HP's booting of Hewlett draws criticism

Corporate governance experts and others had urged HP to keep Hewlett on the board even if the Compaq Computer deal was ultimately approved. Even some of those who backed the deal, such as key adviser Institutional Shareholder Services, had suggested that HP have Hewlett or another family member on the board.

"I think we still feel that way, whether it was Walter or anyone else," ISS Vice President Patrick McGurn said Monday. McGurn said he still hopes the board will start a dialogue with both the Hewlett and Packard families.

But HP's board has clearly decided it has had enough of Hewlett. The board, which had been weighing whether to renominate Hewlett since the March 19 vote, decided late Sunday that a lawsuit filed against the company last week by Hewlett was the last straw. Hewlett is seeking to have all votes cast in favor of the deal overturned, thereby scuttling the merger.

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

While not suggesting any other Hewlett or Packard family members to replace Hewlett, HP CEO Carly Fiorina did say in a statement that the company's board would look for other ways to seek alternative views.

"This board has always operated on the important governance principles of independence, deliberation and respect for a diversity of views," Fiorina said in a statement. "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."

An HP representative said that with the Compaq acquisition, HP will be adding four more independent directors to its board, which will then be made up of 12 directors of which only two will be current management.

In a letter to employees, seen by CNET News.com, Compaq CEO Michael Capellas addressed HP's decision not to renominate Hewlett.

"As we've learned during the past seven months, the right road is not always the easy road," Capellas said. "The latest example is Walter Hewlett's suit to block the proposed merger between Compaq and HP...HP has said that the suit is completely without merit, and we support them."

But the decision regarding Hewlett is likely to drive a further wedge between HP management and those shareholders and employees who opposed the deal.

"At a minimum he represents 49.5 percent of shareholders and possibly more," said David Katz, chief investment officer of Matrix Asset Advisors, an early opponent of the deal. Katz said the decision was unfortunate, especially considering that boards are under pressure to nominate more independent thinkers in the wake of the Enron scandal.

"It's disappointing although not surprising," Katz said. "In an age where people are hoping to have (more) independent directors, this sort of flies in the face of that."

Charles Elson, director of the University of Delaware's Center for Corporate Governance, was among those who had encouraged HP to renominate Hewlett. He, too, described his reaction as disappointed but not surprised.

"Half the shareholders agree with Walter," Elson said Monday. "Basically, you are shutting yourself off to that viewpoint."

The decision to oust Hewlett could come back to haunt the company if the deal is approved but the integration falters.

"At this point they certainly don't have the mandate most boards would like going into an integration," Elson said. "Turning him out only compounds their problems."

Said one HP worker who opposes the deal: "It has been Carly's style to get rid of those who disagree with her direction. Walter was our only saving grace."