The Board’s dilemma

I wrote this article to address one of the many difficult decisions a Board has to make when it is confronted with a conflict between corporate values and financial performance metrics. They have to make quick choices in a complex, ever changing, and competitive world. In fact the perplexing challenges they face can sometimes seem like a choice between the devil and the deep sea. You are damned if you do and damned if you don’t.

Let me explain. Oracle’s CEO Larry Ellison in a letter to the New York Times said “the HP board made the worst possible decision since the idiots on the Apple board fired Steve Jobs many years ago.” In his opinion the board was wrong to force the resignation of their CEO Mark Hurd for what he obviously considers at the most to be a minor transgression.

The HP Board was forced to launch an investigation into the behavior of Mark Hurd because of sexual harassment allegations made against him by Jodie Fisher, an external contractor who helped organize executive events for HP. Interestingly they did not find anything to substantiate this claim, but they stumbled upon an accounting malpractice that eventually led to the CEO’s resignation. Apparently, Mark Hurd had submitted expense reports that hid his relationship with Ms Fisher. In simple words he was claiming meal and travel expenses that he should not have because they were incurred in his personal capacity and completely unrelated to the company’s business activities.

Larry Ellison rates Mark Hurd as an accomplished CEO (as does the HP Board) and letting him go was not in the best interest of the shareholders, customers, partners, and employees. This would have a negative impact on the financial performance of HP and in light of its magnitude, the error of judgment shown by the CEO was something that could easily have been sorted out possibly with a rap on the knuckles.

The essence of corporate values
Corporate culture is a way that companies accomplish their strategies. Hewlett and Packard formalized the HP Way as a management philosophy in 1957, the year the company went public. Integrity and Trust were strong pillars on which the firm built its cultural foundations. Belief in people was a large part of the culture and a persons’ credibility was built around his words and actions. However, with the changing dynamics of the industry and in particular the personal computer, many policy changes had to incorporated over the years which slowly but surely eroded the company’s long standing philosophy.

The HP Board as it contemplated the actions of its CEO had to consider the short and long term ramifications of their decision in the best interest of the organization. On the one hand there was the obvious short term consequence of losing a very competent CEO with its ensuing negative impact on financial performance and the sacrificing of shareholder’s interests in particular. On the other hand, there was the genuine long term risk of doing serious damage to the culture of the organization.

The Board’s role is to provide entrepreneurial leadership, set strategic goals, and ensure that financial and human resources are in place to meet the organization’s short and long term objectives. They also need to set the company’s values and standards that guide employee behavior and establish a framework of effective controls to assess and manage risk.

Entrepreneurial leadership versus organisational values
Clearly Larry Ellison is telling the HP Board to give greater weight to its entrepreneurial leadership role, as the downside of losing a good CEO and the cost of replacement is far too high and should not be compromised for something as trivial as a false expense claim. I guess he was also possibly keeping in mind the turbulence during Carly Fiorina’s term as CEO and the performance stability that Mark Hurd had achieved over the years. And given the ever changing and competitive nature of the industry, in the long run, there would be no long run if the short run was not taken care of first.

But the Board is also assessing the issue from the perspectives of corporate culture (values and beliefs that drive behavior) and associated strategic and operational risks. Let us consider the risks first. What is the probability that if the CEO was let off (because he was a top performer) there will not be a message that goes out to the rank and file in the organization that as long as you perform well you really don’t need to worry too much about honesty and integrity and trust in this organization? Further, what would be the magnitude of impact on the organization’s results if that scenario came to pass? The Board’s unanimous answer was that the probability of this kind of behavior occurring again was high and the magnitude of impact could be high too. Hence they did not have the appetite to expose the organization to this level of risk. They were in actual fact making a decision in the best long term interest of the shareholders.

Protecting integrity and potency of leadership
On the issue of the company culture, the Board had to safeguard the “way we do things here” aspect of running the organization. Setting the tone at the top was critical to shaping the values and beliefs of the HP leadership and their teams around the world. Leaders, and their ability to motivate, inspire, and coach their followers would depend a great deal on their trust quotient which is directly influenced by their credibility (what they say) and reliability (what they do).

What the Board has voted for is to protect the integrity and potency of their leadership and in doing so opted for what Jim Collins (Good to Great) refers to as Level 5 leaders who channel their ego needs away from themselves and into the larger goal of building a great company. They have also demonstrated what Jerry Porras (Built to last) believes – that a strong, almost “cult-like” culture is one of the factors contributing to the overall financial success of visionary companies.

Maybe the HP way is alive and well after all.

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