The SEC and Corporate Governance: The Curious Example of Hewlett Packard

The Commission on Wednesday issued an administrative order in the case of Hewlett-Packard that arose out of the scandal over pretexting.  See In re Hewlett-Packard, Exchange Act Release No. 55801 (admin proc May 23, 2007).  As was widely reported, an investigation had been initiated to determine which board members were disclosing information to the press.  At a discussion over the results of the investigation (which apparently involved investigators who improperly obtained phone records of various board members), one of the directors, Thomas Perkins, resigned and walked out of the meeting.  It amounted to a resignation by a director over a disagreement with the board, something that triggers a disclosure obligation under Section 13(a) and requires the filing of a Current Report on Form 8-K. 

This is a provision, as we have discussed, that has historically been designed not so much to provide investors with material information but to improve governance by providing dissenting directors with the threat of publicity as leverage.  The post is here.  I discuss this topic in my paper about the SEC its role in the corporate governance process.  In fact, had Patricia Dunn, then chair person of the HP board, been aware of the requirement, she probably would have preferred to negotiate with Perkins rather than have him resign and trigger the disclosure obligation. 

The SEC reported the facts as follows:

• "During the course of the Board’s deliberations, which lasted approximately 90 minutes, Mr. Perkins voiced his strong objections to the manner in which the matter was being handled. Among other things, he repeatedly told the Board that the source of the leak should have been approached “off-line” for an explanation and a warning, rather than identified to the whole Board. He affirmed his belief that the matter should have been handled confidentially by the Chairman of the Board and himself as Chairman of the Nominating and Governance Committee. He also questioned the wisdom of requesting the director to resign over what he perceived to be a relatively minor offense, noting that the director had made significant contributions to HP."

• "After a lengthy and heated discussion, the Board, by a secret written ballot, passed a motion to ask the director to resign from the Board. When HP’s General Counsel announced the results of the vote on whether to ask the director to resign, Mr. Perkins continued to voice disagreement. As noted in the Board minutes, Mr. Perkins “restated his strong objections to the process, specifically [the Chairman’s] decision to bring the matter to the full Board and the manner in which the meeting was conducted.” Mr. Perkins then resigned from the Board and departed the meeting at approximately 2:00 p.m. The director identified by the leak investigation was asked to resign following the vote, but declined to resign at that time."

The administrative proceeding, however, omitted at least importan fact.  Perkins did announce he was resigning, but that wasn’t the end.  Apparently, it required an affirmative act of the Board.  According to Patricia Dunn in an interview with CBS: 

• “He [Perkins] turned to me, pointed at me, and said, `You betrayed me.' He said that several times. `You betrayed me, Pattie. You said that we would handle this offline, and a good man is being ruined as a result.' And he snapped his briefcase shut and stormed out of the room and said, `I resign.' And one of the other directors said, `Can we accept his resignation?' The general counsel said yes. He put the motion on the table. It was seconded and passed within seconds.”

In other words, the board had a direct hand in the process.  Moreover, had the board waited and perhaps acted in a more deliberate fashion, rather than responding immediately, it might have been informed of the consequences of accepting the resignation, namely that it would trigger the filing obligation. 

HP filed an 8-K on May 22, 2006 but did not disclose the reasons for the resignation.  The company concluded “with the advice of outside legal counsel and the General Counsel,” that it did not have to disclose the disagreement because the 8-K requirement only applied to disagreements with the company.  Perkin's disagreement was with Dunn, the chair person of the board.  Given that the entire board apparently voted to accept the resignation, this has a tin sound to it.  Only after the SEC began an inquiry was accurate disclosure made. 

The net result?  The SEC ordered HP to cease and desist violating Section 13(a).  Section 13(a) is a non-scienter based offense.  There were no fines and no officer or director was identified as responsible for the violation.  In other words, the order was less than a slap on the wrist.  In an area when the SEC has spent considerable energy attempting to increase accountability within public companies, this was a missed opportunity to emphasize the role of the board and the importance of the disclosure.  It reflects the overall unimportance of the provision to the SEC in terms of shareholder disclosure and reemphasizes its role as designed to help dissenting directors rather than promote full disclosure.

Comments

[SpiderGirl]

1. Dunn supporters say,she was willing to resist Perkins even at the cost of a public spectable.
2. The 53 yeras old Dunn in 2004 was diagnosed with cancer and underwent extensive surgery after doctors discovered a malignant tumor in her liver and was preparing to go into the hospital for major liver surgery.It seems that Dunn is very sick.
3. Dunn Argument:" I asked the right questions of the right people at the right times."
4. Dunn added: " If the Board wants me to resign, I will accept their judgment." Dunn is very sick.
5. If they are spying on each other, maybe Perkins resigned because he disagreed with the company's activities.
3.