Has HP finally moved past the Hurd scandal?

March 31, 2011: 2:16 PM ET

Hewlett Packard can never write the Mark Hurd scandal out of its history. But have wholesale executive changes at least helped new management turn the page?

Leo Apotheker and Ray Lane

Leo Apotheker and Ray Lane

FORTUNE  -- It's been a rough several months for Hewlett-Packard's (HPQ) board. First they had to deal with a scandal that led to the sudden departure of their Chairman and CEO. Then they had to begin a search for new leadership. Finally, a third of the board that picked that new leadership duo was swept away by it just a few months later. Yet despite the company's best efforts, it's still plagued by lingering controversies stemming from former CEO Mark Hurd's departure.  This all, of course, started last summer, when an investigation of Hurd's relationship with a former contractor and fuzzy expense reports led to his resignation.

Then, shortly after the company picked tech industry heavyweight Ray Lane as its new Chairman of the Board, Lane decided to replace a third of HP's directors in one fell swoop. But the attempt to overhaul the board didn't go as smoothly as expected. In early March, proxy advisory firm Institutional Shareholder Services said HP went against internal policy by allowing its new CEO, Leo Apotheker, to participate in the selection of new board members. ISS recommended that shareholders vote against several of the directors up for election.

Despite the recommendation, last week HP's investors approved all 13 new and returning board members at the company's annual shareholder meeting. But that doesn't mean the company can move past the Hurd scandal quite yet. For starters, HP is still battling a shareholder lawsuit that alleges the board violated its duties by granting Hurd a severance package worth upwards of $40 million, instead of firing him. What's more, while HP's investors may have approved the board's recent makeover, they also expressed ongoing concern about pay packages awarded to both Hurd and Apotheker.

At last week's shareholder meeting, about half of HP's investors voted against the company's pay packages for top management, which includes the hefty severance check Hurd received after stepping down last year. The vote, however, was advisory so it doesn't mean HP will have to change its policies in any way. Still, the message from shareholders was loud and clear enough for HP to respond publicly.

"While we are disappointed with the outcome of the advisory shareholder vote, HP intends to carefully consider our shareholders' perspectives regarding executive compensation matters and will take those views under advisement when making future decisions relating to executive compensation," HP said in a statement. So where does HP go from here?

Despite the multiple rounds of criticism, the company's newish chairman of the board, Lane, maintains that HP is in a good position to move forward. "The outcome [of overhauling the board] was that we got through this and we now have a forward-looking board," Lane, also a managing partner at venture capital firm Kleiner Perkins Caufield & Byers, told Fortune in a recent interview about the incidents.

"This board doesn't have the baggage of looking backwards," Lane continued. Unfortunately, that's probably not completely accurate. The company does have to look backwards -- it has to contend with years of cost-cutting, layoffs, and seemingly ill-managed acquisitions meant to bolster an enterprise software and services business that has yet to pay off significant dividends. And it hardware business can only shore up the company for so long, as margins there continue to erode in the face of overseas competition. The board will have to look back constantly, to do a best-guess accounting of how long the "old" HP can financially support the company while Apotheker hurriedly builds the "new" HP out of nearly whole cloth. It won't be an easy time, and in that way, what's facing the company has surprisingly little do with whether Mark Hurd had stayed or gone: a new strategy was going to be needed sooner rather than later, no matter who was sitting in the CEO suite.

Of course, making nice with shareholders will go a long way -- and doing that will take a lot more than swapping out a few board members. To finally move past the Hurd debacle, HP will need to prove to investors that this new strategy, under its new management, will succeed. Lane has argued that the board needed to match the company's new aims, something board guru Ram Charan has also defended as necessary. However, now that the team is in place, the direction is set, and the task is clear, the palace intrigue has to die down to normal levels for the company to move beyond dysfunction into turnaround mode. In other words, what's really needed to get shareholders, customers and employees past the machinations of the late-Hurd and early-Apotheker/Lane eras, and on board with the new Hewlett Packard, might be as simple as this: transparency.

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About This Author
Michal Lev-Ram
Michal Lev-Ram
Writer, Fortune

Based in Silicon Valley, Michal Lev-Ram covers enterprise and mobile technologies for FORTUNE. Prior to joining FORTUNE, she wrote for CNNMoney, Fast Company, Popular Science and other business and technology publications. She was also a staff writer at Business 2.0 and holds a B.A. in journalism from San Francisco State University.

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