
In Defense of Standards, Ethics, and Honest Financial Reporting at HP - jayliew
http://bhorowitz.com/2010/10/08/in-defense-of-standards-ethics-and-honest-financial-reporting-at-hewlett-packard/
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grellas
Whether one agrees with the author or not (I do), this is a well-articulated
defense of the need for a strong ethical standard in corporate America.

How does one begin in sorting through it all?

There are, on the one hand, those who see the "corporation" as an inherently
evil abstraction, at least in its mega form as represented by publicly traded
companies such as HP. This sort of view is primarily ideological and, argue as
one might with one who is an ardent proponent of it, you will not dislodge
that person from the broad idea that corporations are an inherently evil
mechanism for conducting business and that those who manage corporations are
therefore inherently malevolent in their motives. Just mention the telcos, or
Microsoft, or any one of a number of large, institutional companies and the
word "evil" rapidly comes to the forefront of the discussion. If one takes
such a view, what room is left for high ethical standards within such a
framework? If the very vehicle is inherently corrupting, then ethical breaches
in themselves should be treated as mere by-the-way phenomena, as inherently
corrupt by-products of enterprises that are already corrupt top-to-bottom.
This to me is not a realistic view of what a corporation is. A corporation is
a collection of people whose policies are determined and executed by human
beings. The entity, then, will be a reflection of those who control and manage
it. Having worked with thousands of such entities over the years in their
smaller forms (early-stage startups), there is no doubt in my mind that there
is nothing inherently corrupting about the corporate format. It is merely a
legal body for organizing human activity. It will be good or bad depending on
who organizes and administers it. Yes, there is a de-personalizing element in
public companies, where there are primarily institutional owners as well as
thousands or tens of thousands of faceless shareholders whom no one in
management even knows. But even public companies have a culture and this
culture sets the tone for their boards of directors and the board in turn can
set the tone for the company. Ergo, the author is right - ethical standards
_do_ matter in public companies and setting a high standard does absolutely
make a difference.

On the other hand, there are business pragmatists who regard the corporation
as a pure money-making machine, as noted by the author. For them, the end can
justify the means in many cases. As long as it promotes shareholder value, and
as long as it does not cross some overt criminal line or is not legally
egregious, it is acceptable to look the other way in furtherance of the
broader profit goals of the company. The author picks this view apart fairly
nicely by showing that human beings who adopt such an approach can readily
find themselves on a slippery slope to ethical (and legal) perdition.

I began my career at a large law firm working on a case involving a NYSE
company whose senior management decided at some point to "smooth" their
earnings results essentially by overvaluing the inventory on hand in its
various warehouses scattered throughout the nation. That was in an era when
such inventory (in this case, copier machines) carried a high value and was
probably the major asset class of the entity. The company had been a growth
darling of the stock market and had seen consistent and impressive quarter-to-
quarter increases in both revenues and profits. These increases were initially
very real. The company did not start out as a fraud. It was a bona fide
success, and a huge one at that. After a time, however, as results came in a
bit below expectations, the senior management started to fudge the numbers.
Nothing too extreme at the start. "Let's just treat some of that obsolescent
stock as if it still have value - it will only affect results marginally but
will be critical for the stock performance." After a time, however, that
management became intoxicated with the company's stock performance and this is
turn caused the members of that management to begin doing more extreme things,
one step at a time. After a few years of this, they had wound up essentially
fabricating the existence of large volumes of inventory in its warehouses that
were no more than fraudulent paper entries and were not backed by real goods.
The initial internal justification, kept within a very tight-knit circle, was
that this was necessary to preserve the value of the stock while the company
simply rode through a temporary dip in performance. It would be "made up"
later. To achieve its goals, though, this management team had to involve
progressively more and more people, such as regional sales managers. They
would give them bonuses to reward "performance" in their regions. The pattern
was the same with the regional guys. First, just do a small thing; later, as
things got more desperate, they too were asked to commit over fraud. This all
went on for over half a decade and, only after it had reached an extreme did
it all collapse. The result: bankruptcy, disgrace, criminal convictions, and
shareholders deprived of their valuable savings, with some left destitute.
Given that such things can and do happen, is there room for saying that it is
acceptable for those in the highest seats of corporate power to commit
breaches involving moral turpitude and to simply ignore this?

