HP & Autonomy: how bad strategy leads to bad corporate governance

By Nigel Kendall

As we said in an article earlier this year, at a time of great global change and even greater volatility, seldom in modern times has good strategic management been as important for companies. By this we mean the process of administering a company or business such that it continuously formulates, adjusts and implements strategies. This implies the ability to revalidate corporate goals and produce a credible new strategy which will endure unchallenged in at least the short to medium term.

At Tangley International, the holistic approach we take to corporate governance in our Applied Corporate Governance (ACG) methodology stresses an inclusive approach to strategy which embraces the interests of all key stakeholders.

What happens when the strategic management process is allowed to slip? Just look at the HP Autonomy fiasco. Let’s trace briefly the history of the two parties to this disastrous marriage and look at their history of corporate governance. Let’s then look at how our ACG approach could have headed off this mistake, or at least caused them to cut a different deal which might have worked to both parties’ enduring satisfaction.

Autonomy

A business founded by Mike Lynch, a brilliant technician, a visionary, but also by temperament a rebel and definitely not a person who would sit comfortably in the establishment. A man with a clear goal, and an inspirational leader but not good with those that disagree with him. He is very successful so he inspires a loyal following in his chosen field. He is a driven individual with huge self belief, who will stretch the rules (which he has little time for) to reflect the value he perceives his ideas and his business to have. In his mind, he is accountable to himself and those who follow him, and of course his clients who clearly believe in him. Are there echoes of Steve Jobs here?

HP

The company founded by Bill Hewlett and David Packard was iconic and an example of good corporate governance admired round the world. In its heyday it was a technical leader started by two technical wizards who then developed a self-justifying philosophy – “The HP Way” - which was quoted in all the management literature.

However, founders get old, move sideways and eventually die. Like IBM after the Watson era, HP starts to lose its way. Unlike IBM it fails to find a new way, finds its traditional goal failing to deliver results and loses sight of the way forward. So it seeks the answer through a new leader who might have the new vision that it needs. However, its new leaders look to expensive acquisitions as the answer, initially to reinforce HP’s hardware business buying Compaq and Palm, then as this fails to deliver, a major move into services with EDS, then a dramatic flip flop into exiting hardware altogether and diving into leading edge software with Autonomy. In the process it fires the CEOs who took each of these major decisions.

After a succession of new CEOs and rapid sackings and spending tens of billions with little apparent progress, investors get increasingly desperate, as does the board. It is interesting to compare HP with IBM which also took an acquisition approach to its strategy. Unlike IBM it conspicuously failed to integrate its acquisitions. Was this, perhaps, at least partly a result of the different nature of these acquisitions. IBM’s acquisition of Price Waterhouse’s consultancy business after HP turned it down compares with HP’s acquisition of two major businesses EDS and Autonomy, which were founded relatively recently and run by their autocratic founders Ross Perot and Mike Lynch. The integration of part of a long established accountancy and audit practice might have been by its nature rather easier than trying to graft two leader-driven businesses with very strong cultures into an established business.

So for HP, what now is their goal – moving further into software, building a high-tech software business, or continuing with the huge existing hardware business while dabbling in software and services – no-one knows. The organisation must have been wrenched by all this acquisition stuff and they have certainly lost both technical lead and customer trust, blowing a huge hole in the high tech Autonomy business through their recent actions. Sacking a CEO on performance grounds (Carly Fiorini) followed by one on moral grounds (Mark Hurd) followed by another on performance grounds (Leo Apotheker) makes its accountability look questionable.

What would an ACG survey tell us in these circumstances?

HP is the party to this deal which is complaining, so let’s examine this from the point of view of the hard-pressed stakeholders in HP. If we had conducted a survey according to our Five Golden Rules, what might the responses have been?

Ethical approach: the company run by Messrs Hewlett and Packard had strong ethical values, so let’s assume these values still apply. Whatever the rights and wrongs of Autonomy’s approach to accounting, one has to assume that there would have been some unease about buying into such a business, particularly after Larry Ellison had walked away.

Clear and broadly held Goal: Leo Apotheker’s plan represented a radical change of goal which was forced through against the wishes of many large investors. The Board was a willing party to this. However, it represented a very expensive move and the plan to exit hardware could be viewed as a “bet the farm” strategy. Surely not what investors or employees would have supported. The mismatch was surely made worse by the implied promise to Mike Lynch that he would be the one leading HP forward into the new software future.

Strategic management: the view in the market is pretty clear: this company doesn’t know where it is going. Hardly an endorsement of a strategically managed business

Organisation to fit strategy: with an acquisition-driven strategy wrecked by the virtual destruction of the acquired businesses, all the stakeholders would surely question the decision to graft on another business with a totally different business model

Accountability: Meg Whitman stands or falls on her accountability to the investors particularly. But there seem to be questions over why she is doing what she is currently doing at this particular time. After all, she was a party to an acquisition widely viewed as over-priced and a difficult culture task for HP. Moreover, if the Autonomy side is to be believed, regardless of the acquisition valuation, HP has subsequently done serious damage to the business it acquired by very poor management.

Except that HP is still a major force in its industry, there are shades of the RBS-AMRO deal here, where the hubris of an over powerful CEO and an acquiescent board forced through a deal which the major stakeholders would have rejected had they been given a meaningful say in the decision. The probability of failure was too high and the risk of damage to the company was too great. One might say: what happened to common sense? And even market stallholders understand the concept of caveat emptor.

Update 5 Dec 12

Since Meg Whitman went public with her accusation of “accounting improprieties” at Autonomy, designed to inflate the price prior to the takeover, several stakeholder groups parties have rounded on each other. Shareholders are suing both the company and the directors individually for not disclosing their knowledge of these accounting issues earlier and “deceiving” the investing public. Each of the “big four” accountants is denying any lack of professionalism on their part. Analysts at Citi investment bank have accused the UK’s Financial Reporting Council of allowing toothless regulation of corporate financial reporting, which, of course, it denies. Incidentally, no-one seems to be asking the views of the other two key stakeholder groups, customers and employees. Surely they can’t be happy?

How much better if the ACG system of stakeholder surveys, driving our holistic assessment of corporate governance had been in place. Then the HP Board would have been clearly informed of the views of the complaining stakeholders regarding the accounting issues and could have balked at the risks publicly, enjoining the investors, customers and staff in this decision, and backed off the acquisition. Alternatively, they could have gone ahead, publicly minimising these issues, taking the chance of a subsequent backlash from these groups and probably then having to abort the deal.


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