The 'Mark Hurd Affair'
On August 6, Hewlett Packard’s board forced CEO Mark Hurd to resign after the conclusion of a
sexual harassment investigation. Hurd had apparently been accused by Jodie Fisher, a marketing
contractor, of giving her less business with the company because she did not respond to his sexual
advances. Fisher worked for HP from 2007 to 2009 helping to organise networking events. Hurd
denies all the charges and the HP board also agreed that he did not violate the company’s sexual
harassment policies.
Hurd settled with Fisher for an undisclosed amount
before resigning. Such a settlement is not
necessarily an admission of guilt as going to court
would be far more expensive than settling. Although
the board concluded that Hurd was wrongly
accused of sexual harassment, he was still asked to
resign because he allegedly inappropriately
charged expenses related to meetings with Fisher
for a total amount of up to $20,000. As a result, the
board stated it had lost its ‘trust’ in the CEO. There is
some irony in the fact that the board blamed Hurd
for wasting shareholder’s money on Fisher, while
Fisher blamed him for saving shareholder’s money
at her expense.
On the day of the announcement, HP’s market value
fell by $10 billion, close to a 10 per cent decline,
consistent with the view that the market believed
Hurd’s leadership was worth $10 billion to HP
shareholders. This is not surprising as he is credited
by Wall Street for turning around HP, making it the
number one technology company in terms of
revenue. During his tenure HP’s stock price
doubled, largely outperforming market indices.
Typically the removal of a CEO is preceded by a
bad performance, not an extremely good
performance. So in these normal cases, stock prices
may actually rise when the CEO is removed because
it may lead to better leadership. For example, when
Hurd’s predecessor, Carly Fiorina, was fired in
February 2005, HP’s stock price jumped by seven
per cent. This is probably a downward-biased
estimate of value creation as the stock market
should only respond to unexpected events – and
CEO departures after poor performances are less
unexpected than after excellent performances.
An alternative interpretation of the stock price
decline is that there was another, dark reason for
firing Hurd. But Cathie Lesjak, the CFO and new
interim CEO of HP, stated in a press conference that
the resignation had nothing to do with the
company’s operational performance.
Some may argue that the stock price decline was an
overreaction. However, so far the stock price has not
recovered. It is true that on August 30, HP
announced a $10 billion share buyback programme,
something which is consistent with the overreaction
hypothesis. However, the buyback came only after
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HP stock price was hammered further as a result of
the bidding war between HP and Dell for 3Par,
especially after HP made a bid for the company at a
200 per cent premium above pre-announcement
market prices. The buyback seems to be intended to
reassure markets that HP is not going to waste all its
excess cash in other value-destroying acquisitions.
Hurd has since been named co-president at Oracle
Corp and I tend to agree with Larry Ellison, CEO of
Oracle, who stated that HP’s board made a big
mistake here, incompatible with its fiduciary duties
toward shareholders. While the board has argued
that Hurd was fired because it could no longer trust
his judgment and values, the relevant question is
whether these interfered with his ability to create
value for shareholders of HP. Shareholders appoint
board members because they trust the board to
respect their fiduciary duties. This trust seems to be
lost here as well. Another mistake was to listen to the
APCO public relations firm who reportedly advised
the board to disclose the accusation of sexual
harassment, even though an investigation found that
he hadn’t violated the company’s sexual harassment
policy.
Contributory Retirement System, filed a lawsuit
against the board. However, the lawsuit misses
somewhat the point as it only wants the board to
recover the severance payments to Hurd and return
them to the company. Severance payments of $12
million will do nothing to the stock price of a $100
billion company and will benefit no one except
lawyers. Shareholders will only get their $10 billion
back if Hurd gets his job back or if the board finds
someone with the same ability to create shareholder
value.
The first option evaporated on September 7, when
Hurd became co-president of Oracle. On a day
when the NASDAQ fell by 1.1 per cent, Oracle’s
stock price increased by 5.9 per cent. This 7 per
cent abnormal return translates into an $8 billion
increase in Oracle’s market value. Once more, Wall
Street showed it loves Mark Hurd.
Disclaimer: I don’t know Mark Hurd or Jodie Fisher,
and am not an HP shareholder. I simply believe that
capitalism can only survive with good governance
and what we have witnessed here is not an example.
Theo Vermaelen is Professor of Finance at INSEAD.
If Hurd had behaved inappropriately by charging
expenses that were not really business expenses, he
should be asked to pay them out of his own pocket
and that should be the end of it. The punishment
should be proportional to the crime and the
punishment should not come at the expense of
stockholders whose wealth depends on Hurd’s
leadership skills, not his testosterone levels. Adding
insult to injury, Hurd has now been awarded
severance payments of at least $12 million paid by
the same stockholders.
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The only defence the HP board can put forward is
that, when it asked Hurd to resign, it underestimated
the CEO’s ‘market value’. First, it could cite a
precedent: in March 2005 Boeing removed its CEO,
Harry Stonecipher, because of an affair with a
company executive. On that day Boeing’s stock
price declined by only one per cent, although, like
HP, Boeing had outperformed the market
significantly with Stonecipher at the helm. However,
Stonecipher was 68 and Hurd is 53. So the meek
market response to the removal of Boeing’s CEO
was probably related to the fact that, at 68,
Stonecipher was close to retirement anyway. A
second similar argument the board could make is
that apparently some investors supported the
decision to fire Hurd. Presumably these investors
were not asked after they lost 10 per cent of their
wealth, but before. If they agreed to the plan to fire
him, they also did not know to what extent the
market value of the company was driven by the
CEO.
On August 13 a major stockholder, Brockton
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