Monday Note

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And rightly so.

You recall: Last August, HP’s Board of Directors dismissed its wunder-CEO, Mark Hurd. Well-loved by Wall Street, although not so much by employees, Hurd turned HP around after the lackluster Fiorina years. He made acquisitions, cut costs, and put the company at the very top of the IT industry. But HP’s fearless leader was accused of having entangled himself, carnally and emotionally, with a female “marketing contractor”, and of having engaged in a few financial peccadilloes in the process of covering up the relationship.

I’ll hasten to add that Hurd reached an amiable—and solid—settlement with the former soft-porn actress. By “solid settlement” I mean we’ve heard exactly nothing from the aggrieved woman, or from Gloria Allred, her highly expressive Hollywood attorney. (As a self-described “Fearless Advocate for Justice and Equality”, Ms. Allred appears to dig gold on behalf of the rejected/dejected paramours of media and sports celebrities.)

While Hurd tried to do the right thing after his alleged mistakes, HP’s Board and management repeatedly and needlessly pilloried him, barely stopping short of accusing their former CEO of fraud. (See more sorry details in this Monday Note.)

All this led Larry Ellison to publicly lambaste the HP Board for kicking Hurd to the curb—and to promptly hire him as co-president of Oracle.

Ignoring the “when you’re in a hole, stop digging” maxim, HP doubles down and sues Hurd. Their complaint? As Oracle co-president, Hurd will inevitably misuse HP’s confidential information and cause his ex-employer grievous harm.

Larry chuckles and lashes out again. He calls HP’s suit vindictive, which is true, and adds that it will make it impossible to continue as business partners, only somewhat true as each had already recently moved into the other’s business. Oracle bought Sun and HP got into software and services by acquiring EDS.

A few days later, on the eve of Oracle’s OpenWorld, the suit is settled. HP’s pain is salved by a few million dollars, and the threat of the misuse of confidential information is suddenly, mysteriously no longer an issue. One wonders about the damage HP’s Board did to the company’s reputation by treating this alleged sinner in such a bullying and ultimately lame way.

While Hurd stays out of the limelight plotting Oracle’s next moves, HP directors keep stoking the coals for their critics. In their quest for a new CEO, the Board rejects internal candidates for the third time and pick an outsider: Léo Apotheker, ex-CEO of SAP Germany. This leads to another salvo of Ellison jibes. (When Larry calls himself “speechless”, you know he’s having a good time.)

But wait, there’s more.

What does the Board do besides recruiting Apotheker? They hire Ray Lane as Chairman. As the link to his Kleiner Perkins bio proves, Lane is, without a doubt, an “industry figure”, the type Kleiner Perkins, one of the largest VC firms in the world, likes to co-opt. But the slick KPCB bio (there is, significantly, nothing on him on Wikipedia) omits an important episode: Ray’s acrimonious departure from Oracle. The more charitable souls among us hope that everything is forgiven and forgotten. But knowing the protagonists, Larry and Ray, a more realistic view is that HP’s Board brought Ray in with a specific intent: They want to strengthen the team for a fight against Oracle.

There are three problems with such a move.

First, we now have two muscular venture capitalists on HP’s BoD: Lane and Marc Andreesen, from Andreesen Horowitz (as an aside, admire the firm’s spartan site). While some argue that it’s great that HP has such connections in the VC world (as if any executive or Board member couldn’t get us VCs to return their calls), there’s a governance problem. There will be many situations in which Mark’s or Ray’s existing investments and connections will raise conflict of interest questions; they won’t be deemed independent directors.

Second, Ray Lane’s appointment as HP’s Chairman could be viewed as waving a red cloth in front of a bull, as needlessly antagonizing Oracle instead of calming things down and returning to a normal level of coopetition. If HP starts a real fight, the Valley’s money is on Larry.

Third, why saddle Léo Apotheker with such a weighty Chairman? Knowing Ray, one wonders how he’ll manage to keep himself from getting in Léo’s way.

This isn’t to say that Léo is a wallflower. SAP’s supervisory board didn’t “renew his contract” earlier this year because Léo’s grip was deemed, rightly or wrongly, a little too firm. I’ve only met Léo socially, in Paris, and I’ve been impressed by the breadth and depth of his intellect, his fluent command of industry issues. He’ll bring a welcome international perspective to our sometimes provincial Valley.

And he’s got his work cut out for him.

HP employees are unhappy. An April 2010 survey indicated that about two thirds of them would quit if an opportunity arose. (See another related survey here.) Six months later, agitated by the what and the how of Hurd’s departure, and by the Board’s rejection of internal candidates, the grumbling in the HP ranks has gotten louder: “What do I or any of us think of Mr. Apotheker? What does it matter? HP has stopped caring.”

Of course, this could prove to be a golden opportunity for the new CEO. Serious, believable words and genuine changes could “violently” turn morale around and unite HP workers behind the new leader.

To help matters—or complicate them, I’m not sure which—HP’s new boss will have an opportunity to reassess the company’s strategy. Under Fiorina and Hurd, the company grew through acquisitions and by cutting costs. There were some unfortunate buyouts, such as Compaq, but others were more felicitous: EDS, ArcSight, and after a heated contest with Dell, 3Par. (You can find an interesting list of HP acquisitions over the years here.)

The cost cutting, on the other hand, simply went too far: HP now spends about 2% of its revenue on R&D, dangerously low, many think. (Oracle spends more than 13%…)

Then there are the products themselves. While storage systems (such as 3Par’s) mesh well with HP’s servers and with the HP Enterprise Services business, one must question how HP will make any real money in increasingly commoditized businesses such as printers and PCs. And there are the puzzling prospects of WebOS smartphones and tablets after the Palm acquisition.

How did this happen? Simple. HP’s Board failed at a key task: Managing bench strength, looking for and grooming enough inside talent to provide an orderly succession in case the CEO leaves, willingly or not, by retirement, accident, or indiscretion. Jack Welch, the iconic ex-CEO of GE—sometimes called the colossus with the penis of clay for his late-in-life sexual escapade—slammed HP’s Board for their constant lack of forsight: “They have not done one of the primary jobs of a board, which is to prepare the next generation of leadership.”

Having failed at the task for the third time, HP had to resort to an outsider, and has done a great disservice to employees and shareholders. Will they, now, really set to work with their new CEO, or will they continue to play the old Board game?

— JLG@mondaynote.com

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