As a result, Hurd resigned from his positions as Chairman, CEO and President. This was followed by much controversy surrounding Hurds lucrative severance package. Hurd then proceeded to join one of HPs main rivals, Oracle, as its co-president and director. The objective of this case is to allow a discussion of issues such as ethics, the role of the board in developing and enforcing the right culture and tone at the top, the challenges faced About HP Hewlett-Packard Company, commonly known as HP, is a multinational information technology (IT) corporation headquartered in California, USA. The company was founded by Bill Hewlett and Dave Packard in 1939 and is listed on the New York Stock Exchange (NYSE). It is one of the worlds largest IT companies. HPs core business is built around the development and manufacturing of computers, data storage, networking hardware, the design of software and delivery services. HP also offers after-sales support for its products and partner products, especially in the provision of consulting services. The HP Way On 1 January 1939, electrical engineers Bill Hewlett and Dave Packard founded the Hewlett-Packard Company. From the companys early days, the founders had decided that its employees deserved a share of HPs success12. This would be done through production bonuses and company-wide profit-sharing plans. The founders also ran the company based on the principle of management by objective, where employees were provided with overall objectives and the flexibility to choose their own direction. The founders decided that HP should be built on a loyal and dedicated work force. Thus, HP implemented a policy to facilitate employee retention3. When HP became a publicly traded company in 1957, all employees with six months of service received an automatic stock grant and qualified for a stock option programme. After going public, Bill and Dave held a company meeting with 20 senior managers to decide on the companys objectives. These objectives eventually formed the basis of The HP Way. It comprised seven aspects: profit, customers, and field of interests, growth, employees, management and citizenship. HP under Hurd: The Re-Awakening of a Giant On 1 April 2005, HP announced the arrival of Mark Hurd, replacing Carly Fiorina as the CEO of HP. Little was known about Hurd, and many stakeholders were concerned about HPs future in the fast-paced and competitive industry. Hurd was described as aggressive and ruthlessly efficient by Forbes4 and true enough, Hurd embarked on an aggressive cost-cutting strategy. This included the retrenchment of 15,200 workers.5 Hurds retail strategy for HP was simple: to make HPs retail outlets a one-stop centre for consumers, combining product sales with superior customer services. As a result of Hurds clear and direct approach, HPs stock price increased more than twofold from US$20 at the time of his appointment in 2005 to US$53 in late 20076. HPs profits soared not merely because of cost cutting, but from real growth across its different business segments as well. In 2007, HPs annual revenue reached a high of US$104 billion and HP overtook its long-time rival IBM.7 In 2009, Hurd was named one of the Top Gun CEOs by Brendan Wood International. The Scandal In June 2010, Jodie Fisher, a contractor of HP, made a claim of sexual harassment against Hurd. Fisher was a marketing consultant with HP for the past two years and was assigned to organise company functions for high-value customers. The HP board of directors responded immediately by forming an investigation team that comprised HPs General Counsels office together with an outside counsel. While there was insufficient evidence that Hurd had violated HPs policy on sexual harassment, the probe found instances of Hurd submitting inaccurate expense reports to conceal a personal relationship with Fisher. HP also alleged that there were numerous instances where Fisher received compensation and reimbursement without a legitimate business purpose8. These violated HPs standards of business conduct. The Fallout On 6 Aug 2010, HP announced that Mark Hurd will resign from his positions as Chairman, CEO and President with immediate effect. The board concluded that Marks conduct demonstrated a profound lack of judgement9. In a conference call with analysts, General Counsel Michael Holston said that the board concluded, and Mark agreed, it would be impossible for him to be an effective leader moving forward and that he had to step down10. Yet, in spite of his resignation, Hurd was awarded a lucrative severance package consisting of cash severance payments, stock options, performance-based stock units and restricted stock units. When medical and dental benefits were included, the total amount of compensation would exceed US$34 million11. When CFO Cathie Lesjak was subsequently appointed as CEO on an interim basis, the board expressed confidence in HPs strategy of profitable growth, as well as in the senior management team and their ability to perform. In a move to allay potential fears from Wall Street, HP simultaneously raised its full-year outlook for revenues and earnings per-share. These forecasts topped analysts expectations, signaling the companys belief that Hurds resignation would not put a dent on HPs performance. The Aftermath In