Corporate Governance
Hewlett-Packard Case
• Introductory Summary including Questions
• Character Sketches
• Basic Facts
• Quotes on Corporate Governance
• An Outline on Corporate Governance: Leading
Basic Questions
• Who embodies the best approach to corporate
– Dunn who takes a compliance approach best outlined in the Law
of Agency
– Perkins who takes more of a stewardship approach that places
less emphasis on compliance
• Perkins and Dunn have different takes on the leaks of
information made by board members to the press
– For Perkins, leaks performed the function of a “release valve”
that allowed frustrated insiders to vent concerns about
company policy
– For Dunn, leaks were, first and foremost, violations of company
confidentiality, ultimate damaging because they undermined
relations of trust necessary for board deliberations
Groups, and
Silicone Valley
(Home of
•Director of HP
•Speaking with
Press (On/Off
(Employee Info)
•Telephones, cell
•HP Board
•Tech Board
• PowerPoint
•Electing Board
•Sarbanes /
•Fed Sentencing
•R/ Board-Mgt
•Procedures for
•Tele info (Call
•SEC Regs
•Emails (stored
•Privacy Legis
•Project Kona I
•Law of Agency
•Project Kona II
•HP Mgt (CEO)
•Model for Corp
Gov (Agency vs
•Public Relations
M V (Press
pierces privacy)
M V (Press
Procedures /
Role Conflict)
(Transparency of
M V (Maintained
by mgt but
vulnerable to
Board Members
Undermined by
transparency of
Supported by
STS Highlights
• Confidentiality
– Protected under law of agency. General expectation that information
on BOD deliberations is confidentiality. This preserves trust
– Hardware, software and procedures protect confidentiality
– Leaks to press considered violation of confidentiality (relation to press
and procedures = vulnerability)
• Privacy
– Protected piece-meal by law. However, as case progressed, pretexting
became illegal because it bordered on ID theft and invasion of privacy
– Pretexting involves a deception
• Privacy and Confidentiality are in conflict with transparency
mandated by Sarbanes-Oxley and Federal Sentencing Guidelines
• Enabled PIs to track reporter and board member
movements by hacking into email exchanges and phone
• Used SS#s of Board members to open false email
• Sent emails to reports posing as potential leakers. Emails
had Trojan Horses to access computer files and emails
• “it involved investigators requesting information from
operators orally, over the phone, pretending to be
someone else if necessary.” (DeLia quoted in Stewart)
• “created a fictitious disgruntled employee named Jacob
to make e-mail contact with Kawamoto. “ E-mail has a
Trojan Horse
Corporate Governance
Lawrence and Webber on CG
• “The system of allocating power in a corporation that
determines how and by whom the company is to be
directed.” 557
• “The term corporate governance refers to the process
by which a company is controlled or governed. Just as
nations have governments that respond to the needs
of citizens and establish policy, so do corporations have
systems of internal governance that determine overall
strategic direction and balance sometimes divergent
interests.” 320
Stewart on Corporate Governance
• “a term that technically refers to all aspects of
running a corporation but in recent years has
come to emphasize issues of fairness,
transparency, and accountability.”
• Questions:
– How does transparency required by corporate
governance fit in with the confidentiality required
for Board of Director Deliberations
Dunn on corporate governance
• “The most fundamental duties of a director—the
duties of deliberation and candor—rely entirely upon
the absolute trust that each director must have in one
another’s confidentiality. This is true for trivial as well
as important matters, because even trivial information
that finds its way from the boardroom to the press
corrodes trust among directors. It is even more critical
when discussions can affect stock prices….Leaking
“good” information is as unacceptable as leaking “bad”
information—no one can foretell how such information
may advantage or disadvantage one investor relative to
another.” (quoted by Stewart, 156)
CG Models
• Agency Theory
– Managers act as the agents of the corporation
– Problem = keeping managers faithful to the interests of the owners /
• Stakeholder theory
– Corporation is run, by its managers, for the sake of the stakeholders
– Managers are not just faithful agents of stakeholders. Instead of
faithful agency, they are responsible for balancing conflicting
stakeholder stakes corporation
• Stewardship theory
– Starts from premise that manager and owner interests are more or
less the same
– Managers act, not as agents, but as stewards for stakeholders
– Stakeholder interests are aligned with the long term wellbeing of the
corporation. Managers facilitate this alignment.
Agency Theory (Dunn)
Owners/directors set the central objectives of the corporation.
– Managers executing these.
– Corporate governance = procedures to control management and restrict to carrying out owner
Managers cannot be trusted to remain faithful to interests and goals of the
– Human Nature = Egoistic pursuit of self-interest
The owners/directors = principal.
