Will This Management Change Usher in a New Era for HP?

Meg WhitmanWhether Hewlett- Packard’s (NYSE:HPQ) reorganization of its board will provide the struggling personal computer manufacturer the opportunity to shake off its troubles is a question at the forefront of analysts’ minds after the company announced Thursday that its Chairman Ray Lane and two other directors had resigned. Taking charge on an interim basis will be activist investor and current director Ralph Whitworth.

Hewlett-Packard’s acquisition of Autonomy in 2011 — which prompted an $8.8 billion accounting write down in the fourth quarter of last year — both exacerbated and resulted from many of the underlying problems that are still affecting the personal computer manufacturer to this day: management upheaval, stumbling strategy shifts, and stagnating growth in the company’s core business. All these factors have contributed to making Chief Executive Officer Meg Whitman’s turnaround efforts a very complicated affair.

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Problems with management have led to shareholders concerns. Based allegations that “flawed oversight” was responsible for the Autonomy purchase, Chairman Ray Lane and several other members of the technology company’s board were targeted by a referendum to remove them from their positions in recent elections. Their situation was made even more precarious because investors have become increasingly dissatisfied by the direction the company has taken to combat declining personal computer sales and weaker corporate IT spending…

Somebody has to be symbolically accountable,” Yale University management professor Jeffrey Sonnenfeld told Bloomberg. “The hope is that it puts this behind them so it doesn’t become a governance sideshow.”

Lane failed to use his extensive experience in enterprise computing to breath new life into HP. At Oracle (NASDAQ:ORCL), where he served as president in the 1990s, Lane helped repair the company’s relationship with customers and reformed its sales culture. But, along with Whitman’s predecessor Leo Apotheker, he failed to transition HP from its traditional, lower-profit personal computer business to more lucrative software despite being given a mandate to expand in that area. Shareholders expected him to bring stability, yet his tenure — like Apotheker’s — has come to be associated with the botched Autonomy acquisition, which shareholders have argued was not vetted properly.

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In order to build on the momentum that Whitman’s turnaround efforts have begun to show — the first quarter revealed that revenue and earnings losses were narrower than expected — the board is looking for a new chairman that will devote more time to HP’s revival. Investors seem to be buying into the idea that the company’s fortunes have begun to improve; shares have risen 56 percent this year — an indication that headway has been made in its attempt to reignite growth.

Lane and directors G. Kennedy Thompson and John Hammergren were all narrowly re-elected at HP’s annual shareholder meeting on March 20. But last year, Lane was backed by at least 80 percent of shareholders, while two weeks ago, he received just 59 percent of the votes cast. “It’s not typical to get a withhold vote, and if you do you’d usually resign,” said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, to the publication. “Lane deserves credit for stepping down. If he’d stayed on he’d become the issue.”

But shareholder unrest was making it difficult for HP to attract additional high-quality directors to its board, a source told Bloomberg. Representing the second board overhaul in as many years, Lane’s departure underscores shareholders’ dissatisfaction with the company’s performance and its takeover of Autonomy.

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“In the coming months you will see further evolution of our board,” Whitworth wrote in a blog entry posted on the “HP Next” website, which was set up to chronicle the company’s turnaround. “We will recruit a world-class chairman to take my place as soon as possible, and we also hope to recruit at least two other outstanding directors before the end of this year. While sooner is better, rest assured we will not allow the rush of time to compromise our focus on recruiting the best of the best.”

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