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Chairman, Director Resign In HP Scandal
Leaks Probe Advances in Calif.

By Yuki Noguchi and Ellen Nakashima
Washington Post Staff Writers
Wednesday, September 13, 2006

The chairman of Hewlett-Packard Co. and one of its directors agreed yesterday to resign over a spying scandal that the California attorney general said could lead to charges against company employees, the latest shake-up for a board plagued by internal strife.

Chairman Patricia C. Dunn, who led the company's controversial efforts to identify the source of media leaks, will step down on Jan. 18, handing over the reins to Mark V. Hurd, currently the firm's president and chief executive. Dunn, who joined HP's board in 1998, will remain a director.

George A. Keyworth II, a longtime director whose phone records identified him as a source of the leaks, also resigned, effective immediately. But in a tersely worded statement, Keyworth defended his actions, saying his statements to the news media "did not involve the disclosure of confidential or damaging information."

It's unclear how soon charges in the scandal could be filed, but on last night's "NewsHour With Jim Lehrer" on public television, California Attorney General Bill Lockyer said, "We currently have sufficient evidence to indict people both within Hewlett-Packard, as well as contractors on the outside."

The management turmoil follows the resignation of Thomas J. Perkins, who stepped down from the board in protest in May when he learned that the outside investigators looking for the leak posed as company directors and journalists in an attempt to obtain private phone records, an act known as pretexting.

The HP board has been divided for years, stemming to Carly Fiorina's bid to acquire Compaq Computer Corp. when she was chief executive, a move that the company's founding family members and their allies opposed. When Fiorina was ousted in early 2005, Dunn was named chairman and soon after authorized an investigation into the leaks.

This week's resignations are unlikely to restore harmony to the board -- mostly, because the lineup of directors doesn't include any newcomers, said Charles M. Elson, director of the Center for Corporate Governance at the University of Delaware.

The company designated current director Richard Hackborn, a 33-year veteran and former executive at HP, as the lead independent director. Dunn, who will remain on the board, said in a statement that she hopes to expand it.

"Ideally, you go outside" to fill such positions, Elson said, "but it's very hard to find someone to fill that spot."

Few people would have the industry experience and willingness to join a board under such intense scrutiny, he said.

Paul Hodgson, a senior researcher at the Corporate Library, a corporate-governance watchdog group, said HP's moves are only stopgap measures that won't address underlying issues, including that board members don't appear to trust one another.

"It is a dysfunctional board" that will need to fully replace at least three of its slots, Hodgson said, but at the moment, trying to attract qualified board members would be a tough sell. Consolidating board leadership under the chief executive, however, is not a step forward, he said.

"It makes things a little incestuous," he said. "The problem is that the HP board and management appear to have decided something needs to be done to escape unwelcome media attention, and Dunn was chosen as a scapegoat."

Andrea Zulberti, former chief administrative officer at Barclays Global Investors and who worked alongside Dunn for 15 years, defended Dunn, noting that it was her responsibility as chairman to address the matter of media leaks.

Dunn's management style at Barclays was always respectful of both corporate governance and private space, Zulberti said. "It's surprising that she could be tainted with something like this, because she was always respectful of privacy matters."

In written statements, Hurd promised to ensure that similar tactics will not be employed in the future, but a company spokesman declined to elaborate on any specific measures the company planned to take.

Hurd also issued apologies to Perkins and Keyworth for the phone-records spying.

"On behalf of HP, I apologize to Tom Perkins for the intrusion into his privacy," Hurd said. He added that while Keyworth's contact with reporters was not "vetted through appropriate channels," it was done to further the company's interests. "HP board chairman Patricia Dunn expressed regret for the intrusion into his privacy."

Meanwhile, Congress and federal and state investigators continue to pressure HP about the methods used to obtain those phone records, with calls from lawmakers from both parties to pass legislation, now pending, that would make it a crime to obtain people's phone records by impersonating them.

That follows separate probes by the FBI, a House subcommittee on investigations, the California attorney general and the Federal Communications Commission.

The House Energy and Commerce investigative subcommittee yesterday sent a letter to Dunn, requesting detailed information by Monday on the outside consulting firm and subcontractors that are accused of impersonating board members and reporters to obtain their records. The committee is requesting names of individuals and copies of contracts and all reports of the internal inquiry into the leak probe.

"The most logical potential course of action is to convene a hearing and bring in witnesses who can testify to the facts," said Larry Neal, deputy staff director for the committee, which last week called British Petroleum executives to testify about their failure to prevent a pipeline leak. The investigative panel, he noted, takes all its testimony under oath.

In her statement, Dunn did not take responsibility for accessing phone records, calling that "inappropriate techniques." "These went beyond what we understood them to be, and I apologize that they were employed," said Dunn.

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