Few things could be as disturbing for a company from an IR standpoint as finding oneself at the center of simultaneous probes by the FBI, the California attorney general, US Congress and the SEC. That was the reality for Hewlett-Packard (HP) in the intense period of scrutiny following its own investigation into boardroom leaks to journalists.
The fallout from making ethical – and possibly legal – missteps to discover the source of the leaks has cost the company its chairman, three directors, its chief ethics officer, its top lawyer and thousands of damage-control hours – not to mention the bragging rights to doing things in the virtuous ‘HP way.’
Yet the share price remains essentially unchanged, holding steady near $40 per share and approaching a 52-week high. Despite all the hoopla, do investors care?
HP’s director of corporate media relations, Ryan Donovan, declines to discuss what must have been a strenuous effort to keep analysts and investors on an even keel. What is clear is that the company found a way to shift attention from the scandalous revelations to its financial performance.
HP had met expectations, and that was key. ‘Stock performance is based on a company’s ability to deliver what it promises to deliver,’ says a VP for IR at another US company. ‘I don’t know what HP’s guidance was. Whatever it was, the company is performing.’
The bottom line
HP’s case seems to support the idea that investors focus almost exclusively on business results. ‘Unless the company is saying the product is flawed or it is not going to hit its earnings targets, investors don’t care,’ says an independent research analyst.
HP’s problems began when its chairman, Patricia Dunn, led the board into potentially criminal violations of privacy by acquiring personal phone records to trace the release of confidential company information. Dunn’s investigators used the now infamous method of ‘pretexting,’ trailed reporters and directors, searched through the trash of at least one journalist, and launched a sting operation using a fake source to entrap another.
The operation identified the leaker, board director George Keyworth, who resigned. It also drew felony indictments for fraud and conspiracy for Dunn and four accomplices, a two-day Congressional hearing dragging HP employees including CEO Mark Hurd into the spotlight, and an SEC inquiry about possible inaccuracies in a related 8K filing.
Dunn resigned, but even while facing criminal indictments, she remains a thorn in the company’s side by continuing to discuss the situation and using prominent outlets to put forward her version of events – including CBS’ 60 Minutes and the Wall Street Journal’s commentary page – with the help of famously aggressive PR firm Sitrick.
Such negative publicity must be chilling to the IR team, says the aforementioned independent analyst: ‘It’s a position they must hate being in.’
Hurd held a press conference in September and stayed on message, saying the scandal did not affect the bottom line. ‘I want to reiterate that this has nothing to do with the strategy or operations of HP or frankly the vast majority of people at HP,’ he said.
Reaction from research desks
HP’s covering analysts also saw the positive side and expressed it in their research. Robert Stice of Standard & Poor’s described the events as carrying some ‘headline risk,’ but added: ‘We do not expect recent events to have a material impact on [HP’s] fundamentals.’
Merrill Lynch’s Richard Farmer placed the board investigation last in a list of seven ‘risks’ to his price target. UBS’ Benjamin Reitzes wrote in a note: ‘While the tactics used in this investigation are regrettable and certainly raise eyebrows, we actually sympathize with HP’s intentions since it is not permissible to have a board member who leaks confidential discussions.’
HP’s strong track record on guidance also gave it a boost. Reitzes noted: ‘We remind investors that with regard to financial reporting, it is our opinion that HP has among the best and most complete disclosures in our coverage universe. We view HP as the ‘gold standard’ in terms of segment reporting, timely dissemination of cash flow details and discussion of channel inventories.’
There hasn’t been much hand-wringing by analysts over the state of the HP board, perhaps because the scandal gives the company a chance to bring in three new directors. Baird analyst Daniel Renouard described the opportunity for a fresh start as ‘a big positive.’
The main bone of contention is the question of whether Hurd will have to resign. HP stock has been stellar under his leadership, rising some 80 percent since he became CEO 18 months ago, and the company is well positioned next to its chief rival Dell. There was some early share price weakness stemming from uncertainty over the extent of Hurd’s role in the investigation, but the company’s shares rose again after his press conference. Two investment banks called the dip a ‘buying opportunity.’
At the time of writing, Hurd still hasn’t fully cleared himself, but no matter what the eventual outcome is, he and others at HP still face accusations of divided attention. ‘They are spending so much time dealing with the media and the investigations that investors must be wondering if they are taking their eye off the business,’ says one observer.
Perhaps surprisingly, corporate governance advocates view HP’s leak investigation troubles with equanimity. ‘There is some sense that there has been an overreaction and that this is not at all comparable to Enron, Computer Associates or other corporate scandals,’ says Shirley Westcott, managing director of policy at proxy advisor Proxy Governance. ‘There has been a self-correction. People have come off the board and others have left.’
Patrick McGurn, executive vice president of Institutional Shareholder Services, says that so far this is just a case of a dysfunctional board. ‘These governance issues are not the type that would manifest in a strong stock price reaction,’ he says. ‘The options backdating that you saw at Apple and other companies produced a much more visceral reaction because it went to the heart of financial reporting practices.’
Despite the apparent IR success, the experience of the last three months has put those involved on edge and should make for an interesting session when HP hosts its analyst day on December 12 in New York.
