HP, red-faced but still selling

Company's reputation blemished by revelations of extensive investigation into directors, journalists and employees.

8 min read
What if the initials HP--as in Hewlett-Packard--enter the lexicon in the same manner that Google has?

Google, of course, has become much more than a corporate name. It now doubles as a catch-all term for online search that has resulted in nifty little verbs like "Googled," "Googles" and "Googling."

If HP undergoes the same sort of metamorphosis and becomes shorthand for illicit snooping, you might be telling your friends that a stalking ex-boyfriend is "so HP" or that your office mate, who snoops through the stuff on your desk and listens a little too closely to your calls, has "gone HP."

But the prospect of children hurtling the epithet "HPer" at parents who monitor their Web surfing is just one of the minor worries for HP, which, as the world's largest technology company, has its brand name on millions of computers, printers, ink cartridges and corporate data servers. Revelations that the company's detectives and lawyers planned and supervised an extensive investigation of some of its directors, journalists who covered the company, a few employees and others have blemished its reputation.

The question is whether the scandal will more seriously damage one of the most storied names in corporate America. Mark Hurd, the chairman and chief executive, is the person shouldering the responsibility for managing the scandal's fallout and, for the time being, it appears that he has guided HP through the crisis with the same skill he has been using to turn around this once-stumbling technology giant.

By many measures, the company so far has escaped any serious damage. Its stock, about the only visible barometer of public perception other than retail sales and late-night talk-show jokes, is as strong as it was before the spying operation was revealed in early September. The stock closed on Friday at $36.69, close to its 52-week high of $37.25, almost unchanged during a month of unrelenting reports of detectives obtaining personal phone records, rooting through garbage, following directors and journalists--spying on one while at Disneyland--and planning to infiltrate newsrooms with spies masquerading as janitors or clerks.

Nor would it seem that the outlandish plots concocted by the company's Clouseaus have convinced customers that a Dell notebook or a Sun Microsystems server makes more sense these days. Kurt Francis, a Century 21 real estate agent in Escondido, Calif., said that HP's woes did not change his view of the company and that it would not affect his willingness to buy HP products.

"HP is a lot bigger than one or two people," said Francis, who uses an HP financial calculator, an HP notebook computer and even an HP personal digital assistant. "It's very sad what's happened, but it will blow over--the average consumer is going to forget this in two months."

HP certainly does not appear to be paralyzed by the imbroglio. Last Thursday evening, the same day that Hurd testified before a Congressional subcommittee examining his company's investigative methods, the company's personal computer division announced the acquisition of Voodoo Computers, a maker of high-powered computers for hard-core gamers.

Ravi Sood, a co-founder of Voodoo, said the spying scandal did not make him or his fellow founder--and brother--Rahul Sood, waver in selling their operations to HP "It makes a statement that we closed the deal during this thing," he said. "Business goes on."

Rahul Sood, Voodoo's president, said that one reason he wanted to sell the company to HP was his high regard for Hurd. He said HP executives flirted with Voodoo in the past about a merger, but that nothing had happened. When Rahul Sood sent an e-mail message directly to Hurd in July 2005 outlining the rationale for a merger, "he moved mountains," Sood said. (He gave another reason for wanting to link with HP: "Getting a ticket into HP Labs would be like Charlie getting a ticket to Willy Wonka's chocolate factory.")

Reassuring customers about the sale, Sood wrote on his blog that Hurd "is quick to make business decisions, but understated when it comes to 'glory.'" He recounted how Hurd has said that he did not want his photograph hanging in the lobby of the company headquarters near those of the company founders William R. Hewlett and David Packard.

Hurd's decision not to memorialize himself next to the famous founders is often cited by HP and others as an example of his modesty. It is also no accident that the anecdote offers a contrast between Hurd and his predecessor as chief executive, Carly Fiorina, who made sure that her picture was hung in the corporate lobby next to the founders.

Even so, analysts and others believe that Hurd's modesty has been an important factor in the company's comeback. When asked in a recent interview to comment on his critics' contention that Fiorina deserves the credit for the company's turnaround, he did not disparage her strategy. Instead, he said that her efforts "just needed a bit of crystallization."

Hurd's modest demeanor came into play again at the congressional hearing on Thursday when he deployed it to defuse anger about privacy invasions by company-hired detectives, all of whom refused to testify and invoked their Fifth Amendment right against self incrimination.

Hurd took a big risk by volunteering to appear at the congressional inquiry--any missteps at the hearing could haunt him personally, professionally and legally--but his advisers said he figured that owning up to well-publicized mistakes was a better path to follow than hiding. He also asked to appear alone at the witness table, something that the company's crisis consultants counseled against because it meant that he would probably be hit with more questions.