spite of the efforts of HP, Wall Street remained unconvinced. The announcement of Mark Hurds departure had caught shareholders by surprise. HPs share price immediately tumbled 10 per cent from US$46.30 to US$41.85. By the next trading day, HP lost over US$9 billion in market capitalisation. On 12 August 2010, shareholders filed a derivative lawsuit against HPs board, accusing the directors of breaching fiduciary duties in the way they had handled Hurds resignation. The main area of contention involved the large severance package that Hurd was entitled to. Given that Hurd had willingly resigned in light of the investigation findings, the company was not obligated to compensate Hurd with the severance package. The shareholders felt that the compensation was undeserving, especially since Hurds resignation was due to his own misconduct. The Future of Mark Hurd On 6 September 2010, slightly more than a month after Mark Hurds resignation as CEO of HP, Oracle Corporation announced it had appointed Hurd as the companys co-president and director12. Oracle had been regarded as HPs rival, after Oracles acquisition of Sun Microsystems. Oracles employment of Hurd further aggravated the ties between these two giants in the industry. A few days after the announcement, HP filed a lawsuit against Oracle and Hurd, claiming that Hurd would not be able to perform his role fully at Oracle without giving away HPs trade secrets and confidential information. This therefore violated a confidentiality agreement in the employment contract when Hurd first joined HP13. Nevertheless, investors of Oracle welcomed Hurds appointment, sending the companys share price surging 6 per cent to US$24.29 on the day of the announcement. Was the Firing of Hurd a Mistake? The HP board was afraid that Hurds indiscretion could set an inappropriate example within the company if he was allowed to remain as CEO. The tolerance of misconduct, regardless of its magnitude, could erode the strong corporate culture in HP. Through the companys inception, HP has been known for doing things the HP Way. One of HPs shared values was trust and respect for individuals, described as [working] together to create a culture of inclusion built on trust, respect and dignity for all14. HPs shared values also included uncompromising integrity, and HP should make no exceptions so as to set the right tone at the top. The resignation of Hurd would reinforce this strong culture15. However, given the many scandals in HPs history, it is questionable how much of the HP Way still remains relevant today. The HP Way: Still Relevant? On 3 September 2001, then-CEO Carly Fiorina announced a merger with Compaq, a personal computer company. The merger would involve the retrenchment of 15,000 workers16. This move was met with intense opposition from shareholders, including Walter Hewlett, son of Bill Hewlett. The HP Way was felt to have been endangered under Fiorinas management. However, this would continue even after Fiorinas departure. Shortly after his arrival, Mark Hurd, who was previously CEO of National Cash Register (NCR), announced a series of aggressive cost cutting measures, such as laying off around 15,000 workers and the reorganisation of the sales force into a more product-specific focus1718. Thus, it could be seen in many instances that The HP Way was losing its influence on HPs company culture. In 2006, HP made headlines when it admitted to the use of pre-texting in its internal investigation to discover the source of leaked board room discussions. Hurd, who was CEO at the time of the scandal, claimed he was unaware of the use of pre-texting in the investigations. On 18 January 2007, Hurd took over Patricia Dunns role as Chairman of the board19. Hurd was subsequently involved in a lawsuit by HPs investors who claimed that the senior executives and directors engaged in insider trading. He was alleged to have sold US$1.4 million worth of HP stock on 25 August 2006, shortly before HP announced the details of the board spying scandal. Hurd claimed that the August sale of shares was made in the regular course of an investment strategy. These shares had merely represented 5 per cent of his HP holdings and did not directly cause the stock price to decline20. This raised doubts about the moral integrity of Hurd and the HP board. Looking Ahead On 30 September 2010, HP appointed Lo Apotheker, former CEO of SAP, as CEO and President. The board also elected Ray Lane, Managing Partner at Kleiner Perkins Caufield & Byers, as non-executive Chairman of the board21. Investors reaction to Apothekers appointment was mixed, and many wondered if he would be able to fill the shoes of Hurd. It would be up to Apotheker to re-establish the HP Way, or even to define his own The Leo Way, as the Economist puts it, of doing things. However, Apotheker did not last long. On 22 September 2011, he was fired and Meg Whitman, the former CEO of eBay and a current board member of HP, replaced him. This came at a difficult time for HP, when its US$1.2 billion mobile operating system had been floundering and HP had been considering spinning off its PC business22. The case suggests that the HP Way may no longer be relevant today for HP. What is the HP Way? Do you think any company can operate successfully today based on similar values