Leak scandal costs HP's Dunn her chairman's job

The board has appointed CEO and President Mark Hurd to take over for Dunn, who will continue to serve as chairman through the company's Jan. 18, 2007, scheduled meeting, the company announced early Tuesday. After that point, Dunn will remain on the board as a director.

In a statement, Hurd said, "I am taking action to ensure that inappropriate investigative techniques will not be employed again. They have no place in HP."

Hurd will continue to hold his positions of president and chief executive. In addition, HP said Richard Hackborn was named lead independent director, effective in January.

Also on Tuesday, HP announced that George Keyworth is resigning from the board, effective immediately. Dunn earlier this year had identified Keyworth as a source of media leaks.

Dunn's departure caps a tumultuous episode for HP, one of the country's largest companies and a Silicon Valley icon that just over a week ago had been basking in the glow of an economic turnaround. The computer maker now finds itself mired in a scandal sparked by an investigation into media leaks emanating from its boardroom.

Last Tuesday, several media outlets reported that an internal HP investigation into its own directors was behind one director's angry resignation this spring.

During the course of last week, it came out that the investigation to find the source of media leaks involved possibly illegal access to phone records of the company's directors, at least nine journalists and potentially many other people. As a result, federal and California state prosecutors launched investigations, and civil lawsuits and criminal charges are possible. A U.S. House of Representatives committee is also seeking records related to the case.

HP said in a statement on Tuesday that it will cooperate with the House subcommittee "and will provide the necessary facts and information."

Patricia Dunn

A top aide to the Senate Commerce Committee said on Tuesday that the panel would be pushing harder a floor vote on legislation that would increase penalties for telephone pretexting. That bill, S.2389, creates new civil and criminal penalties, and lets individuals sue over privacy violations.

Kevin Martin, chairman of the Federal Communications Commission, noted after the Senate hearing that the FCC last week sent a letter to AT&T asking for details about the HP case. "Making it illegal to sell (phone record information) would be helpful," Martin said.

Dunn, who ranked 17 on Forbes magazine's "100 Most Powerful Women" list in 2005, replaced Carly Fiorina as the chairman of the computing giant last year. Dunn had been a director at HP since 1998. She was co-chairman, chairman and chief executive officer of Barclays Global Investors from 1995 through 2002. According to a biography of Dunn on HP's Web site, she "also serves on the advisory board of the (University of California at) Berkeley Haas School of Business, as well as the conference board's Center for Corporate Governance."

Dunn had been frustrated by media leaks dating back to articles in early 2005 about the relationship between then-CEO Fiorina and the board. A Jan. 23, 2006, report by CNET News.com that quoted an unnamed source describing a strategy-planning meeting of the board apparently so angered Dunn that she authorized an investigation of her fellow directors to find the leak.

In a statement, Dunn said she was proud of her accomplishments at HP but regretted the use of "inappropriate techniques" in the investigation.

"These leaks had the potential to affect not only the stock price of HP but also that of other publicly traded companies," she said. "Unfortunately, the investigation, which was conducted with third parties, included certain inappropriate techniques. These went beyond what we understood them to be, and I apologize that they were employed."

Eric Ross, a financial analyst at ThinkEquity Partners, said replacing Dunn is a good move for the company, if only because the controversy may be demoralizing and distracting to employees.

But Hurd's accumulated power as president, CEO and soon chairman does raise questions of corporate governance, Ross said.

"Making Hurd chairman seems to be a lot of power for one person," he said. "It seems like the world's moving away from that model."

According to a Securities and Exchange Commission filing by HP, an outside investigative firm hired by the company relied on a subcontractor who impersonated the identities of board members and journalists to access personal phone records, which were then used to help determine which board members were talking with the press.

The disclosure of the practice, called pretexting, has led to the departure of two of the 11 directors the company had when the investigation was disclosed to the board May 18.

Tom Perkins

Tom Perkins, the famed Silicon Valley venture capitalist (of Kleiner Perkins Caufield & Byers) protested the Dunn-led investigation when it was disclosed to the board in a May meeting.

At the heated meeting, Dunn pointed to fellow board member Keyworth as a source of leaks and asked him to resign. Keyworth declined. Perkins, who wanted the matter to be dealt with privately, was outraged by the way the disclosure was handled, and he abruptly quit.

