By Dominic Jones
Did HP’s Keyworth Really “Leak” Anything? |
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Amid the media storm over Hewlett-Packard’s spying scandal, corporate governance pundits like Nell Minow of the Corporate Library and Rick Steinberg of Steinberg Governance Advisors, Inc. say the media has overlooked the fact that an HP director leaked information. Both say this is a serious harm to companies and their boards. However, that is only true if the information given to reporters was confidential. In the HP case, former director George Keyworth has admitted to speaking to the CNET News.com website about the company’s strategy after attending a January 2006 board retreat. A review of the original CNET News.com article which sparked HP’s notorious probe finds that it contains no more information than had already been disclosed by the company or reported by the media. Indeed, shortly before the article ran, HP itself provided a wide range of information about the company’s strategy to investment analysts at the company’s major annual analyst day meeting on December 13, 2005 at which CEO Mark Hurd and five other senior executives gave analysts a complete overview of the company’s strategy. That was about three weeks before the board session in early January 2006. In the CNET article, an anonymous source (presumed to be Keyworth) mostly reiterated what was already contained in the HP analyst day presentations. Other information in the article was neither new nor meaningful. For example, the article said HP was frustrated with delays from Intel and planned to use more chips from its competitor, AMD. However, the Intel problems were not new. HP was being publicly attacked by Sun Microsystems at least two months earlier over the Intel Itanium chip delays. In November 2005, Sun issued a so-called ‘reality-check’ to clients about the issue. The only “confidential” information in the story related to the location of the board retreat and the fact that directors worked from morning till 10:00 pm, with breaks only for meals. Hardly market-moving information and probably reassuring to many shareholders who might wonder what directors actually do. Directors cannot reasonably be gagged from ever speaking about their companies to outsiders. Indeed, they can be valuable assets as ambassadors for the companies they help govern. In fact, HP has admitted using Keyworth repeatedly in the past to speak both on and off the record with the media. However, it says in this case the board believes he didn’t have approval. |
UNLIKE other elected representatives, directors of corporate boards generally have an appalling track record when it comes to staying in touch with their constituencies.
These men of woman are largely unknown to the people who elect them. Usually, the closest shareholders get to them is a couple of inanimate paragraphs in a gray proxy statement. If you’re lucky, you might get an airbrushed photograph on a corporate website.
Directors are almost never seen in public and I’ve yet to see one kiss a baby. Sometimes, as in the recent case of Home Depot, they don’t even show up at annual shareholder meetings.
Proxy changes will put directors on shakier ground
If recent developments on the corporate governance front are any indication, then directors should probably start behaving more like other elected representatives if they want to keep their jobs.
One way or another, shareholders are going to get a greater say-so in who and how people get elected to corporate boards. This is going to put directors on shakier ground and make their re-election much less assured than in the past.
If I was on a corporate board today, I’d be asking my fellow directors and the corporate secretary where our communications plan and budget are. What are we as a board doing to communicate with our voters? And, perhaps more important, what are we doing to encourage ongoing input from the people who put us here?
Yes, directors need to get their heads out of the rarified atmosphere of the boardroom and start engaging with the commoners. I’m talking about the majority of the shareholders, not their similarly out-of-touch institutional investor brethren, but the uncouth masses.
Opening up communication channels
Judging by the recent antics and pronouncements coming from Hewlett-Packard’s board, some directors need a good dose of the oxygen the rest of us breathe. This will help them understand what matters to us, help them make better decisions and have a better sense for who it is that they ultimately represent.
There a many ways for directors to open up the lines of communication. The Internet is an obvious place to start because it doesn’t cost a lot and can reach a lot of people irrespective of location or status.
Richard Breeden, a former SEC chairman, had the makings of good idea when he was charged with putting together a plan for bankrupt WorldCom. He called it an “electronic Town Hall.” Essentially, he was talking about a permanent web-based venue where directors could update shareholders on what they’ve been doing and shareholders can give directors a piece of their mind.
