Treating the H-P Headache

It's hard to see how hiding information about how a company is being run is serving investors.
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Here's a radical proposition to prevent the kind of boardroom blowups afflicting

Hewlett-Packard

(HPQ) - Get Report

from happening again: Be more open.

Yes, be honest. Don't hide stuff. Disclose board-meeting notes and transcripts to all investors.

I'm not saying information on new products or initiatives that could dull a company's competitive edge -- but being clear on what a company is doing right and what it's doing wrong. Or who among executives and board members is pulling their weight, and who isn't. In other words, basic stuff about running a company.

Investors deserve to know this, but they rarely hear it. Board members aren't elite people with secret powers that give them the right to do whatever they want -- they are fiduciaries given weighty responsibility of looking out for the interests of shareholders.

How is hiding information about how a company is being run supposed to serve investors? And how is going to great lengths and expense to rat out a board member who is willing to share the rare tidbit of information helping to safeguard the owners of the company?

Well, it's not. The basic assumption here is that the less investors know about a company, the better off they are, which sort of goes against the way the financial industry has been moving in the past few decades. It's all been about finding out more information so people can make informed, intelligent decisions about buying, selling or holding stocks.

As a case study, let's take the Jan. 24, 2005, story on the front-page of

The Wall Street Journal

that Patricia Dunn cites as the impetus for the illegal snooping that she, wittingly or not, oversaw. The story disclosed what Dunn called "the most sensitive details from a discussion from

the H-P board's off-site strategy meeting."

And what were the "sensitive details"? Simply that day-to-day control of H-P should shift in part from then-CEO Carly Fiorina to three other executives. In retrospect, that was a smart move. After all, Fiorina was in over her head. Dunn herself certainly seems to have agreed -- in her opening statement to a Senate subcommittee, she slams Fiorina for failing to plug the same kinds of leaks that Dunn was after.

Now let's look at the harm that investors suffered because of this leak: On the day of the

WSJ

story, H-P's stock fell 0.005% to $19.49 from $19.59 the previous trading day. Dunn references another, unnamed story that she says "affected stock prices" in January 2006, but H-P rose 9% in January, twice the rate of the tech-heavy

Nasdaq

.

Let's stop kidding ourselves: The leaks had no material effect on H-P shareholders. But the damage to Dunn herself? Much worse: She lost face as H-P's chairman. "The H-P board, particularly as it was constituted under the first year or so of my chairmanship, was beset by considerable conflict among directors," Dunn testified to Congress.

In other words, Dunn couldn't keep her board under control, so she sicced her security minions on them. This whole scandal, from its very roots, was never about what the board should have been doing, which is standing by the shareholders. It was about the very ego battles and petty politics that poison a well-run company.

Dunn's upside-down logic hits its peak when she decries "the breakdown of boardroom sanctity."

Breakdown of boardroom sanctity?

After Enron, WorldCom, Adelphia and (insert other scandals that a vigilant board could have been prevented), that's exactly what too many companies need. Any investor who

isn't

clamoring for the breakdown of boardroom sanctity is sadly misguided.

There's a lot of talk in economic news these days about the growing gap between rich and poor. But there is another, less acknowledged gap not getting much attention: the gap between the powerful shareholder -- the corporate officer or investor who owns enough shares to influence policy -- and the rest of us.

For me, the proof of that gap came courtesy of Dunn, although it had little to do with H-P. On Sept. 20, the Bay Area Council -- apparently a large-scale support group for other ethically challenged corporate types -- inducted Dunn into its Hall of Fame, right in the thick of the disclosure of her incompetence.

A local TV station, KPIX, said Dunn was given a standing ovation. The clip is

worth watching because what is described as a "hero's welcome" for Dunn can only be explained in one of three ways: 1) the audience is insane, 2) they just feel sorry for heror 3) they actually think what Dunn did was right.

But was she right? Forget that journalists were upset -- no one cares about them anymore, except journalists. The stock's impressive tear from $20 to $37 in 16 months has been cut short by this scandal. In an era in which consumers are increasingly concerned about personal data, Dunn turned H-P into a brand that wants to ride roughshod over privacy. And now Congress is sniffing around. How does any of this help H-P?

That Dunn made such a damaging decision is less disturbing than the applause showered over her by other executives and board members. And that raises a bigger question: Just how many companies not only support what Dunn did, but have actually done it?

This is also why every company should be worried. H-P's misdeeds may well prompt further regulations. If so, it's the honest companies and their law-abiding boards that will pay the price. Just as the financial fraud of a minority of companies saddled all companies with millions in Sarbanes-Oxley compliance costs, the H-P mess may hinder companies who have done nothing wrong.

Advocates of corporate espionage often defend it by asking: If you don't like spying, what do you have to hide? I'd ask the same question of corporate boards. Why hide decisions from the same investors they're pretending to serve? If boards can pry out information through illegal means, why won't they legally disclose to investors what they're doing? Had H-P taken this step, this scandal would never have spun out of control.

The real danger for companies isn't investors who know what is really going on. It's board members and executives who have grown so self-absorbed they've lost touch with the needs of their bosses, the company's owners.

Watch Dunn's clearly rehearsed comment to the Bay Area Council that "it wouldn't hurt if the Pope continued to make controversial comments to grab the attention of the press." And how the well-heeled crowd goes nuts as she says this.

Of all the weird details of this scandal, this is the hardest to swallow. Dunn is essentially saying she's happy with nuns being gunned down provided it takes attention away from her own incompetence. Look closely and you can see Mr. Burns in the audience, tapping his fingertips together and intoning, "Excellent!"

It doesn't get any more self-absorbed than this. Or any stupider. Yet if Dunn emerges as a grotesque poster child of secretive, self-serving corporate boards, it may work out. To quote the closing lines of her own disingenuous statement to Congress, "if such a 'bright line' can be created, then my undertakings in this matter will not be in vain."

Your words to God's ears, Ms. Dunn. Just don't tell the pope.