The giant California Public Employees' Retirement System (Calpers) will withhold its support from five members of Hewlett-Packard's ( HPQ) board of directors during a vote at its upcoming shareholders' meeting. In a note on its Web site, the $161 billion pension fund said it objects to the fact that five of H-P's directors are also members of H-P's audit committee, which has allowed its auditor to perform nonaudit services. Corporate-governance experts say auditing firms that also provide pricey consulting services to their clients have a financial incentive to issue a clean bill of health. According to filings with the Securities and Exchange Commission, H-P's auditor, Ernst & Young, earned nearly as much in non-audit-related fees as in audit fees last year. In fiscal year 2003, H-P paid Ernst & Young $24.3 million in audit and audit-related fees, plus another $21 million for tax services and other fees. But H-P is hardly the only company to come under fire for this practice. Calpers spokesperson Brad Pacheco said that the blurry line between auditors and consultants is "an industrywide problem, and we believe it raises conflicts of interest." He estimated that about 75% of the 1,700 companies in Calpers' portfolio employ auditors that also do consulting work.
Calpers, which owns 17.85 million voting shares in H-P, said it will withhold votes for directors Lawrence Babbio, Patricia Dunn, George Keyworth, Robert Knowling and Sanford Litvack. Besides expressing concern with the auditing issue, Calpers singled out Litvack for criticism: He "has a poor attendance record and a business relationship with the company that Calpers believes could impair his objectivity," the fund commented. In an SEC filing, H-P said all directors attended at least 75% of board and committee meetings except for Litvack, who only showed up 63% of the time. Litvack was a lawyer with the firm of Dewey Ballantine from March 2001 to December 2002. H-P retained the firm's legal services during fiscal 2003, which began in November 2002. H-P will hold its shareowners meeting on March 17; the company's shares were recently up 12 cents, or 0.5%, to $22.45.