A New Theory about HP

The H-P boardroom has seen the circus come to town on prior occasions, with the board spying on itself. Now, CEO Mark Hurd walks the plank over seeming peccadilloes amounting to $20,000 of expense reports which were reimbursed after audit. These compare to a four-fold rise in the share price over a five year tenure. Institutional investors quoted in the press said that the 8% first day decline in the stock price was overdone, so in their minds, the CEO's management of corporate assets and above-market returns are what matters. Never mind that much of it was market timing, but these investors prefer profits and ROE over peccadilloes.

Meanwhile, much of our avowed governance reform is about codes of ethics, and like the Old West, there's only one code for everybody. In reality, the board made the only decision that it could possibly have made, by taking control of the issue. Had the contractor-in-question remained a mystery, the issue would have been framed in the tabloids and she would have had a much bigger stage, with the company constantly on the defensive. However, just like the Toyota sudden acceleration story, the HP episode makes very little sense, starting from the process of hiring the contractor, to the supposed marketing duties, to the efforts to conceal the ongoing relationship. For the ongoing lack of judgment and circumspection, and for any additional risk down the road, the board took the only appropriate decision it could.

Now, the newspaper stories report employees delirious with delight at Mr. Hurd's resignation because of his"Chainsaw Al"-like crimes of cost-cutting. Quite a few people quoted are engineers. It has always seemed that HP has been dominated from its founding by an engineering culture. I suspect that former CEO Carly Fiorina's difficulties with the board and company culture were not so much about Compaq as they were about offending the inbred, engineering culture.

One of the lead marketing tag lines from her time was "HP: Invent," and that legacy lives one in the "Invent" centers in Geneva and Mumbai. This was probably dismissed internally as being the product of a marketing person who didn't understand innovation anyway. CEO Hurd further went on to attack a bloated cost structure, something that engineers really don't like. In their view, ordinary executives aren't smart enough to understand how difficult good (read perfect) engineering is; putting out new products isn't something that can be held to a quarterly timetable, they whine.

HP is positioned well as a result of decisions taken by recent CEO's, including Ms. Fiorina and Mr. Hurd, but it really hasn't fulfilled its potential yet. I suspect that it still relies too much on profits from its consumables businesses, where it has marginally innovated and effectively raised prices, while completely defeating movements like the refillable cartridge businesses. This was done mainly through marketing and only secondarily by engineering. Giving away printers didn't hurt either, another marketing decision.

So, HP shares continue to look like a value play, but I suspect that there's a very large, cultural elephant in the room that could slow any transformation into a sustainable, growth story. The next choice of a CEO might best be someone who is known and acceptable to the insiders, rather than another, charismatic outsider.