What's Outrageous About Mark Hurd and HP

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I don't know much about HP (NYSE: HPQ  ) , save for the fact that my ink cartridges go empty far too quickly. I do, however, have a pretty firm grasp of third-grade arithmetic, and running a few basic numbers convinces me that HP's decision to oust then-CEO Mark Hurd was patently ridiculous.

You already know most of the story: Hurd is accused of falsifying less than $20,000 of expenses over two years. That this was ethically shady is obvious. And as my colleague Tim Beyers rightly notes, Hurd "approved payments for reasons having nothing to do with creating value for shareholder. Do business offenses get any more serious than that? I can't see how."

No arguments there. But even more appalling is that canning Hurd triggered a $35 million severance package. So to be sure, the total financial cost of this debacle looks likes this:

$35 million + < $20,000  = $35.02 million

Now, which side of that equation did more to rob shareholders of their value? Hurd's petty expenses, or the HP board's decision to show him the door with a sum of money equal to more than double the gross domestic product of the nation of Tuvalu?

Last year, Bank of America (NYSE: BAC  ) shareholders faced a similar logical snafu when the bank was up against $33 million in penalties stemming from management's abuse of shareholders. As the judge handling the case (who threw the charges out) said of the penalty:

It does not comport with the most elementary notions of justice and morality, in that it proposes that the shareholders who were the victims of the bank's alleged misconduct now pay the penalty for that misconduct.

I suppose there's an argument to make that canning ethically challenged executives is about teaching lessons and sending signals. I just wish HP's board would be upfront and tell shareholders that spending $35 million of their money to teach Hurd a lesson was an appropriate use of capital that will add shareholder value. I think the absurdity in that speaks for itself.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. The Fool has a disclosure policy.

Read/Post Comments (9) | Recommend This Article (13)

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  • Report this Comment On August 13, 2010, at 2:51 PM, mjpriz wrote:

    This is what is wrong with America. Morgan House and most of America do not believe that character counts. The only thing that counts is money. America does not care if its politicians are dishonest. All we care about is how much money they can bring to us personally and to the district they represent. Morgan does not care that Hurd stole $20,000 as long as the shareholders still see a profit. According to Morgan's way of thinking, as long as Hurd stole less than 35 million dollars, the shareholder are better off if Hurd is not fired. What Morgan should be bemoaning is that HP did not have a contract that denies a thief his compensation package. What American, and especially Morgan House needs to realize is that capitalism only works in a moral society. Compare capitalism in Mexico to capitalism in the United States - then thing about which direction the U.S. is going thanks to people like Morgan House.

  • Report this Comment On August 13, 2010, at 3:16 PM, cmfhousel wrote:

    "According to Morgan's way of thinking, as long as Hurd stole less than 35 million dollars, the shareholder are better off if Hurd is not fired. "

    No. If he stole anything, he should have been fired *without severance.*


  • Report this Comment On August 13, 2010, at 3:25 PM, cmfhousel wrote:

    As for the board not being able to "denies a thief his compensation package," they indeed did. Per the Corporate Library:

    "Hurd's contract makes it clear that he is an "at-will" employee who can be terminated at any time. It describes the consequences of termination for cause (eliminating most severance payments) without defining it. There is nothing to prevent the board from sending Hurd a letter telling him he has been fired and then stopping payment on all those severance checks."

  • Report this Comment On August 14, 2010, at 3:00 AM, Sovestor wrote:

    So there anything that make not boring innovative in your article.

  • Report this Comment On August 15, 2010, at 4:06 PM, tommy2kjr wrote:

    This article is completely ridiculous. As an HP employee I find Mark's actions appaling. I don't care it it was 20K or $2M. HP has a long history of holding ALL employees accountable. If more companies did the Enron failure wouldn't have happened, and many other corporate scandals. What creates more shareholder value than ensuring executives act ethically. Your point is completely useless as far as I'm concerned.

  • Report this Comment On August 15, 2010, at 11:02 PM, gogobrigado wrote:

    If you don't have integrity, your intelligence really doesn't matter much. Sooner or later the company would have paid.

  • Report this Comment On August 16, 2010, at 1:06 PM, Turfscape wrote:

    The bigger question now becomes: How will the board handle the hiring of the new boss? Will there again be a "golden parachute" offered in case of sudden loss of ethics?

    THIS is the time that shareholder input is needed. Let us see the contract before it goes into effect and vote on it!

  • Report this Comment On August 16, 2010, at 1:08 PM, Turfscape wrote:

    tommy2kjr wrote:

    "What creates more shareholder value than ensuring executives act ethically. Your point is completely useless as far as I'm concerned."

    How does it encourage ethical behavior if you pay someone $35 million for doing wrong? Do you think Mark Hurd is sitting at home wringing his hands saying, "how will I pay my mortgage? who will feed my kids"?

    Mark Hurd was not punished for his actions. He was rewarded for them. THAT'S the issue that Morgan has brought up.

  • Report this Comment On August 17, 2010, at 11:25 PM, MMTInvestor wrote:

    Shareholders lost a lot more than $35.02 million; how about the major hit to HP's market cap when Hurd's resignation was announced?

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