HP directors send Hewlett packing

As first reported by CNET News.com, HP chose not to nominate Hewlett, who late last year launched a proxy fight opposing the company's planned acquisition of Compaq Computer.

In a statement, HP said that the decision of its board not to nominate Hewlett is "based on his ongoing adversarial relationship with the company, as evidenced by his recent litigation against HP, as well as concerns about his lack of candor and issues of trust."

HP's board said that it had planned to renominate Hewlett but changed its mind after he launched a lawsuit against the company that questioned the last-minute decision of institutional shareholder Deutsche Asset Management (a unit of Deutsche Bank) to support the deal.

HP called the suit "spurious," adding that "allegations that HP bought votes from Deutsche Bank or improperly coerced it to change its votes are false."

Hewlett said in a statement that he regretted the company's decision not to renominate him.

"It is unfortunate that the HP board has seemingly missed what the company's stockholders have clearly recognized: that dissent is not disloyalty, that healthy boards need not agree on every issue and that while management and board may run a company, the stockholders are the true owners of a company."

Hewlett reiterated that if the merger with Compaq is eventually closed, he will do everything he can to "support the successful implementation of the merger."

According to Sam Ginn, chairman of the HP board's nominating and governance committee, CEO Carly Fiorina encouraged Ginn to meet with Hewlett after last month's shareholder meeting to "re-establish a constructive working relationship."

The parties met again March 27, and it looked as though Hewlett would be renominated, Ginn said. However, the board was "shocked" by Hewlett's subsequent lawsuit, adding that he was "continuing his assault on the integrity of the HP board and management team."

HP said the decision not to nominate Hewlett wouldn't deter the company from selecting independent board members.

"The board recognizes the importance of shareowner voices. We will reach out to shareowners, including our institutions and foundations, to determine the best way to assure they continue to be heard," Fiorina said.

If the merger transaction with Compaq closes before HP's annual meeting April 26, HP said shareholders will vote on the following nominees later this month:

• Current HP board members Philip M. Condit, Patricia C. Dunn, Fiorina, Ginn, Richard A. Hackborn, George A. Keyworth II and Robert E. Knowling Jr.

• Current Compaq board members Lawrence T. Babbio Jr., Michael D. Capellas, Sanford M. Litvack, Thomas J. Perkins and Lucille S. Salhany.

If the merger with Compaq doesn't close before the meeting, HP shareholders will vote on the following nominees: Condit, Dunn, Fiorina, Ginn, Hackborn, Keyworth, Knowling and Robert P. Wayman.

The annual meeting will start at 2 p.m. PST on April 26 at the Flint Center in Cupertino, Calif.

Although Hewlett won't serve on HP's board anymore, he is still a board member at Agilent Technologies, an HP spinoff.

Criticism ahead?
The vote to exclude Hewlett is likely to spark sharp criticism from some employees, investors and others who have a stake in HP's leadership. Hewlett's decision to publicly fight against HP's $20 billion acquisition of Compaq has been hailed by advocates for shareholder rights as well as by large institutional investors.

In addition, many HP employees--who face being among the thousands who will lose their jobs if the merger is completed--have rallied behind Hewlett.

Not having Hewlett on the board could also present other problems. His exclusion would mean that no Hewlett or Packard family member is included on HP's board--no trivial matter, considering that the family group holds about 18 percent of HP shares through various trusts, foundations and personal holdings.

However, if the merger is completed, the power of their voting bloc would be somewhat diluted.

The vote marks the latest chapter in a nasty five-month proxy battle over HP's proposed Compaq acquisition that has pitted HP against one of its own directors. Just four days ago, Hewlett filed a lawsuit charging HP with improperly garnering votes for the merger and requesting that a judge invalidate the shares cast in favor of the deal.

Hewlett announced last November that he would oppose the merger, even though he initially voted for it as an HP director. Since then, both sides have traded caustic personal attacks: HP has dismissed Hewlett as a "musician and academic," and Hewlett has called for Fiorina's ouster.

Recriminations also flew back and forth between the outside directors and Hewlett over such issues as Hewlett's release of board minutes on executive compensation, a topic he felt should be shared with investors before the merger vote.

The fighting continued right up to HP's March 19 shareholder vote on the merger. HP claimed victory after that meeting, based on an informal count. But Hewlett has maintained that the results are too close to call.

Hewlett still has at least two options to get his name before shareholders at the upcoming annual meeting. He can ask the HP board to waive a Nov. 29 deadline for write-in candidates to declare their candidacy, or he can ask a court to waive the deadline.

Hewlett knew of the deadline when he launched his proxy fight in early November and could have entered his name as a write-in candidate early on. However, he "knowingly let the time go by," said a source close to Hewlett.

