Corporate overreaction renews 'spirit of inquisition'

The Baltimore Sun

Early last year, Hewlett-Packard's board held a confidential retreat. A few days later, The Wall Street Journal's Pui-Wing Tam, quoting anonymous sources, told readers all about it, reporting that directors expressed concern about HP's stock price and discussed shifting some of Chief Executive Officer Carly Fiorina's duties.

The article enlightened countless people who have a stake in this important, publicly traded institution - workers, vendors, shareholders, bondholders, neighbors and competitors. Eleven million Hewlett shares traded hands that day, and the report soon proved correct, as Fiorina got canned.

Then the institution, as institutions often do, struck back. It grilled its own directors and, after a second leak this year, spied on them with a detective agency that misrepresented itself to obtain critical phone records, according to Hewlett filings with the Securities and Exchange Commission last week.

It was a horrifying overreaction. But there's a lot of that going around, a vigorous renewal of what writer Jacques Barzun calls "the permanent spirit of inquisition" in the halls of commerce as well as in government.

While the lessons of Enron and WorldCom suggest that public-company boards should be more open with the public, many corporations have apparently reached the opposite conclusion. They're still muzzling directors, referring board interview requests to PR flacks and trying to make sure what happens in the boardroom stays in the boardroom.

After investigating several directors, Hewlett fingered board member George Keyworth as the source of the second leak and asked the former science adviser to President Ronald Reagan to resign, according to SEC filings. He refused, saying he was elected by shareholders. The company pledged to withhold his nomination for re-election.

Two months ago, the parent company of Airbus filed a lawsuit and launched an internal investigation over who leaked minutes of a board meeting to Le Monde, the French daily. The minutes revealed critical news: budget overruns and delivery delays for the A380 "superjumbo" passenger jet.

Late last year, a big shareholder in Australia's Virgin Blue Airlines asked that country's regulators to investigate a board leak about a huge dividend that was about to be paid.

The shareholder, Chris Corrigan, also threatened to make directors disavow the leak in writing, saying, "We will see who is willing to lie under oath and who is not," according to The Australian.

A few years ago, Westar Energy, a Midwestern utility, paid an investigator $100,000 to try to trace leaks of negative information to journalists, according to an account of court testimony by the Kansas City Star.

What's especially galling is that these witch hunts are often portrayed as a way to improve corporate governance. The conflict that included persecution of leakers will help Hewlett become "capable of upholding today's highest governance standards" by making the board less "personality driven," Chairman Patricia Dunn said in a statement quoted by the Journal.

That's perfectly wrong. Better corporate governance is about increasing transparency for shareholders and shifting power away from management and toward independent directors such as Keyworth.

If there is such a thing as a corporate conscience, independent directors are it. Let them be independent. They ought to be speaking a lot more, and on the record.

"If you look at independent directors as less insiders and more outsiders, hell, yes, then they're supposed to be able to do that," says Ralph Ward, a consultant and publisher of Boardroom Insider newsletter. "I think the pressure is going to be there to allow directors to be more open. I don't think this is the last issue of the leaky board we're going to see."

You probably don't want directors starting blogs or blabbing about anything to anybody, but they won't.

None of the above disclosures involved trade secrets or anything else that hurt shareholders. Most items should have been officially announced long before they were leaked. What was Airbus doing sitting on blockbuster news about the A380 delay? How come Virgin Blue hadn't told shareholders about the big dividend?

Hewlett is in plenty more disarray now than when it had to worry about a few board leaks. The SEC and California attorney general are inquiring into potential improprieties of the anti-leak campaign and related board dissension, the company says. It wasn't just directors but also journalists whose telephone records were surreptitiously obtained.

Chairman Dunn is besieged. If Fiorina successor Mark Hurd turns out to be involved, he also could come under fire.

Take note, everybody, from Washington to Palo Alto: Obsessive secrecy is usually bad for its own sake, but sometimes it backfires on the perpetrators, too.

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