Yes, it _is_ possible to be prudish or otherwise wrongly motivated on these
sorts of issues. I have seen startup founders hounded out of their positions
and have to forfeit large amounts of valuable stock simply because they left
themselves vulnerable to be "set up" with sexual harassment claims, only to
have a board motivated by ulterior motives use this as a pretext to take them
out. In such cases, there is room for abuse on all sides, and in an imperfect
world it will not always be possible to tell who is motivated by what and
whether ethical standards are in fact being upheld or whether the board
actions are mere pretexts for darker goals.

That said, it is vital that those who run corporations do, to the extent
practicable in large companies, act in good faith to strive to uphold
standards in every way they can. Will they be able to do this perfectly in a
large organization? Not likely. Should they try? Absolutely. In public
companies in particular, they hold the trust of large numbers of shareholders
and, if they try to cover for the lapses of a CEO who has shown a lack of
honesty on non-trivial matters, they will be just as culpable as the immediate
wrongdoer. Moreover, they will permit a corporate culture to develop that is
indeed corrosive and that could easily lead to serious wrongs committed under
their watch.

This is not merely an issue of legal liability. Yes, a board that knowingly
countenances corruption may be legally culpable. But that is not the main
point and the author focuses on this nicely. It is an issue of _integrity_.
"Integrity" comes from a Latin root meaning "whole" (we get the word "integer"
from that same root). The idea of wholeness in ethics is that what is
reflected in a part will reflect the entirety of what is there. That is why it
is always dangerous to look the other way when wrongdoing occurs among those
holding positions of authority. We can excuse the lapse but what does this
reveal about the person doing it. If he lapses here, will he not lapse
elsewhere? If it is a peccadillo, maybe that is one thing. But if it does
involve a serious moral lapse, that is quite another, especially if willfully
done. Does such a person deserve continued trust? From a board perspective,
the answer should be no. Not for legal reasons but for ethical. Whatever
corporations are, they are better for upholding the highest standards possible
insofar as the nature of the institution permits.

One final illustration to emphasize why legal liability is not alone enough to
check wrongdoing and why an ethical standard ought to prevail: What about a
startup controlled by investors on a board following several rounds of
funding. What happens when, as the bubble is bursting, they vote to use
company money to "acquire" other of their portfolio companies that do not in
fact warrant being acquired, thereby bleeding the company on whose board they
sit for the benefit of their separately owned private investment fund. The
board votes are all taken very legally (at least in form), with each investor
representative abstaining in the instances where his own fund is concerned but
otherwise voting for the other guy's payout, with the net result that the
company is effectively bled out for the benefit of the various investors
sitting on that board and all at the expense of that company's shareholders
(all done under the supervision of a prominent law firm representative). Is
this legal? Who knows, but it is very hard to do anything about it legally. Is
it ethical? Absolutely not. Yet, this is precisely the sort of thing that
happens when ethics are disdained in a business context - indeed, in such
cases, the person who refers to ethics is typically regarded as an
unsophisticated rube. This is where such things lead when ethics are discarded
in favor of pure money goals, as (by the way) often happened during the
bubble.

HP is no model company in this respect. I have seen this company do some
pretty questionable things over the years. Yet the HP cultural carryover from
"Bill and Dave" days _is_ something to be admired and, insofar as that is
reflected in the points made by the author, is worthy of being emulated.

