Did the Punishment Fit the Crime? Hurd Firing Raises Eyebrows

The surprising sacking of Hewlett-Packard (NYSE:HPQ) CEO Mark Hurd late last week has raised more than a few eyebrows around Silicon Valley and Wall Street, with some wondering whether the punishment matched the publicly-stated crime.

In a move that shocked the tech industry, HP announced the resignation of Hurd for filing inaccurate expense reports that were designed to hide a “close personal relationship” with a contractor, later identified as former actress Jodie Fisher. However, HP said Hurd didn’t violate the company’s sexual-harassment policy and Fisher and Fisher denied having an "affair or intimate sexual relationship."

Some have expressed skepticism that Hurd, who is widely credited for successfully turning around a sinking HP boat, was really canned for simply lying on a few expense reports.

“Whatever happened was significant enough to allow the board to step in and remove him,” Rob Enderle, principle analyst at the Enderle Group, told FOX Business. “Remember, he was both CEO and chairman of the board. It is really tough to pull somebody out of a job like that unless there is substantial evidence that they misacted.”

But it’s not clear what, if anything, the HP board discovered that led them to can Hurd, instead of going with a less harsh punishment like a private or public admonishment. The investigation showed that Hurd demonstrated a "profound lack of judgment that seriously undermined his credibility and damaged his effectiveness,” Michael Holston, HP’s general counsel, told reporters.

According to some reports, the amount of money fudged in the expense reports for dinners with Fisher totaled no more than $20,000, not an insignificant amount of money but not eye-popping either. After all, HP had reportedly been in talks with Hurd over a $100 million, three-year contract extension.

“There may be other things that may be bubbling around that we don’t know about. It’s a pretty serious step to take if it was just fudging a couple of expense reports,” said Bob Concannon, managing director at the technology practice of executive search firm Boyden.

Another school of thought is that HP’s board had been itching to fire Hurd even before it opened an investigation into the sexual harassment claims.

“My hunch is they were really looking for a way to get rid of him,” said Charles House, a 29-year veteran of HP and co-author of The HP Phenomenon. “This guy ran on a total fear and intimidation standpoint. He was ruthless in how he dealt with people and ran meetings.”

Specifically, House points to a survey conducted every five years at HP that he said revealed a shocking 70% of employees said they would leave tomorrow if offered a matching job elsewhere. “It just blew the executive committee away in terms of the ill will generated.”

House said employees were disgruntled by pay cuts, a removal of stock options for many employees and cutbacks in research and development spending that he said has left HP behind its rivals.

Then again, these unpopular moves have left HP where it stands today: ahead of IBM (NYSE:IBM) as the world’s largest tech company by revenue and with a market capitalization that has more than doubled under Hurd’s tenure to as much as $108 billion. (More than $7 billion of HP’s market value has evaporated since the Hurd announcement.)

“I would cut Mark some slack in that category because the job he’s had to do after taking over has been primarily about getting the cost structures in line with a company of its size and really putting finances in order,” said Concannon. “Any time you’re going to do that in as dramatic way as he has, a lot of people are going to be unhappy. You’re going to ruffle some feathers.”

Enderle said he wasn’t completely surprised that things got out of hand at HP and criticized the board for a lack of oversight.

Hurd “had a lot of time on his hands, has a lot of money and a lot of power and no oversight. It’s not unusual when you put someone in that position -- regardless of how much integrity they have going in -- that they are going to make a mistake and he did,” said Enderle.

Other corporate governance experts applauded HP for the apparent zero tolerance policy towards Hurd’s fudged expense reports.

“I don’t think they had any other choice. As a board, the most difficult thing you can do is remove a CEO. It opens up all kinds of problems. You don’t do it lightly,” said Charles Elson, director of the University of Delaware’s John L. Weinberg Center for Corporate Governance. “You have to give them the benefit of the doubt.”

HP’s stock has been thrown into turmoil in the wake of the Hurd firing, sinking nearly 8% on Monday. In fact, the 13.17% decline in HP’s stock in late trading on Friday represented the largest selloff since Aug. 2004.

“Shareholders dislike instability,” said Elson. However, it’s “better it’s off a couple percent today than if something serious happened and it was dramatically off down the road.”

While Chief Financial Officer Catherine Lesjak has taken over on an interim basis, it’s not clear who will be a long-term replacement for Hurd. If HP decides to go in-house, Concannon said it could tap Todd Bradley, 51, currently executive vice president of HP’s personal systems group and the former CEO of Palm (NASDAQ:PALM), which agreed in April to be acquired by HP for $1.2 billion.

Concannon said a flashier replacement for Hurd would be Jon Rubinstein, another CEO of Palm who was credited with helping to invent Apple’s (NASDAQ:AAPL) iPod.

Experts said executives fudging expense reports probably happens more often than shareholders realize. House recalled a similar incident at an unnamed company he served as a director at where the board allowed the CEO to quietly retire for other reasons after discovering improper expense reports.

“My guess is almost always these things get whitewashed,” said House. He recalled the board of the company’s thinking was that disclosing the mistake would have created a distraction. “Why put the dirt out there?”