– Originates the action and bears primary moral and legal responsibility for it.
– Principal delegates executive authority to agent, often because of a lack of knowledge of details
pertinent to execution
– Develops compliance structures to compel agents to be faithful to interests in executive function.
Managers = agents.
Responsibility: serve as faithful executors of the goals and interests of the principals
Positively this assumes the exercise of due care (proper exercise of professional judgment)
Negatively: avoiding conflicts of interests and maintaining confidences
Bound and Free Agency
Corporate Governance Focus
– Primary emphasis is placed on compliance, i.e., enforced conformity to rules that constitute
minimum thresholds of acceptable behavior.
– (1) rule based codes, (2) systems of monitoring to detect violations, and (3) punishments and
rewards to deter non-compliance and reward compliance
Stewardship Theory (Perkins)
Managers and employees can be trusted to act as stewards or guardians of the
– A steward is a caretaker who looks after the owner's property and interests when the owner is
Corporation modeled on conception of a social contract
Corporation is a cooperative, collaborative enterprise.
Individuals transcend narrow self interest and find meaning in concerns of corporation
Managers can, to a certain extent, act on altruistic motives
CG consists of build trust and social capital.
Owners still establish the cardinal objectives for corporation
– But they must provide managers with an environment conducive to meaningful work.
Stewardship focuses on management by values
– (1) identify and formulate common aspirations or values as standards of excellence,
– (2) encourage employees to adopt values as core aspirations through training programs, ethics
audits, corporate codes, and so forth
– (3) respond to values "gaps“ by means of moral support
Training programs
DPO procedures
Proactive performance evaluations
Empowering leadership
• Provide increased protection for whistle-blowers
• Adhere to an established code of ethics or explain
reasons for non-compliance
• Engage in "full, fair, timely and understandable
• Maintain“ honest and ethical" behavior.
• Report ethics violations promptly
• Comply with "applicable governmental laws,
rules, and regulations"
Quoted from Dyrud, M.A. (2007) "Ethics, Gaming, and Industrial Training," in IEEE Technology and Society
Magazine. Winter 2007: 36-4. Dyurd cites: ELT, Ethics and Code of Conduct, n.d.;
Federal Sentencing Guidelines
• Establishing standards and procedures to prevent and
detect criminal conduct
• Promoting responsibility at all levels of the program,
together with adequate program resources and authority
for its managers
• Exercising due diligence in hiring and assigning personnel to
positions with substantial authority
• Communicating standards and procedures, including a
specific requirement for training at all levels
• Monitoring, auditing, and non-internal guidance/reporting
• Promoting and enforcing of compliance and ethical conduct
• Taking reasonable steps to respond appropriately and
prevent further misconduct in detecting a violation
Dyrud, M.A. (2007) "Ethics, Gaming, and Industrial Training," in IEEE Technology and Society Magazine. Winter 2007:
Characters / Participants
Patricia Dunn
• Board member and supported ouster of
• Specialist in corporate governance with
impeccable reputation
– Advanced through ranks of Wells Fargo
Investment Advisors (later acquired by Barclays) to
become CEO of Barclays
Carly Fiorina
• CEO of HP until ousted by board
• High profile corporate executive
• Considered a good salesperson but a poor
manager by members of the board
• Later Republican candidate for US senate from
Jay Keyworth
• Longest-standing member of HP BOD
• Physics division at Los Alamos National
• Developed close relation with CNET report, Dawn
• When identified as source of leaks was forced to
leave HP BOD
Tom Perkins
• Close relation with HP founders and family
• Venture Capitalist
• Author of “Sex and the Single Zillionaire”
– “Heather was nude upon the bed and Kim, above, was also nude, but
wearing some sort of complicated black leather harness…” (It goes on
from there0
• Resigned from board in protest over removal of Keyworth.
