Friday afternoon (as Michelle Leder noted, just seven seconds before the SEC stops accepting submissions at the end of the week), HP announced in a filing that their CEO, Mark Hurd, was leaving the company. He had been one of the most successful CEOs of the past five years, creating billions in shareholder value and turning around a company in turmoil following the departure of now-Senate candidate Carly Fiorina.But he falsified his expense accounts in a tawdry series of incidents involving a one-time actress-turned seminar leader, and this came out after she filed a sexual harassment complaint against him. An investigation cleared him of the harassment charge, but found that the expense account fiddle was grounds for termination.
Predictably, some people are complaining that this was an over-reaction. They say it could have been handled privately, with reimbursement and a stern talking to. These people have clearly not consulted a lawyer lately or they would know that in order to do any business with the government (including eligibility for certain licenses to do business abroad), companies need to be able to demonstrate that they have “tone at the top” ethics and compliance in place. It says a good deal about our system of corporate governance — and our media and ourselves — that the announcement a few days ago that HP was settling a false claims charge with the government for $50 million did not result in either disciplinary action against the CEO or headlines in the financial press or mainstream media.
When the government investigates companies in these cases, the authorities have to decide whether to prosecute criminally or settle for a civil fine. They also have to decide whether to target the company as a whole or just some lone, unauthorised employee. To make such decisions, the government has said it will look to see whether the top management — starting with the CEO — has sent unambiguous messages that noncompliance will not be tolerated. Has misconduct been punished in the past? Have people been fired for violations? Or does management turn a blind eye for the sake of business expediency? If it’s the latter, the government says the whole company will be penalised. This is not just true of government contracts, it is true of overseas payments that violate the Foreign Corrupt Practices Act, it’s true of books and records violations under S-Ox, and it is true of export control violations. DOJ and SEC policy are quite clear on this.
Companies will always argue that any violation is just the act of some rogue employee. The government, in determining whether this is the case, has to make some assessment of the corporate culture and controls. In the post-Enron, post-meltdown world, investigators are not impressed with colour brochures and fat books of guidelines. They insist on seeing how violators are treated. And if a middle manager would be fired for exaggerating (otherwise known as cheating or stealing) on his reimbursements, then the guy who’s been paid more than $100 million has to be fired, too.
Beyond that is the actual (not just apparent) tone at the top, which is the board’s responsibility. They cannot keep in place an executive who has demonstrated such a failure of judgment and responsibility. They cannot keep in place an executive they cannot trust. It is hard not to conclude that the culture that created a $50 million liability to settle fraud charges needs a new leader.
Many people are objecting to Hurd’s severance package, which may be worth as much as $30 million. This is indeed appalling. While most CEO contracts exempt poor performance as a reason for “termination for cause,” there is no reason to permit a departure following an ethics violation to be characterised as a resignation – when the result is a $50 million payout that would otherwise stay in the corporate bank account.
Hurd’s contract makes it clear that he is an “at-will” employee who can be terminated at any time. It describes the consequences of termination for cause (eliminating most severance payments) without defining it. There is nothing to prevent the board from sending Hurd a letter telling him he has been fired and then stopping payment on all those severance checks.
The HP board has been a serial corporate governance offender, so we should not be surprised that they have bungled this one. This contract that fails to state what “cause” means is the one that famously — and outrageously — provided that all of Hurd’s first year performance goals were deemed to have been met. This is the board that mis-handled the hiring, direction, and firing of Carly Fiorina and then mis-managed the “pretexting” scandal following the investigation of a leak from the boardroom. This is the board that TCL has rated as high-risk for its inability to manage incentive compensation. And now, this is the board that is paying the CEO who essentially embezzled corporate funds by submitting his expenses for reimbursement $30 million to go away.
Which is why this is the board that has made “the HP way” a standard they cannot be deemed to have met.
Nell Minow edits The Corporate Library, a leading independent source for corporate governance research and risk analysis. This post is reprinted with permission. Check out more Corporate Library posts here.
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