Dunn to Step Down as HP Chairman After Spying Scandal

Published: September 14, 2006

by Timothy Prickett Morgan

As we predicted might happen in last week's issue, Hewlett-Packard's chairman, Patricia Dunn, has succumbed to the pressure of the HP board of directors and will step down from that post in January 2007. Her demotion to a regular member of the HP board follows in the wake of a scandal where she approved of spying on board members to discover who was leaking information to the press from board meetings.

As it turns out, HP had hired a firm to get access to phone records of board members, other HP employees, and members of the press, and that firm apparently used illegal methods, known as "pretexting," to obtain that information. Pretexting means pretending to be someone else to get information. The heated debates around the fate of the leaker was what prompted Tom Perkins to quit the HP board in May. The leaker was none other than board member George Keyworth, a 21-year veteran who, with board member Tom Perkins, vetted the hiring of Mark Hurd as president and chief operating officer last year. Keyworth refused to quit when confronted by Dunn. Perkins, of course, is famous in Silicon Valley. He was an early employee hired by Bill Hewlett and Dave Packard when HP was young, and he was the first manager of HP's computer business as well as one of the founders of Silicon Valley venture capitalist firm Kleiner Perkins Caufield & Byers.

HP announced last week that Hurd will be given the additional title and responsibilities of chairman of the board in January--provided that shareholders and institutional investors do not push HP to create a more independent board. Heyworth also announced that he would resign, and Dunn and Hurd apologized to HP employees, board members, and members of the press who were spied on.

With so many stock scandals going on these days in the IT industry, having a board of directors that is separate and distinct from the people who run the business is a good idea, which is why choosing Hurd as chairman may have been a bad idea. While Hurd is certainly qualified to be chairman, it would probably be a better idea to pick someone from outside the company to do the job. This probably won't happen, however, now that Hurd has been tapped. HP cannot easily change its mind without showing weakness.

Of course, with the Justice Department, the U.S. House of Representatives' Energy and Commerce Committee, the Securities and Exchange Commission, and the attorney general of California all launching inquiries into the matter, this scandal is far from over. Pretexting is illegal in California, and many federal lawmakers want to make it illegal across the entire country. HP may have just given lawmakers the means to make this happen, which could be the only good that comes from this scandal.

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