HP, Apple and Why Firms Don't Often Do the Right Thing

Rob Enderle
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Last week it was all about Mark Hurd and this week starts off with a lot of focus on HP's board, with suggestions that the members should step down. IT Business Edge's own Lora Bentley asks whether they are to blame for Hurd's lack of judgment, and I'm starting to agree with blogger Don Tennant that Ann Livermore may be the best choice for Hurd's replacement. Underneath these suggestions is the belief that the board should be more transparent because, as each piece of information leaks out, it makes the board look dishonest in its initial pronouncement surrounding Hurd's firing.


A few months ago, Apple was pounded for using a subcontractor who employed underage workers and was painted as a company that cared more about its bottom line then the health and safety of children. Both events resulted from decisions that appear to have been right, but the companies got pounded anyway. So it is no wonder that we don't seem to get many public, timely and right decisions of this type. Let's explore that. We'll start with Apple.

Apple's Child Labor Problem


To be clear, the children identified weren't under 10; they were as young as 15 and often the only earner in their respective families. And the problem was identified through an internal audit. Apple, after doing a review, found that one of its vendors was not adhering to Apple policy and identified, reported and corrected the breach.


This is the way things are supposed to work, but the company was blasted just as if an enforcement agency had discovered it and Apple had tried to cover it up. This media behavior works against transparency because it clearly punishes the company that is being transparent. It promotes the idea that it's better to not look for problems or to not report them and to correct them quietly.


If you had a child who had discovered a mistake made inadvertently, and had a plan to correct it and you punished that child harshly, that child would likely never share this information with you again. We appear to be training our corporations in similar behavior.


HP Board's Tough Spot


HP's board was tied tightly to Mark Hurd, who had significantly increased compensation to board members during his term. The amount is estimated to be in the neighborhood of $300,000 a year for not a lot of work. Should he be removed, there was little doubt that some of the board members would be replaced by his successor. Even if they stayed, there was a strong possibility that the new chairman and CEO would see the board income as exorbitant and reduce it substantially. This was one of the recommendations when Hurd himself took office, setting a sort of precedent (covered in the book "The Big Lie." I'm about halfway through it, and it is fascinating). In short, there is a significant financial incentive for them to not mess with this lucrative arrangement.


In addition, Hurd was the chairman, which meant discussions surrounding his replacement had to take place outside his presence and with members of the board who might be loyal to him. The board has had leak problems, which could have resulted in an early PR catastrophe.


In the end, HP found out about the situation from Jodie Fisher's attorney, built a defensive case to protect the company from the litigation, and then Mark Hurd did an end run, paying off his accuser, and effectively denying HP's board access to the information. But without that information, HP only had allegations. Had its internal investigation concluded there was sexual harassment, the related information would have been used against it to determine damage. Much of the information was undoubtedly controlled by Fisher's attorney anyway.


Additional Problem Emerged


There appeared to be significant governance problems and executive salary containment problems behind the scenes with employee morale reported by some insiders. A recent review of competitive numbers put HP well behind IBM and Cisco in key employment areas (scroll down for linked text), suggesting HP would bleed employees during the recovery. For instance, the marketing director, David Roman, responsible for the very successful Apple-like HP PC campaign, left to work for Lenovo.


Finally, in putting together the information package, for fear of a leak (leaks have plagued HP for years and Hurd put in place a termination policy for anyone caught leaking), the board had to use an outside resource and wasn't able to bring HP corporate resources online until after the announcement, significantly increasing the level of difficulty and risk for the board members.


Still, upon being made aware of the coverup and having access to what appeared to be falsified expense reports, HP lost trust in its CEO and accepted his involuntary resignation. In effect, the board members put their own income at risk to do the right thing for the company.


Could they have done a better job? Certainly, but to contain leaks, they were barred from many of the resources they would have needed to do it.


Wrapping Up: We Seem to Get What We Deserve


If we pound on companies like Apple and HP when they actually do the right thing, albeit imperfectly, the result isn't a better-run company, it is a less transparent one. People work to avoid the pain and actually become less transparent. In fact, we teach them to distrust the very process of transparency and avoid it just as we, as investors and customers, seem to be asking for more of it. Even today, an Apple employee was caught in a very difficult-to-identify scheme to take millions of dollars illegally. While Apple clearly did report and handle it properly, there is a risk that Apple's image will be damaged by it.


In the end, much like we'd hope to do with a child, when a mistake is made, identified, and fixed, the firm should be praised for handling it properly because people are human and mistakes are made. If we punish them regardless of their mitigating actions, we'll only get less transparence and more bad behavior. That wouldn't be a good trend, but we seem to be working hard to earn it.

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Add Comment      Leave a comment on this blog post
Aug 19, 2010 12:41 PM alima amoser alima amoser  says:

I'm not sure how many they will have but last time I was in line for the 3G, I saw the guy at the apple store came out to count how many people in-line to let them know if they will get the iPhone or not and it was about 40 people in-line and he said everyone who was in-line will get one.

Acai Optimum


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