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Published: Jul 18, 2007 in Knowledge@Emory

The professional future of Patricia Dunn, the former chairwoman of Hewlett-Packard, looks grim now as she faces four felony charges stemming from the company’s internal spying scandal, but professors at Emory University’s Goizueta Business School expect that the damage will be limited to the boardroom – and may even serve as a catalyst for some positive changes in the company’s board.

Dunn resigned from her post in September after allegations that she was involved in an illegal investigation into the telephone records of other board members. On Oct. 5, Dunn surrendered to a Santa Clara judge, charged along with four felony counts in connection with the alleged plot. The arrests followed statements she made under oath to the U.S. Congress the previous week, which some observers have said will make her defense against the fraud and conspiracy charges considerably more difficult. Ironically, the plot reportedly arose from a misguided attempt to stop another kind of misbehavior at the company – years of press leaks that some disgruntled board members are alleged to have made.

That kind of messy saga might sound like the antics of a company on its way out – as the old Wall Street saying goes, there is never just one termite–but professors say that HP is actually in better shape than it’s been in many years. As long as the board continues to stay out of the way of the company, they say, the Palo Alto printing and technology giant should continue to do well.

“It’s historically a bright, innovative company,” says Benn Konsynski, a professor of decision and information analysis at Goizueta. “It’s suffered and benefited from a series of mergers that have shaped and changed the company. As long as they can straighten out senior management and board issues, they’ve got a very good future.”

Some professors even believe that the scandal will end up having a positive impact on HP. “This is actually good for HP,” contends Jagdish Sheth, a professor of marketing and corporate strategist. “The problem with HP has not been management or technology or customers or market, the problem has been the board.”

Wall Street’s reading of the scandal seems to corroborate Sheth’s analysis. The day before the scandal broke, Sept. 5, the stock stood at 36.46. As of Oct. 6, it closed at 37.72 last Friday – just pennies off the 52-week-high it hit on Oct. 4. In fact, looking at the chart, investors have been very well pleased with the company’s performance: since August 1, HP’s stock price is up over 19% in the last three months, having risen all the way from 31.67 on Aug. 1.

Sheth sees the scandal as the latest battle in an ongoing cultural war within the company between a faction of East Coast outsiders formerly led by Carly Fiorina, a CEO ousted by the board in 2005, and West Coast board members from the old HP days, according to Sheth. “The two never saw eye to eye about the future of the company,” he says.

Although the newer, East Coast leaders were mostly former telephone industry executives, according to Sheth, the older board members were still committed to a traditional vision of the company that was no longer competitive. “The board has been very much an old-timer, good-old-boy network,” observes Sheth. “These are board members appointed by [Bill] Hewlett and [David] Packard.”

Dunn, the former chairwoman, also describes the boardroom struggles in terms of a cultural clash, but one between old and new styles of boardroom cultures, an old culture that wanted to focus on such issues as business and product strategy, and a new culture that recognized its obligations to meet the requirements for regulatory oversight of Sarbanes-Oxley and other related rules. “The clash is perhaps particularly poignant in Silicon Valley,” she told Congress on Sept. 28, “where the culture of innovation, freedom of maneuver and creativity are seen as essential to value creation.”

Those older members are the product of HP’s strong and unusual culture. Founded in a Palo Alto garage in 1939, Hewlett-Packard is in many ways the original Silicon Valley company, a pioneer in a distinctive West Coast approach to business that emphasized innovation over corporate formality. Engineers Bill Hewlett and David Packard had even codified their behavior and comportment as “the HP Way,” a set of operational and cultural precepts that some historians say served as a blueprint not only for the culture of HP but much of Silicon Valley. Founder Bill Hewlett defined the HP Way as an ideology that included “a deep respect for the individual, a dedication to affordable quality and reliability, a commitment to community responsibility, and a view that the company exists to make technical contributions for the advancement and welfare of humanity.”

The formula worked well for the company from the 1950s up into the 1980s, as the company brought a series of important innovations to market, including the first small computers and electronic calculators. It also served as a magnet for innovation that helped create Silicon Valley—for example, high school student Steve Jobs first learned about technology by attending after-school lectures offered by Hewlett-Packard. Yet in the 1990s, history seemed to have passed the company by and the company appeared to have lost its capacity for innovation.

In a bid to regain its momentum against other technology companies that focused less on innovation than supply chain efficiency, Fiorina engineered a merger with Compaq in 2002. While Fiorina won that battle, following a bruising proxy fight against the merger by HP heir Walter Hewlett, she ultimately lost in her war against the entrenched HP interests. After some lackluster quarters, Fiorina was dismissed by the board in 2005, replaced by NCR executive Mark Hurd.

Today, Fiorina’s strategy may have positioned the company for growth. Professors say that HP is now back on track. The company has managed to cut costs to compete better against Dell Computer’s vaunted supply chain and at the same time improved their customer service. “They’ve also been doing a pretty good job of emphasizing customer service and trying to offer integrated packages of products and services, with pretty good success,” says Robert Kazanjian, a professor of organization and management at Goizueta. “Their strategy seems to be working.”

Yet the latest scandal will likely result in more changes to the board, notes Sheth, which should result in the company bringing on leaders who are more attuned with what the company is today.

Sheth believes that HP’s future lies in three different streams – first, in its popular line of printers. The second stream is in selling printers and PCs in emerging markets, perhaps as integrated units. “The number of units they can sell in the China and India markets is absolutely mind-boggling,” he says. The third revenue stream is in servicing main frame computers installed by HP that are still in place in many large corporations.

Beyond changes in the board room, the other lasting impact of the scandal is likely to be a greater respect for in-house counsel, both at Hewlett-Packard and other Silicon Valley companies, says William Carney, a professor of corporate law at Emory’s School of Law.

“Companies take their outside counsel seriously,” notes Carney. “They take the guy who charges $600 an hour seriously, but they’re far less likely to take their inside general counsel seriously, which is a big mistake.”

This scandal could raise the level of respect for inside lawyers, Carney says, since the whole incident might have been avoided if HP’s in-house lawyers were informed about them earlier. “This I suspect will do it, not just at Hewlett-Packard but I expect at other companies.”

Few professors believe that the Dunn scandal is likely to have a negative impact on the company. Kazanjian notes that this scandal is different from some of the other high-profile corporate scandals in the recent past, in that the boardroom antics haven’t called into question the character of the entire company. The questionable actions don’t involve core aspects of the company’s business, he says, as turned out to be the case of Enron. However, he acknowledges that it is possible that the scandal is not over yet. “You can never predict where these things will go,” he says.

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