HP Wants to Boot Board Member Who Leaked Secrets

HP (NYSE: HPQ) is seeking to remove a member of its board of directors after an internal investigation showed he was responsible for leaking confidential board-level discussions to the media. The company said it will not renominate George A. Keyworth II to his seat on the board.

HP reportedly put some board members under surveillance and may have tracked their phone records as part of the leak inquiry. California law enforcement officials are reviewing the investigation.

Questionable Methods

Among the issues being examined is whether HP used so-called "pretexting" to obtain the phone records of board members. Pretexting involves a third party posing as a telephone customer to obtain phone call records. While not illegal, the practice has come under fire from privacy experts. Earlier this year, the state of California sued Web-based firms that resold phone records obtained through pretexting.

The computer maker -- which has put together a string of strong quarters under new CEO Mark Hurd and is in the midst of a major restructuring push -- disclosed that it had asked Keyworth to resign from its board in May.

HP made that request after its internal inquiry revealed that the former adviser to President Reagan was the source of leaked information that had appeared in the media. At the same time, a second director, famed Silicon Valley venture capitalist Thomas J. Perkins, turned in his resignation. HP revealed Tuesday that Perkins' departure stemmed from his displeasure over the way HP investigated the leaks.

"HP has been the subject of multiple leaks of confidential HP information, including information concerning the internal deliberations of its board of directors," the company said in a filing with the Securities and Exchange Commission.

AG Inquires

The company said it first hired outside counsel to investigate the leaks by interviewing board members directly. When that did not turn up the source, HP hired an outside investigator to work with Chairman Patricia Dunn to find the leaks.

"Those investigations resulted in a finding that [Keyworth] did, in fact, disclose board deliberations and other confidential information obtained during board meetings to the media without authorization," HP charged.

Though the company didn't say so, it appears that Perkins -- who reportedly stormed out of the May 22 board meeting after clashing with Dunn over how the leak investigation was handled -- took his complaints to the state attorney general.

HP said it had what it termed an "informal inquiry" from the AG's office and was cooperating with the agency. It also said its own board was working on new guidelines for internal investigations to ensure they "comply with applicable laws and HP's code of ethics."

No details were given on the substance of the leaks, but the company said the problems began even before the ouster of longtime CEO Carly Fiorina, suggesting they may stretch back as far as HP's controversial merger with Compaq.

The SEC is also looking into whether HP fully disclosed what it knew about Perkins' departure, with staff at the regulator questioning why HP did not notify the SEC that Perkins left the board because of an internal dispute. "HP intends to respond to the SEC staff that it believes its disclosures with respect to Mr. Perkin's resignation were accurate and complete at the time," the company said in its latest filing.

Voted Off

HP shares were trading down 1.2 percent in midday action Wednesday to US$36.01.

The board dispute underscores the high-stakes nature of corporate governance in today's world, with HP's strong business operations story at risk of being overshadowed by the controversy. Similarly, Apple's (Nasdaq: AAPL) best chance to make a market-share run in the PC space is being clouded by its own internal issues related to stock options grant timing.

It's "hard to tell" how far back the internal dispute may stretch, and whether it encompasses the Compaq merger or the ousting of Fiorina, Enderle Group Principal Analyst Rob Enderle said.

"What we can determine is that this appears to be a breach of trust with the departing board member and, as such, he has been effectively voted off the island," Enderle told the E-Commerce Times. "As a board member you have to be able to be trusted as you have the ability to create a litigation nightmare that can start with insider trading and go downhill from there. If this was worse he would have been booted."

Because trust is such a key trait in board members, Keyworth will likely find it difficult to find his way onto other corporate boards in the future, he added -- "which is likely the way it should be."