In Defense of Standards, Ethics, and Honest Financial Reporting at HP

How does one begin in sorting through it all?

There are, on the one hand, those who see the "corporation" as an inherently evil abstraction, at least in its mega form as represented by publicly traded companies such as HP. This sort of view is primarily ideological and, argue as one might with one who is an ardent proponent of it, you will not dislodge that person from the broad idea that corporations are an inherently evil mechanism for conducting business and that those who manage corporations are therefore inherently malevolent in their motives. Just mention the telcos, or Microsoft, or any one of a number of large, institutional companies and the word "evil" rapidly comes to the forefront of the discussion. If one takes such a view, what room is left for high ethical standards within such a framework? If the very vehicle is inherently corrupting, then ethical breaches in themselves should be treated as mere by-the-way phenomena, as inherently corrupt by-products of enterprises that are already corrupt top-to-bottom. This to me is not a realistic view of what a corporation is. A corporation is a collection of people whose policies are determined and executed by human beings. The entity, then, will be a reflection of those who control and manage it. Having worked with thousands of such entities over the years in their smaller forms (early-stage startups), there is no doubt in my mind that there is nothing inherently corrupting about the corporate format. It is merely a legal body for organizing human activity. It will be good or bad depending on who organizes and administers it. Yes, there is a de-personalizing element in public companies, where there are primarily institutional owners as well as thousands or tens of thousands of faceless shareholders whom no one in management even knows. But even public companies have a culture and this culture sets the tone for their boards of directors and the board in turn can set the tone for the company. Ergo, the author is right - ethical standards do matter in public companies and setting a high standard does absolutely make a difference.

On the other hand, there are business pragmatists who regard the corporation as a pure money-making machine, as noted by the author. For them, the end can justify the means in many cases. As long as it promotes shareholder value, and as long as it does not cross some overt criminal line or is not legally egregious, it is acceptable to look the other way in furtherance of the broader profit goals of the company. The author picks this view apart fairly nicely by showing that human beings who adopt such an approach can readily find themselves on a slippery slope to ethical (and legal) perdition.

I began my career at a large law firm working on a case involving a NYSE company whose senior management decided at some point to "smooth" their earnings results essentially by overvaluing the inventory on hand in its various warehouses scattered throughout the nation. That was in an era when such inventory (in this case, copier machines) carried a high value and was probably the major asset class of the entity. The company had been a growth darling of the stock market and had seen consistent and impressive quarter-to-quarter increases in both revenues and profits. These increases were initially very real. The company did not start out as a fraud. It was a bona fide success, and a huge one at that. After a time, however, as results came in a bit below expectations, the senior management started to fudge the numbers. Nothing too extreme at the start. "Let's just treat some of that obsolescent stock as if it still have value - it will only affect results marginally but will be critical for the stock performance." After a time, however, that management became intoxicated with the company's stock performance and this is turn caused the members of that management to begin doing more extreme things, one step at a time. After a few years of this, they had wound up essentially fabricating the existence of large volumes of inventory in its warehouses that were no more than fraudulent paper entries and were not backed by real goods. The initial internal justification, kept within a very tight-knit circle, was that this was necessary to preserve the value of the stock while the company simply rode through a temporary dip in performance. It would be "made up" later. To achieve its goals, though, this management team had to involve progressively more and more people, such as regional sales managers. They would give them bonuses to reward "performance" in their regions. The pattern was the same with the regional guys. First, just do a small thing; later, as things got more desperate, they too were asked to commit over fraud. This all went on for over half a decade and, only after it had reached an extreme did it all collapse. The result: bankruptcy, disgrace, criminal convictions, and shareholders deprived of their valuable savings, with some left destitute. Given that such things can and do happen, is there room for saying that it is acceptable for those in the highest seats of corporate power to commit breaches involving moral turpitude and to simply ignore this?

Yes, it is possible to be prudish or otherwise wrongly motivated on these sorts of issues. I have seen startup founders hounded out of their positions and have to forfeit large amounts of valuable stock simply because they left themselves vulnerable to be "set up" with sexual harassment claims, only to have a board motivated by ulterior motives use this as a pretext to take them out. In such cases, there is room for abuse on all sides, and in an imperfect world it will not always be possible to tell who is motivated by what and whether ethical standards are in fact being upheld or whether the board actions are mere pretexts for darker goals.

That said, it is vital that those who run corporations do, to the extent practicable in large companies, act in good faith to strive to uphold standards in every way they can. Will they be able to do this perfectly in a large organization? Not likely. Should they try? Absolutely. In public companies in particular, they hold the trust of large numbers of shareholders and, if they try to cover for the lapses of a CEO who has shown a lack of honesty on non-trivial matters, they will be just as culpable as the immediate wrongdoer. Moreover, they will permit a corporate culture to develop that is indeed corrosive and that could easily lead to serious wrongs committed under their watch.