While Breeden saw the “town hall” as a formal part of the company’s governance, including as a mechanism for shareholders to have proposals included in the proxy statement if they achieved 20% support, it need not be so onerus or formal.
We’ve suggested that every board should have a blog where they can post information at regular intervals and request feedback.
The feedback is the valuable part of this. It gives shareholders – and other stakeholders for that matter – an opportunity to provide input. That input can help directors understand the sentiments of the people they represent. It also could diffuse some of the anger over controversial issues and demonstrate that directors are accessible.
Besides these two admittedly unconventional ideas, there are a wide range of more modest and decidedly easier things that boards can and should be doing to improve communications between themselves and their stakeholders. They range from improving online proxy statements to making corporate governance websites more dynamic and easier to use, to taking the annual meeting seriously on the Web.
Look around, inspiration is everywhere
Finally, it would do North American directors and boards well to be much less parochial in benchmarking their corporate governance practices. The work I do involves researching the communication practices of companies all over the world. I am struck by how many companies in Europe, and even Brazil, seem to be much more in touch with public sentiment than their North American counterparts.
Of course, there are some structural reasons for this, including mandatory gender diversity requirements in Norway to the co-determination model in Germany where silver-spoon directors rub shoulders with union shop stewards.
I’m not suggesting for a minute that American companies adopt an entirely new model, just that they borrow some ideas from outside their backyards.
Reading the coverage last week on HP’s spying scandal, I can see the fallout being that many boards will be taking steps to lockdown information, gag directors and inventing new ways to fire directors who talk to the press.
Unfortunately, that would be precisely the wrong reaction. To my mind, none of what occurred at HP would have happened if the company’s board had been more open in its communications.
Would there have been any need for director George Keyworth to talk to the press when they called in January 2006 if details of the board’s strategy session had been made public? Indeed, would the press even have called him?
It’s worth thinking talking about.
With large institutions holding or controlling the bulk of stock, do you really think many boards will feel the need to communicate with commoners? After all, most of us hold our stock through mutual funds or pension plans.
The ownership concentration among a small group of institutional owners puts boards at risk.
Big mutual funds are susceptible to outside influence because they rely on deposits from a wide range of customers (the public). They are sensitive to public sentiment for marketing/perception reasons. They will act in their own best interests, which is to protect and grow their assets. If its a choice between their own popularity with clients or backing an unpopular board, no guessing which way they will vote.
Their sensitivity to general sentiment is magnified since they were required to disclose how they vote at annual meetings. Activists really haven’t figured out how to use this, but they are starting to.
So by ignoring retail investors and other stakeholders, boards ignore the very audience their biggest shareholders care about the most.
Savvy shareholder activists understand this dynamic. If they can create sympathy for their cause with the media and public, they can make it very difficult for the biggest investors to stand by the board and management.
The bigger the investor, the more pressure is on them.
I have touched on this in more depth in two articles about high-profile proxy fights:
Web-based campaigns a wake-up call for corporations (Save Disney)
and
Don’t be a sitting duck for activist investors (Heinz)
Beyond the voting sensitivity issue, another incentive for boards to communicate better is that being trusted in the capital markets spills over to corporate reputation in other areas. Consumers, suppliers, partners, governments, NGOs, all are influenced by companies’ reputations. This is something pension funds are sensitive to.
A board that understands the perspectives of these constituencies is likely to make decisions with an understanding of the potential ramifications for the corporation’s reputation.
This article was to say that directors make bad decisions, even seemingly childish ones like spying on one another, in part because they have become too far removed from real world. And as the HP debacle ably shows, that is a liability to the companies they govern.
[...] Corporate Boards Should Communicate More [...]
[...] In her article Warner quotes several people, including National Investor Relations Institute CEO Nancy Humphries as saying the solution is for directors to communicate clearly and more often with their shareholders. I agree they need to do that, as you can see here, here and here. [...]