Risk & Compliance

HP Settles Charges over Board Shakeup

Hewlett-Packard made misleading disclosures about the resignation of a director during the boardroom spying investigation, according to the SEC.
Stephen Taub and Dave CookMay 24, 2007

Hewlett-Packard settled administrative charges by the Securities and Exchange Commission regarding HP’s disclosure — or lack of disclosure — while the company was investigating leaks of confidential boardroom information to the press.

The SEC found that several months before the public revelation of the investigation, a director objected to HP’s handling of the matter and resigned from the board, but the company failed to disclose the reasons for his resignation as required by federal securities laws.

The boardroom spying scandal led to the departure of chairwoman Patricia Dunn; criminal charges against her and several other individuals were ultimately dropped earlier this year.

HP began its investigation into boardroom leaks in or around January 2006, according to the commission, and Thomas Perkins, chairman of the board’s nominating and governance committee, “was generally informed of the inquiry.” Perkins believed that he and Dunn had come to an agreement, the SEC added, that “upon completion of the investigation, they would approach any individual implicated privately, obtain an assurance that it would not happen again, and inform the full board that the matter had been resolved without identifying the source of the leak.”

By April, the commission continued, HP investigators had concluded that one director was responsible, and Dunn and several senior executives decided to present those findings to the full board. On May 18, 2006, the board heard that evidence and, “after a lengthy and heated discussion,” voted by secret written ballot to request the resignation of the director in question.

Perkins — who was not the source of the leak, the SEC stressed — had already “voiced his strong objections” to how the matter was being handled, reported the SEC, affirming his belief that it should have been handled confidentially by Dunn and himself, in his role as head 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,” the commission noted.

After the vote, Perkins “restated his strong objections to the process,” then resigned from the board and departed the meeting, according to the commission’s account of HP’s board minutes.

Federal securities laws, explained the SEC, require that it a director resigns because of a disagreement with the company on any matter relating to its operations, policies, or practices, then the company must disclose those circumstances. “Notwithstanding this requirement, HP did not make the mandated disclosures, instead reporting only the fact that Mr. Perkins had stepped down,” the commission added.

“This action highlights the importance of the required disclosures regarding corporate governance issues,” said Linda Chatman Thomsen, director of the SEC’s Division of Enforcement, in a statement. “The federal securities laws exist to ensure transparency, and investors have a right to know when a dispute among board members over operations, policies or practices causes a director to resign, as such a dispute may have far-reaching ramifications for the company.”

“The company viewed this as a personal dispute between a director and the chairman and opted to stay silent about the disagreement,” said Marc Fagel, associate regional director of the SEC’s San Francisco office, in a statement. “But the failure to make the required disclosures deprived investors of important information about the management of the company by its board of directors.”

Without admitting or denying the SEC’s findings, agreed to cease and desist from committing or causing violations of the relevant provisions of the federal securities laws. The commission imposed no fine or other penalty.