Bad Boys, Bad Governance

The TakeAway: Lapses in Personal Ethical Conduct Often Point to Bad Corporate Governance

Late last Friday, in case you missed it, Hewlett-Packard fired its CEO Mark Hurd, amidst charges of improper behavior.  Michelle Leder of footnoted.org noted that HP buried the announcement of Hurd’s departure in an SEC filing made exactly seven seconds before the SEC’s closing time.  At issue: a female contractor accused Hurd of sexual harassment.  The company‘s internal investigation found no evidence of that, but did find falsified expense reports designed to conceal his “close personal relationship” with the contractor.  The HP board asked for Hurd’s resignation due to his violation of its business conduct code, a standard they said would apply to any employee.  He leaves with a purported $50 million severance package.

The lesson for corporate boards: ethical lapses at the top often point to governance lapses by the board. On the ethical lapse front, for example, The Wall Street Journal pointed out that former BP Chief John Browne resigned in 2007 after he admitted lying to a judge while trying to prevent a British newspaper from exposing details about his personal life.  The article lists a number of other fallen CEOs, including:

• Mark Everson of the American Red Cross, who was fired in 2007 after revelations that he had a “personal relationship” with a subordinate employee;

• Chris Albrecht of Time Warner’s Home Box Office unit, who left the company in 2007 over an incident for which he pleaded no contest to battery against his girlfriend; and

• Harry Stonecipher of Boeing, who was replaced in 2005 after emails revealed his relationship with a female executive at the company.

In an earlier time (call it the Mad Men era), such breaches were not uncommon, but they typically remained hidden from public view.  Nowadays, it’s more difficult to draw the blinds.  In each case, boards are faced with the same decision:  What to do, and how to do it?  Another question:  How closely should boards monitor management behavior, to offset such risks?

Some commentators such as Yale’s Jeffrey Sonnenfeld praised HP’s decisive action; others found it too harsh.  The most thoughtful views come from TheStreet’s Eric Jackson, The Corporate Library’s Nell Minow and Doug Y. Park of DYP Advisors, who placed the current fracas in the context the HP board’s long history of failed due diligence (what if the woman had not come forward? Park Tweeted on Sunday).  “The HP board has been a serial corporate governance offender, so we should not be surprised that they have bungled this one,” Minow blogged yesterday.  Jackson flagged Hurd’s excesses almost a year ago, and the board’s failure to act because he was delivering big numbers.  “If you’re piggish about the small stuff like expense reimbursements, you’re going to be piggish about the big stuff,” he wrote.

The culprit: cozy relationships between CEOs and boards.  The remedy is not just adherence to higher standards of ethical behavior.  The remedy is a culture of integrity, including better boards and better corporate governance.  Throw in greater shareholder involvement in the nomination and selection of board directors, who in turn are responsible for appointing and overseeing CEOs and top management, and you’ve got a chance to improve the tone at the top.