IT’S ONE OF THE MOST AMAZING boardmeltdowns in U.S. corporate history. The departures of Hewlett- Packarddirectors George Keyworth and Tom Perkins, combined with the effectivedemotion of Chairman Patricia Dunn, have created a sturm und drang thatis reverberating through boardrooms across the country.
The story has all the elements of a potboiler thriller. At the behestof Dunn, HP hired a consulting firm whose detectives obtained the phonerecords of board members under false pretenses and those of theirspouses, according to insiders. The investigators even subjecteddirectors to physical observation, according to these sources. And thesame investigators went after the phone records of nine reporters whocover HP, resulting in a media frenzy, including a cover story in Newsweek attacking Dunn.
Most directors sided with Dunn. At an off-the-record session in Washington, sponsored by Institutional Investor and cohosted by Directorship,board members said Keyworth had violated his fiduciary responsibility.”The duty of loyalty has been breached,” said one. Asked whether achairman of a board has a responsibility to investigate leaks, mostfelt the answer is yes. “Patty Dunn followed the rules prettycarefully,” said Nell Minow, editor of The Corporate Library, who oftencriticizes board conduct.
Directors drew a sharp distinction between awhistleblower such as Sharon Watkins at Enron and a director whodisagrees with a company’s directions. “There’s no way a board canfunction if someone is leaking,” said another director on two publiccompany boards. Most directors argued that Keyworth’s only option wasto resign his seat.
But Keyworth’s defenders argued that HP hadpreviously used him to give on-the-record interviews with reporters aswell as to give them background that was off the record. Keyworth’scamp insisted he had the right to use those relationships withreporters. “The attack on him makes it pretty hard to be an agent forchange in the boardroom,” said one associate.
When confronted by Dunn in May, Keyworth declinedto resign, saying that he worked for shareholders, not other directors.Perkins, a friend, resigned over the episode in a huff, although thecompany’s 8K filing to the Securities and Exchange Commission did notreveal that it was an acrimonious departure.
The event went public when the company feltobliged to make another SEC filing. The firestorm culminated intranscontinental telephone negotiations that lasted until 4 a.m. onemorning. Keyworth agreed to resign, and Dunn agreed to cede her titleof chairman to CEO Mark Hurd. The transition takes effect in January.”It was pretty clever of Hurd to set it up that way, because she nowhas to make the apology tour in Washington,” one source said. “He canstart with a clean slate.”
The role of Wilson Sonsini Goodrich & Rosati was hotlycontroversial. The prestigious Silicon Valley law firm was already ofregular counsel to the board. Dunn turned to Larry Sonsini to also actas special counsel in connection with the investigation since she,theoretically, also was a suspect in the leaking. But because sherecused herself from parts of the board’s deliberations, she left LarrySonsini to preside. “They have a highly conflicted law firm right now,”said Yale School of Management’s Jeff Sonnenfeld. “They have separateinterests.”
Dunn lost the media war. One lesson from the episode is that mediaperceptions can shape the outcome of boardroom battles, yet very fewboards are sophisticated in media relations. Dunn will almost certainlyremain a target, and few experts believe she will last past January onthe board. “It was an orchestrated campaign against her,” saysSonnenfeld. “Perkins personalized it against Patty Dunn.”
The forces of Keyworth and Perkins also outmaneuvered HP in Washington.A key architect was Viet Dinh, who has served as counsel to Perkins andalso sits with him on the board of NewsCorp. These Beltway operatorsprompted the Justice Department to join a probe by California AttorneyGeneral Bill Lockyer into whether the HP investigation violated thelaw. A House committee also was drawn in. Washington, a town thatthrives on leaks, was solidly anti-Dunn.
The big question is how it all plays out for Hurd. On the one hand, hecan now shape his own board and perhaps ease the dysfunctionality thathas crippled it for years. But the risk is that could distract him fromrunning the business.