The saga may have ended there, except for the way HP disclosed Perkins' departure publicly and to the SEC. In a short press release issued the next day, the company simply said, "HP announced today that Thomas J. Perkins resigned from its board of directors on May 18, 2006, with immediate effect. The board has 10 members following his resignation."

Noting that Perkins had been with HP for 50 years, Hurd was quoted as thanking him "for his service and dedication to our company."

A filing with the SEC was similarly brief: "On May 18, 2006, Thomas J. Perkins announced his resignation as a director of Hewlett-Packard Company ("HP"), effective immediately. The text of HP's press release relating to Mr. Perkins' resignation is filed with this report as Exhibit 99.1."

Perkins, however, wanted the real reasons for his departure to be known. In July, he sent an e-mail to HP board members, pointing out the pretexting methods used in the investigation and asking that the record of the meeting be changed to reflect that he resigned in protest.

"I did not resign from the board for frivolous reasons," he wrote, "but because HP was standing (in) dangerous waters--waters hazardous with both illegal and unconscionable governance practices--and because my advice was being ignored."

In a later letter to the company, Perkins complained that he had not received a response to his request. "Thus, it appears that my disagreement is not only with (Dunn), as I initially thought, but also with the company. As my disagreement concerns probable unlawful conduct, improper board procedures and breakdowns in corporate governance, it constitutes a disagreement 'on any matter relating to the registrants operations, policies or practices' requiring disclosure to the SEC under...the Sarbanes-Oxley Act of 2002."

Perkins also warned that he was "legally obliged to disclose publicly the reasons for my resignation. This is a very sad duty."

Keyworth's departure was also tinged with regret. In the statement released by HP, he decried the handling of the investigation and expressed his desire for the company to regain its footing.

Mark Hurd

"The invasion of my privacy and that of others was ill-conceived and inconsistent with HP's values," Keyworth said in the statement.

Last Wednesday, a day after CNET News.com and other publications reported the reasons for Perkins' resignation, HP filed documents with the SEC explaining the events that led to his departure. The filing also noted that on Aug. 31, the directors decided that Keyworth "should not be nominated for another term."

But Keyworth, who said he was the source for a January CNET News.com story, has since decided to resign rather than wait for his term to expire. In a statement, Keyworth said he believed he was acting in the best interests of the company.

"I acknowledge that I was a source for a CNET article that appeared in January 2006," Keyworth said. "I was frequently asked by HP corporate-communications officials to speak with reporters--both on the record and on background--in an effort to provide the perspective of a longstanding board member with continuity over much of the company's history.

Keyworth said past statements were "praised by senior company officials as helpful to the company...The comments I made to the CNET reporter were, I believed, in the best interest of the company and also did not involve the disclosure of confidential or damaging information."

Keyworth and Perkins, while lashing out at the methods used to investigate media leaks, expressed optimism about HP's future.

"There is but one issue that matters now, and that is that Mark Hurd and the company have every opportunity to move beyond and above the current morass," Keyworth said in the statement.

Perkins on Tuesday said, "I believe in HP. I believe in (CEO) Mark Hurd. I applaud Jay Keyworth for his courage in stepping down today and thank Patricia Dunn for her grace in letting HP move on. This, too, shall pass."

Hurd, meanwhile, apologized to Perkins. "On behalf of HP, I apologize to Tom Perkins for the intrusion into his privacy," Hurd said. "I thank Tom for his contributions, his principles and his help in getting HP past this episode toward its rightful place as the envy of corporate America."

He also praised Keyworth for his long tenure on the board. "Jay is an important member of the HP family," Hurd said. He has served admirably for more than two decades and has provided great expertise, especially on matters relating to technology policy. We wish him well."

In the statement, HP said Keyworth often had contacts with the press to explain HP's interests at the company's request. "The board does not believe that Dr. Keyworth's contact with CNET in January 2006 was vetted through appropriate channels," according to the statement, "but also recognizes that his discussion with the CNET reporter was undertaken in an attempt to further HP's interests."

Dunn on Wednesday said she learned that pretexting had been used to gain access to the phone records of reporters. In an interview with CNET News.com, Dunn said, "I am not happy that the way this investigation has been conducted has led to this major embarrassment." Asked if she believed pretexting is illegal, Dunn replied, "I have no idea, but it's wrong."

Dunn added: "If the board wants me to resign, I will absolutely accept their judgment on this. I have full confidence that if they ask me to, it'll be the right thing to do for shareholders."

CNET News.com's Martin LaMonica and Anne Broache contributed to this story.