• Later, claimed he was victim of invasion of privacy by HP
investigation. Responsible for information of investigation
becoming public outside of HP
Ron DeLia
• Private Investigator
• From Boston firm, Security Outsourcing Solutions
• Firm uses pretexting to get information on board
members to advance leak investigation
• Were these methods an invasion of the privacy of
board members? Were they illegal
Basic Facts / Case Narrative
Basic Facts
• Carly Firoina became CEO of HP and sought to reinvent the
– “Fiorina had a vision, and she did a phenomenal job acquiring Compaq
and comgining the assets. But we had to make the assets deliver. We
had an execution problem. The stock took a bit hit. She was a better
saleswoman than a manager.” (Stewart 156)
• Fiorina was fired by the BODs in a very political manner
– Rumors of board discontent were leaked to press in advance of
– Leaks also occurred about a strategic planning meeting held by Fiorina
with HP board (source talked about long days and imparted strategic
plans of HP that could affect stock prices)
• Fiorina: It was probably Keyworth and Perkins two board members
who felt that HP should return to its more aggressive, venture
capitalist culture who were the sources of the leaks
Back to Basic Facts
• Dunn became “on-executive” chairperson of HP Board
of Directors
• Board appointed Mark Hurd CEO of HP to take place of
• Top priority: stop board leaks to the press
• Two investigations were eventually carried out called
the Kona files after a vacation retreat in Hawaii used by
Basic Facts
• First investigation yielded no concrete results
– Not clear who leaker was
• Second investigation used more aggressive techniques
– Hired PI firm (Ronald R. DeLia from Security Outsourcing
Solutions from Boston)
– In second investigation, firm used a method called
– “it involved investigators requesting information from
operators orally, over the phone, pretending to be
someone else if necessary.” (DeLia quoted in Stewart)
– “created a fictitious disgruntled employee named Jacob to
make e-mail contact with Kawamoto. “ E-mail has a Trojan
E-Mail (Quoted from Stewart, 160)
• Hello, I am a senior level executive with a high tech firm in
the valley and an avid reader of your columns.
• My real name is not used, you might understand why. Not
quite sure how to approach you on this, but I’ll attempt
• In short, tired of broken promises, misguided initiatives and
generally bad treatment.
• Have some information that I would be interested in
passing along.
• Felt it might be appropriate to contact you.
Basic Facts
• Board Meeting held to inform them about results of leak
• Jay Keyworth was identified as source of leaks
• Apologized to board; thought he’d only get a slap on the
• But Board voted to request his resignation
• Perkins objected: “Jay is the longest serving director on this
board!” (Stewart 163)
• Perkins resigns in protest
– Because Keyworth was fired or because of pretexting?
Basic Facts
• Resignations of Board members must be reported to the
– No reason given initially
• Perkins gets message from ATT that it had to lock his online
account. But he had not set up such an account. This was
done as part of pretexting used during leak investigation.
• Perkins: “My personal phone records were ‘hacked’”
– “I am now legally obliged to disclose publicly the reasons for my
resignation. This is a very sad duty.
– Perkins states as his reasons his objections to the violation of his
and other board members’ privacy by the leak investigations
Leaks: A “steam valve” or a
violation of trust?
Perkins on leaks
• “Leaks don’t happen in stable, happy
companies. They’re a steam valve. People
talk. They’re a symptom of something else.”
Leaks or press handling?
• Message to Keyworth (HP board member) about how to handle
• “Please transition to Carly and her skill set. Specifically, her brilliant
strategic mind and her confidence—illustrated by her deep
engagement of the board….This is an opportunity for us to reset
Carly’s image to show the Carly we all know and love.”
• Keyworth talked to press, specifically to Dawn Kawamoto, a
reporter fro CNET
– He felt conversations were continuation of public relations directives
in above e-mail and not leaks although the information printed in
Kawamoto story was not common knowledge.
– This was, he felt, a way of getting positive press for the company and
building up good will with an influential reporter
Keyworth on Leaks
• “I apologize for any discussion I had with the
reporter in question that may have resulted in
any of my colleagues on this board losing trust
with me.”
• “All I did was take advantage of a lunch with a
reporter to say some nice things about Mark
Hurd. I thought the worst that might happen
would be that they’d slap my wrist.”
• Quoted by Stewart 163
Fiorina on Leaks
• “It is hard to convey how violated I felt. Until a board
makes a decision, its deliberations are confidential….Trust is
a business imperative. No board or management can
operate effectively without it.…I sent an e-mail message to
the board. I informed them of the leak. I said this was
completely unacceptable behavior by a board member. I
convened a conference call for Saturday morning. I was as
cold as ice during the call. I said the board could not
operate in this way and I would not.…Jay [Keyworth] Dick
[Hackborn], and Tom [Perkins] all acknowledged that the
reporter had contacted them. They all denied they had
spoken with her.” Fiorina, Tough Choices. Quoted by
Lawrence, 504.”
• Hewlett-Packard, a company with outstanding ethics
reputation, suffered as a result of invasive investigation
• Dunn was targeted for federal prosecution
– Did she properly supervise investigation?
• Dunn and Perkins embody different approaches to
corporate governance
– Agency and Stewardship approaches respectively
• Case shows how shifting government environment of
organization has altered traditional business practices
– Emphasis of Sarbanes-Oxley on transparency undermines
internal corporate confidentiality and trust built on it.

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