Legal Commentary

There has been a terrific discussion on The Conglomerate about HP's Code of Conduct and its newly deposed CEO, Mark Hurd (who reportedly walked away with a severance package of 12MM cash plus options that could bring the entire package up to about 40MM).  Gordon Smith notes that Joe Nocera has speculated that the Board may have had other reasons for firing Hurd, but used the current "crisis" as a pretext for getting rid of him.  Today's New York Times reports that Hurd was fired because the Board and company investigators were mystified by his lack of judgment (authorizing more than $75,000 in first-class perks for an HP contractor who would later sue him for sexual harassment), and his lack of transparency (reaching a late-night settlement with the accuser before the Board's investigators had a chance to speak to her). 

It seems to me that given these circumstances, the Board acted well within its business judgment. 

At some point, the directors undoubtedly said to themselves, "What else don't we know?" and ultimately concluded, "We don't trust this guy any more."  (We can assume that different directors had different baselines of trust.  What's relevant is that the tipping point had been passed for all of them).  Given HP's prior issues with "integrity" and a brewing FCPA investigation with the feds, it's hardly surprising that risk-averse directors decided that it was time for Hurd to go.

The only question that remains, then, is whether the Board should have given Hurd any severance.  Recall that Hurd "resigned," albeit with some very strong encouragement.  Had he been fired "for cause," he would not have received any severance, but his contract does not define "for cause."  (Even if it did, do you think it would include the exact conduct that occurred here?  Surely, one could always engage in a protracted fight over what happened, and whether what happened constituted "cause".)

So if I'm a board member, I'm probably wondering whether it's better to tell Hurd to go pound sand, and risk a protracted and potentially embarassing lawsuit with Hurd, or give Hurd a relatively moderate severance package (this isn't a Michael Ovitz-size debacle, no matter how you slice it) and risk criticism from the media and a lawsuit from my shareholders.  Assuming that the media storm will die down, I probably choose the latter.  After all, assuming I cross my t's and dot my i's, the business judgment rule protects my decision from judicial second-guessing, and Hurd's severance package is a drop in the bucket compared to the value of moving on from this scandal.

This episode nicely demonstrates the benefits and shortcomings of corporate compliance.  On one hand, seemingly small compliance issues can serve as a bellweather for deeper, more intractable issues.  $75,000 is not very much money to HP, and HP found no evidence of harassment, but Hurd's conduct was troubling enough to raise a number of red flags.  On the other hand, the episode shows us what compliance cannot do, which is prevent people from engaging in incredibly short-sided and even self-destructive behavior.  You can intone values of integrity; you can spend inordinate amounts of time drafting and revising a comprehensive Code of Conduct; you can spend thousands of dollars educating your employees on how and why they should stay out of trouble.  But corporations are like cities, and just as no amount of enforcement by the NYPD can prevent crimes ranging from traffic infractions to violent murder, so too is corporate compliance limited in what it can and cannot do.