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Troubled Times Still Ahead for Hewlett-Packard

The Sunday Herald out of Scotland has an excellent summary review of last week’s developments in the Hewlett Packard corporate spying scandal. In a September 24th, 2006 article entitled I spy troubled times ahead for HP, reporter Ken Symon starts with:

YOU know things aren’t going so well when you run into a brick wall. And that is exactly what state investigators have hit in the spying case at Hewlett-Packard, according to California attorney general Bill Lockyer. “Today we ran into a brick wall,” Lockyer said on Thursday, after he reported that officials from the company had stopped co-operating with the official investigation and were instead employing “stalling tactics”. The development is extremely concerning to those who have HP’s best interests at heart and want to know what went wrong in Hewlett-Packard’s boardroom.

There are certainly a large number of questions to answer, which is why the House of Representatives Energy and Commerce Committee last week issued a whole slew of demands for information about what went on at the company in the spying scandal which had led to the departure of Patricia Dunn as the company’s chairwoman and George Keyworth as a board member in a deal that was hammered out about 10 days ago.

The dual resignation scheme was meant to provide some kind of solution to the issues plaguing the company but that was clearly a false hope. It emerged last week that chief executive Mark Hurd may have known more about the spying affair than was originally believed. That was certainly what was suggested in investigations into the affair published in The Wall Street Journal, The New York Times and Washington Post last week.

This article continues with further details on the legal advice that Hewlett-Packard and its Board of Directors received regarding the corporate investigation into whom was leaking confidential information to the press:

What legal advice the HP officials and board were given on this matter becomes even more of interest when you take into account the fact that it was given by Larry Sonsini. He is chairman of law firm Wilson Sonsini Goodrich and Rosati, and by most accounts Silicon Valley’s most powerful lawyer.

The questions around Sonsini have now reached deafening point, given not only his involvement in the HP affair but also the fact that he advised many of the companies embroiled in the various American investigations into the alleged backdating of stock options. The firm has dismissed the idea that Sonsini faced a conflict of interest by serving as both legal adviser and a director of Brocade Communications, a company whose former executives were the subject of criminal charges in July.

The firm says that Sonsini did not advise HP on its investigation of board members in a bid to find the leak despite the fact that the lawyer is on record as saying the investigation was “well done and within legal limits”. On this Lockyer begs to differ, with the attorney general having stated publicly – as we reported last week – that: “We have enough information to indict people inside HP and outside.

The real kicker comes at the conclusion of the article. As the article suggests, it appears that HP CEO now will be consumed by continuing questions of what he knew, when he knew and what, if anything, he did about that knowledge.

Up until last week, HP had escaped much fallout from the spying scandal in terms of the share price – in fact about 10 days ago it bizarrely hit its highest level since 2001. But on Thursday the company’s shares fell by more than 5% following the reports that Hurd may have been aware of the HP spying practices.

On Friday, Hurd tried to clear the air by offering his “sincerest apologies” to the journalists invvestigated and “everyone impacted”. But this approach may not work in the end for Hurd and Hewlett-Packard. Dunn’s stepping down from the chair and the apology may take some of the sting out of the issue. This weekend, however, it looks far form likely to go the full way.

As James Post, a professor of management at Boston University, put it: “Unless a miracle occurs, Mark Hurd won’t be able to explain his way out of this mess. There are just too many lines and angles of activity that run to Hurd’s office to claim CEO ignorance.” If that is the case it will not just be the Californian authorities’ investigation that is running into brick wall.

Toomre Capital Markets LLC is truly amazed that none of the principal participants in this stupid, bone-headed abuse of corporate power and individual privacy ever stopped to examine the impact of their actions. Did they not understand the value of reputation management? Did they ever think about how they would explain their methods and actions under the cross-examination of an adversial legal process or before the court of public opinion? Because this story is a prime example of poor Enterprise Risk Management due to pitiful operational risk practices, TCM will continue to cover this evolving HP story in the coming days and weeks.