The corporate world has been abuzz for the past week about news that Hewlett-Packard hired investigative firms that engaged in “pretexting,” posing as directors (and perhaps also journalists) to gain access to personal phone records.
The legality of this tactic is far from clear. Although Larry Sonsini, HP’s outside counsel, originally deemed the practice “well done and within legal limits,” he backpedaled quickly, and California Attorney General Bill Lockyer is investigating whether either HP or its investigators violated California law.
The uproar surrounding the story is heightened by the history behind why HP felt it necessary to engage in such underhanded tactics in the first place.
The turmoil facing the HP board began with the company’s 2002 acquisition of Compaq Computer Co. That acquisition, opposed by many of the company’s founders and several of its then-directors, caused great dissension and led to a revolving door on the board of directors. The unrest culminated in the fractious ouster last year of Carly Fiorina, HP’s chief executive officer. During the machinations to orchestrate her removal, someone leaked details of HP board meetings to the media. To determine the source of those leaks, HP hired the investigative firms that conducted the pretexting.
As fascinating as the sordid details may be, we must not lose sight of the broader implications of this story. Those expressing outrage over the information leak and the subsequent probe are shocked, simply shocked, that the once-cohesive nature of a corporate board has been so violated. But at least part of this outrage is misplaced.
There is no excuse for engaging in illegal behavior, and the press and public are right to take HP to task for pretexting. Less clear is whether the leaks warranted such a dramatic response, or any response from the board. Dissent among board members is not uncommon, and the occasional disclosure of it should not be seen as shocking.
It is true that such revelations once would have been unthinkable. Board membership was often a question of who you knew, and interlocking directorates were widespread. Under that management structure, the prevailing ethos was to remain close-lipped. A director’s allegiance to his fellow board members (and they were almost exclusively male) was unshakeable. In that climate, disclosure of dissent would never have happened, both because dissent was unlikely and because when it did occur, board loyalty demanded discretion.
Fortunately, the structure of boards of directors has come a long way. Boards can no longer be characterized as cozy clubhouses where only close friends fraternize. The “old boys’ network,” while not completely dismantled, is in serious disarray, and a broader spectrum of people today serve as directors. With more disparate interests represented, it should not be surprising that board members break rank.
Further, the law encourages directors to do just that. In the American model of corporate governance, directors are the voice of shareholders and are obligated to put shareholder interests first. Further, boards are now charged with greater obligations of independence than ever before. In response to the Enron debacle, the stock exchanges enhanced their listing standards and Congress passed the Sarbanes-Oxley Act to ensure that directors truly are independent.
Expression of individual judgments should at times lead to heated board discussion. It is better for shareholders that board members debate multiple points of view than move in lock-step toward a decision. This is not to suggest that every subject of boardroom debate should be shared with the general public. Boards are given legal protection known as the business-judgment rule so long as they make informed and considered decisions.
The business-judgment rule supports the premise that certain matters discussed at board meeting, such as confidential business discussions, should never be divulged. The reason is that their disclosure would harm shareholder interests by compromising the company’s ability to plan, strategize and negotiate to its full competitive advantage. As distasteful as leaks about personnel matters may seem, they do not fall into the same category. In fact, shareholders may be better served when their directors air such dirty laundry. Only by learning where the warts are can shareholders make informed choices about who is serving their best interests. Far from it being “ugly and reprehensible” that a director might leak – as Patricia Dunn, the recently demoted HP chairman alleges – it may actually be a net benefit for shareholders and, therefore, for the corporation itself.
The shareholders’ job is to choose the individuals best suited to run their corporation. Typically, the information available to them when they make that choice comes from the corporation itself – hardly an impartial voice. While we may not like the thought of leakers, this is a situation where they may play a useful role. Much of our belief in the market and indeed our entire structure of corporate governance demands full and free information. In fact, absent confidentiality agreements, directors should be free to share most information with shareholders, who after all are the owners of the corporation and who are legally entitled to access to board meeting minutes. Rather than discourage open discussion about directors’ dissent, we should acknowledge that there are times when knowledge about it is invaluable, and leaking it is not a venal act.
Celia R. Taylor is an associate professor at the University of Denver Sturm College of Law specializing in corporate and securities law.
