Posts Tagged ‘Corporate Governance’

Multiple Choice Question: Which of the Following Fiduciary Duties Did the Hewlett Packard Board Violate? (There May Be Multiple Right Answers)

law bookIn the article. “Voting to Hire a Chief Without Meeting Him, written by James B. Stewart, The New York Times reported on September 22 that the CEO search committee of Hewlett Packard’s board of directors, consisting of four HP directors, did not require all 12 of the board members to interview the committee’s choice of Léo Apotheker to replace Mark Hurd before the board acted to hire Apotheker as CEO.

Scarcely 12 months since Apotheker joined HP, the value of the company’s equity has declined by approximately 50%. Recriminations about the board’s flawed selection process are now emerging, and Apotheker’s short tenure ended later on Thursday, the 22nd, with the formal announcement that HP director Meg Whitman will become the new HP CEO.  Ms. Whitman has been an HP director for less than one year and therefore was not a member of the board involved in the Apotheker search and selection.

Even if we try to forget the widely publicized (and criticized) circumstances of the board’s handling of Hurd’s dismissal, ignore the boardroom drama associated with the end of the Fiorina period, and generally dismiss the extraordinarily poor record of corporate governance notched by the HP board across the tumultuous reigns of three CEO’s since 2005, this latest revelation is stunning.

According to the New York Times article:

Interviews with several current and former directors and people close to them involved in the search that resulted in the hiring of Mr. Apotheker reveal a board that, while composed of many accomplished individuals, as a group was rife with animosities, suspicion, distrust, personal ambitions and jockeying for power that rendered it nearly dysfunctional.

Among their revelations: when the search committee of four directors narrowed the candidates to three finalists, no one else on the board was willing to interview them. And when the committee finally chose Mr. Apotheker and again suggested that other directors meet him, no one did. Remarkably, when the 12-member board voted to name Mr. Apotheker as the successor to the recently ousted chief executive, Mark Hurd, most board members had never met Mr. Apotheker.

Considering the statements above, please answer the following question:

By not requiring that each member of the board of directors, to whom the CEO reports, personally interview the CEO candidate recommended by the CEO search committee, all of the members of the Hewlett Packard board violated the following fiduciary duties:

A. Duty of Care:  requires a director to act with the care that an ordinarily prudent person in a like position would exercise under similar circumstances.  This duty requires directors to

  • Make informed decisions;
  • Obtain information they believe is reasonably necessary to make a decision;
  • Make due inquiry.

B. Duty of Loyalty: requires a director to act in the best interests of the corporation and not in the interest of the director or a related party

Issues often arise where the director has a conflict of interest:

    • Where the director or a related party has a personal financial interest in a transaction with the company
    • Where the director usurps a “corporate opportunity” that properly belongs to the company

C. Duty of Good Faith: A separate duty of good faith has emerged in some jurisdictions such as Delaware where a director has engaged in such egregious behavior as to not have acted in good faith.

Examples of not acting in good faith:

  • Consciously or recklessly not devoting sufficient time to required duties
  • Disregarding known risks
  • Failing to exercise oversight on a sustained basis.
  • Failure to meet the duty of good faith can have serious adverse consequences to a director, such as being exposed to personal liability for breaches of the duty of care or losing coverage under indemnification or insurance policies.

D. All of the Above: The HP board allowed personal agendas, dysfunctional behavior, personal animosity, process fatigue, and emotionality to undermine what is arguably the single most important duty of the board: to oversee, hire, and fire the CEO.  If this reporting of the facts is correct, there is no doubt that the entire HP board serving at the time of this decision bears some measure of responsibility for the economic value lost by the HP shareholders.  This lack of oversight, especially when considered in the context of the board history of this this company, is an injurious insult to the shareholders and a slap in the face to corporate governance best practices.

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