This author's views probably represent a minority position in today's business
environment but I for one commend them. Integrity _does_ matter over time and
it will show itself one way or the other in how any management plays itself
out.

~~~
pvg
I think the difficulty is not in whether most people or, more importantly,
most employees and shareholders agree that the ethical standards of a
corporation should be applied to all. It's in the notion that Mark Hurd was
fired for no reason beyond his ethical indiscretions. The article rather
questionably refers to him as a 'popular CEO' (with whom?). There's repeated
mention of 'Playboy model'. Of course it's lurid. Did Mark Hurd's behaviour
harm shareholders more than, say, Apple (which still retains its CEO of the
time) backdating stock option grants?

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luckydude
"In closing, I point out the impressive courage of the HP board of directors
to ignore popular opinion and do the right thing. It is not an easy thing to
fire a popular, highly successful CEO."

Oh, my. This is a crock of you-know-what. The HP board has their head stuck up
their collective asses and have been holding that position for years.

Carly was a joke, Hurd was so hated at his previous company he needed body
guards to get to his car with the slashed tires in the parking lot, the HP way
is dead and gone. And Hurd was a huge part of that. Make the current quarter
look good, HP way and employees be damned.

"Highly popular CEO" Are you fucking kidding me? 66% of HP employees would
take a job elsewhere for no bump in salary or title. Until Hurd that number
had never been higher that 10% (that's my memory, maybe Carly pushed it up as
well).

Popular? Yeah, maybe, with his cronies that he pays while watching the profit
sharing and other employee benefits be tossed into the crapper.

I'm not a current or former HP employee, though I did interview for a position
at HP Labs about 15 years ago and have friends there. What's happened to HP is
a crying shame. HP used to be a place that you envied. Now it is a place that
makes you cringe.

"Impressive courage". Gimme a break. If the HP board had courage they would
have given the CEO job to VJ or someone like him. Someone from the inside,
with a clue, that still cared about the HP way and the people that work for
HP.

I'm ranting because this post got me pissed off. So you might wonder if I have
a clue. I'd suggest you go read Chuck's blog here:

<http://hpphenom.blogspot.com>

He was there for a decade or two. Wrote a book about it.

And maybe dig out that calculator that the salesman threw across the room as
hard as he could at the wall and picked it up and showed you that it worked.
Remember those? Just one little example of how much HP cared about you, the
customer, once upon a time. Does anyone think they care now?

~~~
phuff
I dunno much about the HP board or the HP culture. But having spoken
personally with Ben Horowitz about creating company culture, and after working
at Ning, which is a heavily Horowitz + Andreeson-based culture, for nearly a
year, I can say this: he's sincere and the real deal when he says this stuff.
And as an employee, it totally works for me. I feel taken care of, like the
company has a greater mission than just making money, and like they care about
doing the right thing.

While I'm sure HP has many other corporate forces at play in it's decisions,
and I am but a lowly code monkey, if what Ben Horowitz outlines in the post
was at least a partial motivation for what they did, then I think there's at
least a glimmer of hope that things might get better there.

~~~
luckydude
He may be great, I don't know him. HP I know better. Their board is beyond
confused.

Read this, for example:

<http://www.nytimes.com/2010/10/09/business/09nocera.html>

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mindblink
I do think that the best engineering ethos that I admire is that engineers are
not just motivated by a payday but to build something useful for everyone. HP
at its best time represented that. I do like that his quote at the end:

"Companies should not merely be thought of as money generating machines.
Business can represent human society at its best. A business is a group of
people working together to deliver value to the world and improve people’s
lives. When done ethically, business quite literally changes the world for the
better. However, if the dark side of human motivation is not mitigated with
standards and ethics, business can destroy."

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VladRussian
HP invents. Priceless:

"She was hired by Hewlett-Packard and paid up to $5,000 per meeting to meet
with Fortune 50 CEOs. ... This was the Hewlett-Packard Corporation paying a
softcore porn movie star with no relevant work experience more than it pays
Harvard graduates with 20 years of industry experience. "

Different job descriptions - different pay.

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jamespitts
This article altered my perspective of what happened at HP. Firing Hurd, who
IMHO was a great CEO up until his lapse in judgement, was costly and did take
a lot of courage. I am now inclined to agree with the decision of HP's Board.

