Governance Lessons from HP

Editor’s Note: This post comes to us from Elise Walton. Ms. Walton is a consultant specializing in corporate governance, strategic organization design and executive leadership. She was formerly a partner at Oliver Wyman for over 18 years, where she led major projects and served as the Corporate Governance practice leader.

HP has provided some interesting summer reading, which will apparently continue well into the fall. HP commentary covers the spectrum of opinion on corporations, executives, and stakeholders. The billionaire attacks the board for dismissing a CEO committed to shareholder wealth. Professors applaud good governance in dismissing a rogue. A shareholder sues over exit pay and labor asks why the CEO wins when jobs suffer. Competitors swipe at weakness; the press focuses on fumbles. Across the many views, the CEO is pre-eminent.

HP market value declines by $15 billion in the three weeks following the CEO departure. Tuesday’s uptick in HP’s stock price is explained on the message boards –the board has decided on the new CEO. The market speaks – it’s all about the CEO.

Yet, as if in spite of the missing CEO, HP keeps moving the ball down the field – winning the 3PAR bidding war (also acquiring Fortify and pursing ArcSight), reporting earnings, initiating a stock buyback, signing up customers (US Airforce, Thorntons and GS1), rolling out a hot new back-to-school lineup including a 3D computer – and even suing the departed CEO. HP is not missing a beat.

Whether HPs actions are the right actions isn’t the point. All corporate decisions reflect judgment and earn criticism. The point is that HP is acting coherently and swiftly. It’s acting like, well, there’s a CEO. With only an interim CEO. Cathie and team are executing – on strategy and are on plan.

And as such HP offers some lessons worth reviewing – and extrapolating.

First, HP is a well-run, professional corporation. HP handles over a billion financial and customer transactions annually, holds over 6,000 patents, and organizes the activities of 300,000 employees across 5 continents. Well-designed structures and processes organize decisions and execution – around strategy, budgets, product road maps, supply chain efficiency, customer acquisition and retention, talent development and many other vital functions. It’s not just a CEO with good reading glasses doing all that.

In a well-run professional organization, ideas win on merit not based on who said them. And no individual – even the CEO – is above the law. When too much power accumulates in one place, it undermines the professional organization. Professional organizations have self-regulating processes – like audit, like finance, like legal, like HR. It’s no surprise that the finance function has provided a strong backbone for HP. It’s no surprise that HP’s General Counsel, acting according to his professional ethics and principles, had to inform the board of investigations.

Second, HP has good people. HP has leaders everywhere. HP executives who work 3 levels below the CEO don’t get much media attention, but they accomplish amazing things HP. In 2004, Cathie Lesjak was SVP of Finance and Treasurer. As a high potential, she participated in several leadership development activities, including a stint on the Adaptive Enterprise Strategy team. She brought her financial skills and corporate perspective to improve Enterprise sales to customers – and broadened her perspective on HP well beyond the treasurer role. The development investment paid off for HP and Cathie. There are many more like Cathie – and these are the people making HP run, not the CEO.

And third, HP has strong collective leadership capability. Collective leadership capability is the capacity of a group of executives to work together to produce beneficial outcomes. This requires a common vision, trust and a culture that sets the ground rules for collaboration. It assumes good processes and people. The 3Par bidding war involved many functions and required fast decision making across departments, and the ability to rely the judgments of others. Old theory says the big boss resolves conflict and directs the decision making across all these departments, but new theory finds other ways to coordinate decisions and actions. In HP’s case, it’s the fabric of the company.

When you put these together – a professionally run organization, good people, and collective leadership capability – you get a well-run institution. As outstanding and settled lawsuits attest, there are different opinions about whether HP does everything right. It does not. But the well-run professional organization catches a lot of the things it’s not doing right and takes corrective action. HP is the self-regulating, professional organization at work. The case of Mark Hurd’s dismissal shows just that.

* * *

This brings me to a few simple suggestions for the board of directors to keep the HP strong by building on strength.

First, appoint a non-executive chair and institutionalize it in the by-laws. HP can lead by institutionalizing this good governance practice, which is common abroad and increasingly in the US.

The non-executive chair title , stronger than the current lead director nomenclature, clarifies the leader’s role with the board, management and external stakeholders. Second, the title conveys gravitas that can help the leader get work done. Third, the non-executive chair role institutionalizes power sharing, and reinforces the professional culture HP has cultivated. Finally, it’s a good test for the future CEO – if you have e a CEO candidate who demands both Chair and CEO titles, get another candidate. The next CEO best be able to partner.

Second, give insiders an edge as in your CEO considerations and elsewhere. The CEO may be already picked at the time of publishing, in which case, be sure you have good internal candidates for the next transition: CEO succession planning should be job one for the board and the new CEO.

Favor insiders because, while some outsider CEOs have built long term success, growing evidence shows insiders are a better bet. According to research published by Per-Ola Karlsson and his colleagues at Booz Allen, insiders have produced superior shareholder returns in seven of the last 10 years, averaging 2.5 percent; with outsider-generated returns averaging 1.8 percent. And insiders are less likely to be dismissed. And insider pay packages are less grand (every quarter Cathie fills in for Mark, HP saves somewhere around $15 million). Averages aren’t the whole story, but with HP’s tumultuous track record of external CEOs, perhaps it’s time to try an internal one. IBM’s CEO Sam Palmisano, an apprentice insider CEO, gets one tenth the publicity and half the compensation of HP’s recent CEOs, but IBM and its shareholders have quietly thrived during his tenure. Where an insider seems weak, surround him or her with complementary strengths – perhaps matching an operationally strong CEO with a visionary non-executive Chair.

Promoting internal candidates does a lot for morale and for continuity – and will build those sub C-suite leaders and re-instate HP’s as a talent builder not a talent buyer.

