Tension at the Top

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By Yuki Noguchi
Washington Post Staff Writer
Tuesday, September 12, 2006

The Justice Department, the Federal Bureau of Investigation and a House subcommittee have started their own probes into how Hewlett-Packard Co. investigators obtained private phone records in an attempt to identify a source of company leaks to the media, according to the company and regulatory filings released yesterday.

Last night, the HP board of directors also reconvened to consider ousting its chairman, Patricia C. Dunn, who led the company's efforts to identify the source of the leaks from its own board.

The company revealed yesterday in a regulatory filing with the Securities and Exchange Commission that it had been contacted by the U.S. attorney's office for the Northern District of California for information regarding its investigation.

A spokesman for the FBI said the agency also was looking into the methods of HP's investigation. The House Energy and Commerce subcommittee on oversight and investigations has asked HP to submit information as part of the committee's broader look at breaches of private information. Last week, the California state attorney general's office launched its own investigation, and the Federal Communications Commission requested information from AT&T Corp. about the disclosure of the phone records.

How HP's investigators obtained phone records and other private information about its directors and several members of the news media has touched off a storm of criticism and investigations, and has raised concerns that such aggressive tactics are commonplace in the corporate world.

The company, started in the Silicon Valley garage of its founders and incorporated in 1939, is considered an icon in the technology world. But moving its old-line business into the new age divided the company in recent years, a tension that has created one of the fiercest feuding corporate boards.

When Dunn joined the board as a director in 1998, the company was known more for its line of printers than for computers. In 2001, then-HP chief executive Carly Fiorina championed a $19 billion acquisition of Compaq, arguing that buying the maker of personal computers would give the business bigger scale and a broader base of corporate customers. Fiorina clashed bitterly with Walter Hewlett, son of co-founder Bill Hewlett, who sought to keep HP from venturing afield of its profitable printer business. Hewlett had the backing of members of the Packard family, but when Fiorina prevailed and HP bought Compaq, he was dismissed from the board.

Dunn backed Fiorina in that battle but turned against her three years later, calling for the resignation of the brash and charismatic Fiorina as HP faltered after the merger. Fiorina, one of the few female Fortune 500 leaders, resigned. Dunn took over her position as chairman, and former NCR Corp. chief executive Mark Hurd eventually assumed the position of chief executive.

Under Hurd, the company's profit has soared as it cut costs and eliminated more than 15,000 jobs. The company's stock has also made a dramatic recovery during his tenure. When he joined the company in April 2005, its stock was trading at about $22 per share. The stock gained 27 cents per share yesterday to close at $36.36, which is near its 52-week high of $36.73.

This month, however, the company disclosed to the SEC that one of its board members, venture capitalist Thomas Perkins, resigned in May. Perkins is a former HP employee who was best known for co-founding the prominent Silicon Valley venture capital firm Kleiner Perkins Caufield & Byers.

His resignation came in protest over the methods used to determine which board member had been leaking information to the news media.

In trying to find the leak, the company hired an investigator, who then hired an agency that had its employees pose as HP board members and nine journalists to gain access to their personal phone records -- a practice known as pretexting. HP had determined that George A. Keyworth II had leaked the information. Keyworth was asked to resign but declined. The company said it would not re-nominate him to the board.

Dunn, who was named board chairman after Fiorina was ousted, has become the central figure in the scandal because the investigation was ordered under her watch.

Dunn, 53, the daughter of a Las Vegas showgirl, started her career as a secretary for Wells Fargo Bank and worked up to chief executive of Barclays Global Investors.

During her tenure on the board, she has presided over a number of acrimonious battles at HP. This time, she has publicly denied any knowledge of the methods of investigation and has criticized Perkins, the former board member, after he called for her resignation.

"Tom knew more about the investigation than probably any other director," Dunn told the San Jose Mercury News in an article on Saturday. Perkins advocated going further, including subjecting board members to lie detector tests, Dunn told the newspaper, a claim Perkins denied.

In an e-mail, Perkins also complained to HP general counsel Ann Baskins that minutes from the board meeting did not reflect his dismay at the surveillance tactics. HP's outside counsel, Larry Sonsini, chairman of the law firm Wilson Sonsini Goodrich & Rosati, also told Perkins in a June e-mail that the investigation and its conduct were legal.

"In corporate scandals, this is as bad as it gets," said Charles Elson, director of the Center of Corporate Governance at the University of Delaware. While leaks are undesirable, it was far worse that the company investigated its own board, which is supposed to be independent, and was allowed to criticize management practices, he said. "The chairperson of the board should be held accountable" for such a violation of directors' independence, he said.

Staff researcher Richard Drezen contributed to this report.

© 2006 The Washington Post Company

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