This is not merely an issue of legal liability. Yes, a board that knowingly countenances corruption may be legally culpable. But that is not the main point and the author focuses on this nicely. It is an issue of integrity. "Integrity" comes from a Latin root meaning "whole" (we get the word "integer" from that same root). The idea of wholeness in ethics is that what is reflected in a part will reflect the entirety of what is there. That is why it is always dangerous to look the other way when wrongdoing occurs among those holding positions of authority. We can excuse the lapse but what does this reveal about the person doing it. If he lapses here, will he not lapse elsewhere? If it is a peccadillo, maybe that is one thing. But if it does involve a serious moral lapse, that is quite another, especially if willfully done. Does such a person deserve continued trust? From a board perspective, the answer should be no. Not for legal reasons but for ethical. Whatever corporations are, they are better for upholding the highest standards possible insofar as the nature of the institution permits.

One final illustration to emphasize why legal liability is not alone enough to check wrongdoing and why an ethical standard ought to prevail: What about a startup controlled by investors on a board following several rounds of funding. What happens when, as the bubble is bursting, they vote to use company money to "acquire" other of their portfolio companies that do not in fact warrant being acquired, thereby bleeding the company on whose board they sit for the benefit of their separately owned private investment fund. The board votes are all taken very legally (at least in form), with each investor representative abstaining in the instances where his own fund is concerned but otherwise voting for the other guy's payout, with the net result that the company is effectively bled out for the benefit of the various investors sitting on that board and all at the expense of that company's shareholders (all done under the supervision of a prominent law firm representative). Is this legal? Who knows, but it is very hard to do anything about it legally. Is it ethical? Absolutely not. Yet, this is precisely the sort of thing that happens when ethics are disdained in a business context - indeed, in such cases, the person who refers to ethics is typically regarded as an unsophisticated rube. This is where such things lead when ethics are discarded in favor of pure money goals, as (by the way) often happened during the bubble.

HP is no model company in this respect. I have seen this company do some pretty questionable things over the years. Yet the HP cultural carryover from "Bill and Dave" days is something to be admired and, insofar as that is reflected in the points made by the author, is worthy of being emulated.

This author's views probably represent a minority position in today's business environment but I for one commend them. Integrity does matter over time and it will show itself one way or the other in how any management plays itself out.

Oh, my. This is a crock of you-know-what. The HP board has their head stuck up their collective asses and have been holding that position for years.

Carly was a joke, Hurd was so hated at his previous company he needed body guards to get to his car with the slashed tires in the parking lot, the HP way is dead and gone. And Hurd was a huge part of that. Make the current quarter look good, HP way and employees be damned.

"Highly popular CEO" Are you fucking kidding me? 66% of HP employees would take a job elsewhere for no bump in salary or title. Until Hurd that number had never been higher that 10% (that's my memory, maybe Carly pushed it up as well).

Popular? Yeah, maybe, with his cronies that he pays while watching the profit sharing and other employee benefits be tossed into the crapper.

I'm not a current or former HP employee, though I did interview for a position at HP Labs about 15 years ago and have friends there. What's happened to HP is a crying shame. HP used to be a place that you envied. Now it is a place that makes you cringe.

"Impressive courage". Gimme a break. If the HP board had courage they would have given the CEO job to VJ or someone like him. Someone from the inside, with a clue, that still cared about the HP way and the people that work for HP.

I'm ranting because this post got me pissed off. So you might wonder if I have a clue. I'd suggest you go read Chuck's blog here:

http://hpphenom.blogspot.com

He was there for a decade or two. Wrote a book about it.

And maybe dig out that calculator that the salesman threw across the room as hard as he could at the wall and picked it up and showed you that it worked. Remember those? Just one little example of how much HP cared about you, the customer, once upon a time. Does anyone think they care now?

"Companies should not merely be thought of as money generating machines. Business can represent human society at its best. A business is a group of people working together to deliver value to the world and improve people’s lives. When done ethically, business quite literally changes the world for the better. However, if the dark side of human motivation is not mitigated with standards and ethics, business can destroy."

"She was hired by Hewlett-Packard and paid up to $5,000 per meeting to meet with Fortune 50 CEOs. ... This was the Hewlett-Packard Corporation paying a softcore porn movie star with no relevant work experience more than it pays Harvard graduates with 20 years of industry experience. "

Different job descriptions - different pay.