Hewlett-Packard Co. has finally begun addressing the root of its persistent problems – its board. The flailing tech giant has paid too much for targets, skimped on R&D and flip-flopped on leadership and strategy. Its spectacularly dysfunctional board should shoulder much of the blame and needs an overhaul. Appointing heavyweight activist investor Ralph Whitworth as a director is a belated start.
HP’s shortcomings have come to a head in recent months. In August, the company paid almost $12-billion (U.S.) – a staggering 33 times earnings, according to Espirito Santo investment bank – to buy Autonomy, the latest and largest in a string of pricey deals. The board dismissed Leo Apotheker, the last chief executive, out of the blue in September after less than a year. Since then it has reversed a mooted plan to spin off the company’s PC division. Stockholders have suffered a 35 per cent decline in their investment since the start of the year.
One major responsibility of a corporate board is to appoint management. Sacking the past three bosses, as HP has done, looks like institutionalized carelessness. Two-thirds of the directors, including chairman Ray Lane and tech guru Marc Andreessen, have joined only in the past three years. But they’ve still been involved in the Autonomy purchase, Mr. Apotheker’s removal and the unconvincing choice of fellow board member and former eBay boss Meg Whitman to replace him.
Though a bigger revamp of the board is needed, adding Mr. Whitworth is a step in the right direction. His firm, Relational Investors, has a history of successfully taking on companies like Sovereign Bancorp, Home Depot and Waste Management, which suffered from empire-building delusions, excessive executive compensation, poor capital allocation or a combination of those failings. At Genzyme, Mr. Whitworth helped persuade bosses to focus on its profitable genetic disease division, and the company was sold earlier this year at hefty premium to Sanofi. Many of his tools are typical of the activist trade, such as threatening proxy fights if a company doesn’t cease strategies that destroy value and demanding the return of more capital to investors. But he has not been averse to companies investing in the right areas.
This kind of tough love sounds like the right medicine for HP. And better, given the recent turmoil, that Mr. Whitworth should apply it from within rather than publicly from outside. Of course he may meet resistance. And even if he can help straighten out the company’s priorities, it may not be sufficient – even smoothly run technology companies are prone to obsolescence. But Mr. Whitworth has a decent track record. HP may finally be on the way to getting the board it needs.