Image: Associated Press

HP CEO Mark Hurd recently resigned, supposedly because Hurd submitted inaccurate expense reports to conceal a relationship with contractor Jodie Fisher.  In a letter to the HP board, Fisher alleged that Hurd sexually harassed her.  After investigating the allegation, the HP board concluded that Hurd had not violated HP's sexual harassment policy.  Hurd has paid Fisher to settle the matter.  Terms of the settlement have not been disclosed.

This discussion focuses on two aspects of this complex situation:

1. Should the board of directors have been aware of Hurd's submission of false expense reports and his relationship with Fisher?
2. Should the next CEO ask HP board members to resign?

Should The HP Board Have Detected Hurd's Behavior?

Because the expense reports and the Hurd-Fisher relationship are connected, we must consider them together.  Examples of the problematic reports include:

• Hurd stated that he was dining alone, when he was dining with Fisher.
• Payments were made to Fisher for marketing and event organizing work that she never performed.

Should the board have been able to figure out Hurd's conduct earlier?  If so, how could the board have found out about the expense reports and the relationships?

The answer to these questions turn on how closely we think the board should scrutinize the CEO's actions.  The board could require the CEO to have meal companions sign statements regarding their attendance, that would help.  Similarly, contractors could be required to certify that they performed work in expense statements that the CEO signs.  Or the board could ask the internal auditor to audit the CEO's expense reports.  These actions might help deter or prevent problems.

But does the board have the time, energy, and resources to carefully monitor the CEO?  Should the board have to monitor the CEO so closely?  I think not on both counts.  One might argue that the board has a duty to make sure that executives do not engage in malfeasance.  Although that position has merit, we should not ask the board to go to extremes to prevent executive misbehavior.  To do so applies agency theory too forcefully to corporate governance.

Agency theory provides a useful framework for corporate governance to the extent that the interests of the board and management are not always aligned.  Yet, using agency theory to drive corporate governance actions is dangerous.  Taking agency theory too far in the corporate governance context results in distrust and and action paralysis.  Too much distrust impedes the board and CEO from working together on strategy execution.

Should The Next CEO Ask HP's Board Members Resign?

Stephen Diamond, associate professor at Santa Clara University School of Law, contends that HP's next CEO should certain scandal tainted board members to resign.  Diamond points out that Patricia Dunn, the former HP board chairperson, was forced out in 2006 over orchestrating a "pretexting" scandal in which the company spied on board members.  The board mishandled the tenure of former CEO Carly FIorina.  Because the departures of Hurd, Dunn, and Fiorina sullied HP's reputation, Professor Diamond believes that the next CEO should ask certain directors to resign:

The first thing is, they have to find the right kind of CEO.  And I think what that CEO needs to do is come in and say, 'How many board members were here during the last two scandals?  If you were, please resign now.  And, who left before these scandals took place?  Why don't you come back and help us out?' That's the kind of CEO they need.

Nell Minow's critique of the Hurd's severance payment raises excellent questions.  Why wasn't Hurd fired for cause?  Why did Hurd get a severance package worth more than $30 million if he is an at-will employee?

While I agree that the HP board has made mistakes recently, and that changes must happen at the board, I cannot agree with Diamond's specific recommendations.  While some of the current directors might share some responsibility for the Dunn scandal, it is unclear why they should be blamed for Hurd's actions.  Most boards do not track what Hurd did, and we do not want boards to become CEO babysitters.  Do we really want to hold directors responsible for bad executive acts that require  efforts to detect?  When the HP board found out about Hurd's actions, it lost confidence in Hurd and quickly forced him out before the matter became public.  Boards often show little tolerance for the CEO's personal failures.  In that regard, we might commend rather than condemn the HP board.

Finally, do we really want the CEO to tell directors to resign?  Here the interests of the CEO and the board clearly conflict.  CEOs already have substantial influence over director nominations, thus giving the CEO the ability to shape a friendly board.  Just as distrust should not characterize the CEO-board relationship, the relationship should not be overly friendly.  It is important to keep in mind that the CEO serves as the board's pleasure, not the other way around.

As it stands, the CEO has plenty of influence over the board.  The next one needs no more.  Shareholders need to step up and make changes to the board, if that is what they want.

Douglas Y. Park

Twitter: @DougYPark

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