Where's the Shareholder Outrage at Hewlett-Packard?

[Anonymous]

Where’s the Shareholder Outrage at Hewlett-Packard?

Here’s a vastly boiled-down refresher on corporate governance: A public company’s management is accountable to its board of directors, which in turn answers to shareholders, who are, after all, the “owners” of said public company. These holders keep executives and directors honest by casting votes based on tens of millions of shares dispersed across individual brokerage accounts, pension plans, and mutual funds. A management that consistently does wrong by shareholders is liable to be evicted from its seat at the mahogany table. For elaboration, please see Gordon Gekko’s speech in the movie Wall Street.

How then have Hewlett-Packard (HPQ) shareholders largely remained so silent while board infighting, botched multi-billion-dollar acquisitions, multiple strategic false starts, and high C-Suite turnover have combined to lop off more than $90 billion of market valuation—the venerable tech company is now worth just $28 billion—since the end of 2009? After management asked on Wednesday for yet further patience as it restructures HP’s sprawling lines of business, shares plunged to where they traded 10 years ago. One prominent analyst observed in the New York Times that HP was the cheapest big-cap stock in 25 years. And that was before its Oct. 3 plunge.

Aggrieved shareholders, unite! (Cue crickets. …)

What gives?

Increased shareholder vigilance can only do so much to combat the bad business trends that are hitting HP all at once. Its personal computer business is losing out big in the broader trend of iPad and iPhone substitution. The profit pool of overpriced toner cartridges is shallower, and companies’ growing adoption of cloud computing—out of sight, out of mind—makes it harder to convince them to shell out for square-foot-hogging hardware.

But so much of what now ails HP has been self-inflicted—lots of it needlessly. Chief Executive Officer Meg Whitman is the company’s sixth CEO since 2005, a stretch that has seen its culture of corporate governance suborn hacking into the phone records of journalists—and even those of its own directors. With the board’s blessing, management in 2008 paid $13.9 billion to take out EDS, an acquisition so disastrous that HP recently had to write down $8 billion of its value. Mark Hurd, the CEO who sought that deal, got paid $43 million in fiscal 2008, en route to getting fired for questionable human-resources behavior two years later.

The HP board’s ham-fisted handling of that episode might have been forgivable had the directors not then hired a new CEO who hastily made a nearly $12 billion software acquisition and signaled to Wall Street that HP was looking to jettison its PC business. Leo Apotheker lasted less than a year as CEO; the (revamped) board wasted no time in lamenting the decision to hire him.

Meg Whitman, HP’s current CEO, has since been explaining the struggles brought on by Apotheker’s ill-spent billions for Autonomy, not to mention HP’s having squandered its $1.2 billion acquisition of Palm, a false start that has left it without a smartphone or tablet that can compete with Apple (AAPL). Meanwhile, come to think of it, you can rest assured that HP is keeping the PC business it wanted to sell when it was in better shape.

And the board? Earlier this year, in one of the more surreal pieces of business journalism I’ve ever seen, writers James Bandler and Doris Burke chronicled: “Dr. Phil could fill a month’s worth of shows just examining HP’s board, whose dynamics have resembled those of rival junior high school cliques more than what is supposed to be a sage guiding force. At times … HP directors have refused to be in the same room with one another and have accused each other of lying, leaking, and betrayal. Time and again they’ve failed in their choice of CEO—their most important task—selecting a new leader whose most salient trait is that he or she is the opposite of the last one.”

Again, where is the shareholder indignation? HP shares are down 44 percent this year, while the S&P 500 index is up 15 percent and tech-benchmarking Nasdaq is up 20 percent. That is precisely the kind of underperformance that should prompt bloodied shareholders to think board uprising.

According to Bloomberg data, San Francisco mutual fund house Dodge & Cox is the biggest institutional holder of HP stock, accounting for just under 140 million shares, or 7 percent of what’s outstanding, as of the latest filing date. Per company policy, and consistent with what you hear from just about every fund shop, Dodge & Cox won’t comment on individual holdings.

[Author]

October 25, 2012 at 8:28 AM