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Clock Ticking on H-P Reforms

Activists await a response to reform proposals that saw strong support.


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and its CEO Mark Hurd have racked up financial gains for shareholders by improving profitability, boosting market share and overtaking chief rival


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sales of personal computers.

But the company has a mixed record when it comes to addressing shareholder concerns about corporate governance and reforming its troubled board of directors.

H-P is recovering from years of highly public boardroom clashes and ethical lapses that led to charges of conspiracy and battles with shareholders, legislators and the

Securities and Exchange Commission

. While the company has followed its own path to reform, it has rejected proposals from shareholders who are concerned that boardroom discord can distract directors from their duty to oversee management.

Corporate America has witnessed a flurry of shareholder activism. The latest wave of annual meetings saw a marked increase in shareholders' proposals to control who represents them on the board, to let them approve executive pay packages and to prevent insider dealings.

More than 40% of

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shareholders voted last Thursday to give themselves a vote on executive compensation.

The recent boost in emboldened shareholders also has been supported by research from Goldman Sachs, which showed that sample portfolios had better returns when taking corporate governance ratings into consideration.

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H-P's recent troubles began when longtime director William Hewlett, scion of one of the company's founding families, used media interviews, a lawsuit and a shareholder vote to campaign against the watershed 2002 merger with Compaq.

In subsequent years, boardroom leaks revealed tension among members. In an effort to stanch the leaks, the board hired a security firm that

impersonated directors and reporters in order to obtain their phone records.

H-P has taken steps to address those problems and has given shareholders somewhat more control. It has adopted provisions to let shareholders vote on executive severance packages. In 2005, the board sacked H-P's high-profile CEO Carly Fiorina, architect of the Compaq merger.

Later, in response to the board leak scandal, H-P created an executive position to promote ethics, and hired a former federal prosecutor to review its investigative procedures.

Earlier this year, the board put into effect a policy to require directors to receive more affirmative than negative re-election votes in order to retain their seats.

Along the way, H-P has increased the number of independent directors on its board.

"H-P has been asking a lot of hard questions about establishing a culture of ethics and getting its leaders to carry out those standards in daily business activities," said Patricia Harned, president of the Ethics Resource Center. Harned has worked with the company's new ethics czar, Jon Hoak. "He has committed resources to these goals, which shows that ethics are a priority for H-P."

But the company has been ambivalent about making shareholders a part of the reform process. In March, the company

rebuffed proposals to let investors nominate board candidates on the company ballot and separate the roles of chairman and chief executive. It also resisted a proposal to tighten the link between executive pay and company performance.

These proposals received support from Institutional Shareholder Services and Egan-Jones, which advise investors on how to vote. Also, mutual funds managed by TIAA-CREF and Franklin Templeton voted their shares in favor of these proposals.

To date, H-P hasn't taken any visible steps to act on the proposals, even though several won majority support. H-P declined to comment for this article.

"I think shareholders fully expect the board to take action on some of these proposals," said Patrick McGurn, special counsel at Institutional Shareholder Services.

Expectations are highest for the pay-for-performance proposal, because more than 50% of shareholders voted for it. But McGurn says the proposal for shareholder nominations merits action as well because it would give investors the chance to shape the board by voting for people they believe in, rather than the alternative of withholding votes in a show of no confidence.

That proposal gained approximately 40% of the vote.

The board's formal response may come near the end of the year when it sends out its materials for the next annual meeting.

"H-P has some breathing room," said McGurn. "But certainly the clock is ticking."