"It was Mark's decision; he's taken the position that he needs to take responsibility for what went wrong," said Michael J. Holston, a lawyer with Morgan, Lewis & Bockius, which is representing the company before the various state and federal investigators. "He concluded that he didn't have anything to hide so he got up there and answered all their questions."

Hurd also was not represented by a personal lawyer, a point he made sure that members of Congress--and the throng of reporters covering the event--noted.

As it turned out, Hurd never encountered a fusillade of hostile questions from the committee. Congressional ire was aimed, instead, at Patricia Dunn, who as HP's chairwoman had instigated the investigation and tracked its details, according to documents given to investigators. (Dunn recently resigned from the board, and Hurd assumed her duties.) But Dunn did not accept any responsibility for the company's actions and repeatedly said she could not recall or could not remember meetings, e-mail messages and memos related to HP's wide-ranging snooping. Some members of Congress were less than impressed by her.

"It showed that she was not credible," said Rep. Edward Whitfield, the Kentucky Republican who is chairman of the House subcommittee.

Yet Hurd was fuzzy on the details, too, raising the classic questions that arise in any scandal, corporate or political: What did he know and when did he know it? Despite the lingering ambiguity surrounding Hurd's role in HP's snooping, his name appears on only eight of some 20,000 pages of documents that the company has turned over to Congress, the California attorney general, and the United States Attorney's Office so far, , according to people who have examined most of those documents.

One of the stronger pieces of evidence that linked Hurd to the spying project was a March 10 draft report of the operations that HP's investigators prepared for certain company executives. Hurd acknowledged receiving the report, but said he never read it. "It was not my finest hour, Mr. Chairman," he replied to Whitfield's questions about how he could have missed references to such things as surveillance, obtaining a reporter's cell phone records and installing tracer software on a reporter's computer.

Those references appear on the third and fourth pages of the 18-page report. While the reference to the legality of obtaining cell phone records was noted only in a footnote, a reference in the text of the report to a "covert intelligence gathering operation" would seem harder to miss. Hurd testified that he did not approve the use of the tracer software, which covertly pinpoints the Internet address of anyone who opens the document online. He said he had not ruled out the future use of such software in possible criminal investigations of fraud or theft perpetrated against the company. But according to people close to him, Hurd has forbidden its use on reporters.

For all of the apparent good will surrounding him, Hurd still has some tricky issues to juggle. Potential criminal charges still loom against HP and three employees who were deeply involved in the spying operations. As is always the case in corporate investigations, they may end up implicating their bosses as legal pressures mount. The three employees are Ann Baskins, the company's former general counsel (whose office was only several feet from Hurd's); Anthony R. Gentilucci, the company's manager of global investigations, who resigned; and Kevin T. Hunsaker, a senior counsel who reported to Baskins and led the investigation, who refused to resign and was fired.

Even with those employees--and Dunn--out of the company, it is still possible that Bill Lockyer, the California attorney general, could bring felony or misdemeanor charges against HP. And it may be harder for Hurd to charm Lockyer than it was for him to charm members of Congress. Holston, the company's lawyer, said HP continued to supply documents to authorities. "We don't think a crime was committed," he said. "But we understand their argument and want to talk it through."

Hurd faces another challenge. The spy operation has led to the removal of three board members. Finding replacements will be a distraction. But it is also an opportunity to rebuild a board with members who are not at one another's throats, according to analysts.

"They've bled a ton of blood," said Robert Enderle, an analyst at Enderle Group, a technology market research firm in San Jose, Calif., who said the board needed people with a better understanding of the Internet and younger consumers. "It would be good to have someone on the board who understands consumer electronics--and not the way it was 10 or 20 years ago."

However the scandal shakes out, one thing is clear: HP is now widely linked in the public mind with the invasion of privacy, and that perception strikes at the core of the company's identity and its marketing mojo.

"Privacy is a core HP value," said Scott Taylor, the company's chief privacy officer, in a congressional hearing last June. "We firmly believe that our ability to succeed in the marketplace depends on earning and keeping our customer's trust."

Anyone who has an HP computer may have noticed the messages that pop up from time to time on the screen that are sent directly from the company. They were perceived before as innocuous, maybe bothersome. But now they may serve to remind customers of the spying episode, which Hurd described as a "breakdown at multiple levels."

In other words, whenever one of those Hewlett Packard pop-ups appear on users' computer screens, they may feel that they are being "HPed."

Laurie J. Flynn contributed reporting for this article.