Third, pay attention to talent management in the organization in addition to the traditional financial and governance topics. The board regularly oversees tradeoffs – between short term and long term, among investment options, across businesses and functions and so on. Some tradeoffs involve people: layoffs and salary cuts may create value for customers (via lower prices) or shareholders (higher margins), but that value gets transferred away from HP employees. Good people and collective leadership create sustainable growth and performance; they are assets that, once lost, are hard to rebuild. In driving strategy and performance, consider the trade-offs between value created for shareholders and customers versus the longer-term impact on the culture and employee good will.

This final lesson is really for all of us, for the investors, bloggers, analysts and beach goers who sit on the side and prognosticate about HP and CEOs: we need to look at the institution as more than CEO, and more than the earnings releases. The folks at One-Report and Global Reporting have broadened the corporate reporting footprint to include sustainability metrics; the NACD Blue Ribbon Commission Report 2010 recommends boards use broader performance metrics, including human capital metrics. These are the kind of new tools that illuminate a third bottom line worthy of consideration. HP should report to the market using these types of broader metrics, and the pundits should review holistic data before jumping to conclusions based on a single individual (even colorful characters like Larry and Mark).

As an institution, HP creates value for our society – for its customers, its employees, its communities and its investors. While we can find a lot of faults with our large institutions (and there are many) we need to recognize the value created by many and for many.

And the board should keep building a company that is more than the CEO. After all, that’s what shareholders, customers and employees really need. And that’s what future shareholders, customers and employees will thank the board for.

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  1. Andrew Clearfield
    Posted Saturday, September 25, 2010 at 12:00 pm | Permalink

    Thank you for this much-needed piece, Ms. Walton! I couldn’t agree more. Too many investors have this childish fixation upon the identity of the CEO, when what will ultimately drive shareholder wealth creation (or destruction) is the corporate culture. Once a good corporate culture is in place, the most significant difference a CEO can make is by destroying it—which external hires are much more likely to do.

    It is possible for even a very successful company to stagnate if it becomes too inward-looking and entrenched in its ways, but this really means that the corporate culture is gradually degenerating. Even so, a violent shock from outside, without enough attention to what there was in place before the new CEO took over, will usually be value-destroying. A sick organism must be treated organically, not just given a ‘brain transplant’ and told to start life over. CEOs aren’t gods—even if they’re sometimes paid as if they were—and they have to be conscious of the limits on what they can do, as do the boards who hire them. The notion that one man can single-handedly remake a company in his own image is another of those childish delusions that afflict our business culture—except that this one can destroy lives, as well as market capitalization.

    If more investors paid attention to what goes on within the company, as opposed to treating it as a black box with a few inputs, a few outputs, and a slick photograph of the CEO pasted on the outside, equity valuations would be better and more stable. On the other hand, this institutionalized insanity is what creates opportunities for excess returns to be made from capital markets, so maybe we should keep quiet and just let the silliness continue. Except that it is so costly to the broader economy . . .

  2. Susan Bowick
    Posted Monday, September 27, 2010 at 9:04 am | Permalink

    As the former EVP of Human Resources and Workforce Development at HP, I offer a hearty HEAR HEAR to the points Elise Walton presents in the HP CEO debate. The development of HPs professional leadership depth took us a number of years and was a conscious, supported effort. And the mix of talent from various global organizations, functional areas and gender-ethnicity-sexual orientations all working together across boundaries has proven to be the real strength of HP.

    When linked together with solid processes, open communication and a trust in employees, the collective talent and internal leadership
    has allowed HP to reinvent itself many times, deal with proxy drama, complete acquisitions, beat competitors, satisfy shareholders. THIS STRENGTH AND CONTINUITY isn’t the sexy headline grabbing media fodder that grabs headlines, but I take my hat off to the leaders inside HP who get things done, day after day, taking care of customers and delivering results.

    And, I hope HP’s Board wises up and pays attention to both the WHAT and HOW the new CEO gets results. And, that there is a balance between CEO and naming a Non Executive Chair. AND most of all, that the Board hires an HP insider who will just keep on delivering results and leading the company through its next reinvention.

  3. Jeffrey Sonnenfeld
    Posted Monday, September 27, 2010 at 10:26 am | Permalink

    WELL DONE! This is an excellent piece. I’ve known many top leaders from this firm and closely followed the mmoves of the HP board – sometimes first hand.

    Too many in the media fell victim to mob pressures from Silicon Valley gossip circles viilfying this largely new board of this great enterprise ironically just as they showed the courage and character needed years earlier by the board.

    Yes, the board was smart to celebrate long term principles rather than short term performance. Frequent messianic instincts of board to rush to the outside to solve internal leadership challenges, undercut internal leadership develop programs, demoralize internal talent, undermine a high commitment culture, and over-value the celebrity names from the outside where our performance data is weaker and the bias towards over attribution of successes to grandiose individuals is very dangerous.

  4. Lela Tepavac
    Posted Wednesday, September 29, 2010 at 11:45 am | Permalink

    Very insightful and important – thank you Elise for writing this great piece. HP is a (rare) example of a company where purposeful, long-term investments in people and organization have resulted in a truly innovative enterprise. In my research and practice on innovation and fit leadership I’ve seen many organizations that seek innovation to grow and prosper. But only few succeed. As in HP example, it takes a systemic approach to build an organization that enables innovation. The key success factors are: a compelling innovation strategy, effective executive leadership aligned with committed board of directors, robust relevant systems and processes, flexible organization culture and, most importantly, empowered creative talent. All these elements should be assessed and integrated toward a common goal. Boards and investors must understand and actively oversee how the company invests and assesses its innovation potential – not just the celebrity quotient of the CEO!