Hewlett-Packard CEO Leo Apotheker broke internal policy by being directly involved in the selection process of new directors to the company's board, an investor advisory firm said in a note issued last week.
Apotheker directly participated in the appointment of five new directors, while HP's governance guidelines are against the CEO identifying potential nominees for the board, said Institutional Shareholder Services, in a note issued March 2. ISS provides governance advice to shareholders and previously criticized Apple for not informing shareholders about discussions related to a succession plan for CEO Steve Jobs.
"The CEO's formal participation in the ad hoc committee established to identify potential director candidates runs contrary to the Nominating and Governance Committee's Charter which specifically calls for the process to be conducted by independent directors only," the ISS said in its note, which was seen by the IDG News Service.
HP's board faced controversy in August last year over the resignation of former CEO Mark Hurd amid sexual harassment allegations and over the appointment of Apotheker, the former CEO of SAP, which was being sued by Oracle over alleged theft of intellectual property.
Following Hurd's resignation, HP added five new members to the board of directors: Shumeet Banerji, chief executive officer of Booz & Co.; Gary Reiner, the former CIO of General Electric; Patricia Russo, former CEO of Alcatel-Lucent; Dominique Senequier, CEO of AXA Private Equity; and Meg Whitman, former president and CEO of eBay.
Citing a Bloomberg article published on Jan. 26, 2011, ISS said at "least four of the five director nominees have connections with Apotheker." ISS identified Senequier as a board member of Schneider Electric along with Apotheker, and three other nominees as having been customers of SAP's.
"Given that involvement, and the company's track record of abrupt CEO departures, there are also concerns about severance terms for the new CEO, whose recruitment package is valued at $47 million," ISS wrote.
It's possible for directors and executives to serve on outside boards together or to be customers of each other's firms, but the involvement of HP's CEO in this case raises red flags, ISS said.
"Shareholders should be concerned about the direct involvement of the company's new CEO in the selection process for new board nominees."
ISS is now recommending that shareholders vote against the re-election of nominees Lawrence Babbio, Sari Baldauf and G. Kennedy Thompson to the board. The board members failed in their attempt to enforce the company's guidelines to identify potential board member candidates, ISS wrote.
The vote is scheduled for March 23 at the annual meeting of stockholders in Arlington, Virginia.
HP in a statement said that the ISS report "misinterpreted" HP's process of identifying and nominating directors.
"HP has strong and robust governance practices. We believe that ISS's recommendation is based on their misinterpretation of the process that HP employed in identifying, selecting and nominating our directors. We do not believe that it would be in the best interests of HP's stockholders to lose the service of the experienced and dedicated Board members who have been delegated primary responsibility for establishing and maintaining those governance practices and who, by any standard, have carried out their obligations in a fully compliant manner," said HP in an e-mail statement.
The alleged involvement of Apotheker in board activities may be against HP's internal guidelines, but there's no reason to think it will affect the company's performance, said Ezra Gottheil, senior analyst at Technology Business Research.
The board and management were not on the same page when Hurd was CEO, with different visions for driving the company forward, Gottheil said. Apotheker will fuse any tensions and bring both groups on the same page.
It's not even the case that the board wants to radically change HP's operations after Hurd departed, Gottheil said. The result of Hurd's tenure is that half of the business that relies on scale is moving along quite well, and with Apotheker, the company will be able to explore new opportunities.
"I don't see any real problems with the changeover in the top. The company is fairly well set," Gottheil said.