Without the deadline waiver, Hewlett would then be off the board for a year with the possibility of submitting his name as a write-in candidate when the one-year term for HP directors expires.

"I won't speculate about what I'll be doing in a year's time," Hewlett said at a press conference last month when asked about serving as a write-in candidate if the board should not renominate him.

Hewlett said he would be interested in serving another term. If not renominated, he could develop his own slate of directors--a move that would cast him in another contentious proxy battle.

"There's been several cases where a slate of directors was introduced and replaced the incumbent board," said Charles Elon, professor of corporate governance with the University of Delaware.

Last year, timber giant Weyerhaeuser successfully unseated three board members of rival Willamette in favor of its own slate. The proxy battle was part of Weyerhaeuser's effort to acquire Willamette.

Broken family ties?
Hewlett's expected departure would signal the end of family participation on the HP board. Over the past several years, founding family members David Woodley Packard, Susan Packard Orr and Hewlett's brother-in-law, Jean-Paul Gimon, have left the board for a variety of reasons.

Hewlett's exclusion could also stir discontent among shareholder advocates.

Institutional Shareholder Services, a proxy adviser to about 23 percent of HP's institutional investors, had strongly urged the company to have a director with a large stake on the board and one who is willing to be a shareholder activist. ISS noted that Hewlett embodies both such traits.

"We believe that the board would benefit materially from the continued presence of a significant shareholder on the board, however--a presence that would be lost if Mr. Hewlett leaves and is not replaced by another member of the Hewlett or Packard families," ISS stated in its HP merger recommendation report to institutional investors.

One family member who asked not to be identified agrees with ISS's assessment about significant shareholders but noted that representation does not necessarily have to come from a blood relation.

"When you have two families with 18 percent of the shares, you should have one person on the board who will represent the point of view of the families," said a family member. "It doesn't necessarily have to be a family member, but it should be someone who represents their views."

The family member added that if Hewlett wasn't renominated, it would be hard to predict whether the Packard and Hewlett families would seek a board seat via a write-in candidate or work together to jointly find a board member to represent their views.

"We've never really worked together before (on HP business matters)...The families are fairly independent from one another," the family member said. "(HP's) board seems to value directors who have business experience. But company boards are supposed to represent all shareholders, and not all shareholders are in business. I think it is important to get balance on the board, any board."

Elon said there are other reasons why Hewlett should be renominated, particularly because of the support he receives from a large percentage of shareholders.

"He has close to half of the shareholders who think he's doing the right thing," Elon said. "Given these circumstances, he represents an important constituency."

During the March shareholders' meeting, Hewlett received rousing applause and a standing ovation when he gave a five-minute presentation. Hewlett's reception was in sharp contrast to that of Fiorina, who at one point was booed when she said a majority of employees favored the merger.

Ironically, Hewlett's presentation almost helped him dodge a bullet.

HP directors were on the verge of nixing his renomination and had even scheduled a board meeting for later that day, after the HP shareholders morning vote, said a source familiar with the company.

"Originally, that was the objective," said a source. "But Walter made a number of conciliatory comments at the shareholders' meeting about supporting the merger if it went through."

The final blow
That March 19 board meeting was canceled and a new one scheduled for last Wednesday. During last week's board meeting, Hewlett discussed his views on corporate governance and how he would view his responsibilities if he stayed on as a director.

"He said if the merger goes through, he's not one to fight lost battles," the source said. "He also said he now has international stature, which may help him do things for the merger that others could not."

During that meeting, Hewlett later signed off the conference call to enable the directors to go into executive session to further discuss his status on the board. The board voted to renominate Hewlett, on the contingency that nominating-committee members Ginn and Condit have one last discussion with Hewlett to re-confirm the board's understanding of how Hewlett viewed his director's role.

Ginn and Condit would be empowered to tell Walter he was renominated, provided they were satisfied with his answers. But Hewlett was not available to take Ginn's call later that day, and arrangements through Hewlett's attorneys were made to call back after a specific time Thursday morning.

That morning, however, Hewlett filed a lawsuit before Ginn called, alleging that HP used questionable tactics to solicit votes for the merger.

"The board was stunned. There was no warning a lawsuit was coming," said a source. As a result, Ginn never made that Thursday-morning call, the source said. "He made a series of allegations that question HP's corporate governance."

HP's board once again held a conference call to resolve the nominating issue, this time on Sunday night. Although Hewlett had been notified and asked to attend, he elected not to.

In an 8-0 vote, the board voted to forgo re-nominating Hewlett to its slate of directors.

"When he entered into the lawsuit, that places him in a position of an adversary," a source said. "It would not be considered good corporate governance to renominate him as a director."