• 02 Sep 2010
  • What Do You Think?

How Transparent Should Boards Be?

Summing Up: When should boards fire CEOs? How transparent should boards be? Jim Heskett's readers are divided as they look at the HP/Mark Hurd case. What do you think? (Online forum has closed; next forum opens October 8.)
by Jim Heskett

Summing Up

The dilemma posed by the HP-inspired vignette of a CEO allegedly failing to adhere to company values divided respondents to the September column. Two schools of thought evolved.

One was that the CEO should be fired for cause with only secondary concern about public perception. As Ratnaja Gogula put it, "While protecting the short term interests of shareholders and avoiding a depression of stock prices may be a tempting recourse for a Board member to take, long-term shareholder interest is what the Board needs to take care of." David Physick was more succinct: "In the specific case of Acme, sack the guy… If the contract is watertight, be prepared to fight." In chastising those taking a more tentative position, Phil Clark asked, "Is leadership (presumably referring to that of both the CEO and the board) defined by the dollar or by character?" Hal King said: "When culture and strategy collide, culture always wins. End of story."

A second group supported some kind of discipline without dismissal, as well as a more discrete approach to the process. "You don't cut off your nose to spite your face," said John de Vhendt. Most, however, attached conditions to this course of action, typically involving some kind of financial penalty. For example, Walter Blass suggested "a negotiated skipping of his bonus, or stock options…" Deepa Ramamoorthy suggested that the board "also significantly reduce or revoke the severance package of the CEO." To the extent possible, these actions would presumably be carried out quietly.

While maintaining that the CEO should go, others recommended a more quiet approach, neither imposing a firing for cause nor publishing the reasons, paying off the CEO, and sending him on his way. In John Caddell's words, "The CEO made mistakes. The board did as well-the hired the wrong guy… Both need to take their medicine… So, the answer is: pay the man now. Move on." In Guishan Longani's words, " … avoid the public and court drama that would hurt the company and its shareholders."

Others raised questions that would have to be answered before deciding what to do. They included: How good has the CEO's performance been? (Noaman AlSaleh) How clear is the organization's contract with the CEO? (S. Reid) How highly is he or she regarded in the organization? (Lance Lawler)

What comes across quite clearly is that there is no "best practice" manual of instruction for boards when it comes to dealing with CEO transgressions. That's perhaps regrettable. Devin Patel summed up the complexity of the issue by writing, "After reading many of the opinions, it's clear to me that the notion of 'board transparency' is really quite a balancing act." What are the mitigating factors influencing a board's action? With what degree of transparency are the organization, its employees, and its shareholders best served in the short- and long-term? What do you think?

Original Article

The case study for this month is inspired by the Hewlett-Packard board, which deserves some kind of award for continuing to supply business schools with years worth of materials on corporate governance.

One can only speculate on what Mark Hurd did to warrant being asked to resign as CEO of HP, and on the board's discussion leading up to the decision. But we know that the board let Hurd go without cause, meaning that he qualifies for about $40 million in severance pay. (We also know that his contract failed to specify what "cause" might mean, making it very difficult for the board to invoke the provision anyway.) The board announced that its reasons for the dismissal were that Hurd failed to file accurate expense reports and that he was accused of sexual harassment, the latter charge even the board itself decided was groundless. The value of the company immediately fell more than $13 billion.

Now assume that you're one of nine independent directors of the Acme Corporation. It has come to your attention that the CEO has appropriated resources for his personal use and acted in ways that violate the stated values of the organization, values that he has espoused during his five-year tenure. According to the firm's contract with him, these are "cause" for dismissal if the board chooses to invoke them. The two executives making the information available to the board are the only ones who know anything about the CEO's violations.

During the board's discussion of how to respond, those supporting his firing for cause remind the others that such an action could be easily defended by the evidence. They say that they also support firing for cause because they object in principle to paying him $25 million for options that would vest automatically if he were not fired for cause. They note that any disclosures associated with the action represent the kind of transparency to which shareholders are entitled in any event.

A second group supports his firing, but not for cause. They also object to paying him $25 million, but note that it will be accompanied by a "quitclaim" letter settling the case with an agreement that the CEO will make no further statement about the matter. This group argues that if the CEO is fired for cause, it will almost certainly result in a lawsuit in which the details of the CEO's behavior and the board's deliberation will be publicized in the business press for weeks, further depressing the price of the stock. They remind their colleagues that the board's primary responsibility is to shareholders and the value of their stock, and that firing for cause will penalize them more than the alternative.

One board member argues that the CEO should be warned, given a final chance, and allowed to keep his job.

As a director, which course of action would you support? Why? Does your action reflect your views about board transparency? How transparent should boards be? What do you think?