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Case 3-10 Accountability of Ex-HP CEO in Conflict of
Interest Charges
How could a CEO and chairperson of the board of directors of a major company resign in
disgrace over a personal relationship with a contractor that led to a sexual harassment charge and
involved a conflict of interests, a violation of the code of ethics? It happened to Mark Hurd on
August 6, 2010. Hurd was the former CEO for Hewlett-Packard (HP) for five years and also
served as the chair of the board of directors for four years. On departure from HP, Hurd said he
had not lived up to his own standards regarding trust, respect, and integrity.
The woman who brought forward the sexual harassment complaint was a “marketing consultant”
who was hired by HP for certain projects, but she was never an employee of HP. During the
investigation, inaccurately documented expenses were found that were claimed to have been paid
to the consultant for her services. Falsifying the use of company funds violated the HP Standards
of Business Conduct.
HP did not violate securities laws despite making statements such as a commitment to be “open,
honest, and direct in all our dealings” because such statements were too vague and general, U.S.
District Judge Jon Tigar in San Francisco wrote.
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As a result, shareholders led by a New York City union pension fund cannot pursue fraud claims
over Hurd’s alleged violations of HP’s standards of business conduct, the judge ruled.
“Adoption of the plaintiff’s argument (would) render every code of ethics materially misleading
whenever an executive commits an ethical violation following a scandal,” Tigar wrote.
An excellent video that explores the crisis at HP, character of Mark Hurd, and the
ethical culture at HP can be found at:
https://www.youtube.com/watch?v=ef4610AH2lI
Questions
1. When he was CEO, Hurd wrote in the “Standards of Business Conduct” at HP that
“We want to be a company known for its ethical leadership….” His message in the
preface continued: “Let us commit together, as individuals and as a company, to
build trust in everything we do by living our values and conducting business
consistent with the high ethical standards embodied within our SBC.”
What is the role of trust in business? How does trust relate to stakeholder interests?
How does trust engender ethical leadership? Evaluate Mark Hurd’s actions in this
case from an ethical and professional perspective.
Trust is needed in any agreement, contract, or relationship. Trust assumes the other party
in an agreement, contract, or relationship is being honesty and reliable, has integrity, and
exercises loyalty in the situation. Trust is especially important for investors and creditors
to make financial resources available to a company.
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2. Despite hundreds of pages of policies, codes of ethics, organizational values, and
carefully defined work environments, company culture, and lapses in workplace
ethics occur every day. Explain why you think these lapses occur and what steps
might be taken by an organization to ensure that its top executives live up to values
it espouses.
Lapses occur because we are human. Often we are stressed, hurried, tired, and do not
recognize the ethical issues in a timely manner or at all. We all have blind spots and
suffer from moral blindness and bystander effect. A workplace that helps minimizes
temptations by having good internal controls and a safe environment to admit and recover
from lapses helps it executives and workers live up to the company’s espoused values.
3. Leo Apotheker, the former CEO of HP who succeeded Mark Hurd, resigned in
September 2011, after just 11 months on the job—but he left with a $13.2 million
severance package. Hurd left with a package between $40 million and $50 million.
Do you think executives who resign from their positions or are fired because of
unethical actions should be forced to give back some of those amounts to the
shareholders to make them whole? Why or why not?
The role of a severance package is to provide salary and benefits until the executive can
find another position. Some severance packages include all earned deferred compensation
in a lump sum. Some severance packages may be equal to 6 months or a year’s salary. An
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Extended Discussion
The clawback provision was first passed under the Sarbanes- Oxley Act of 2002.
However, Dodd-Frank has given the SEC additional powers to claw back compensation,
such as bonuses, from executives under certain circumstances. Specifically, the law
requires the national securities exchanges and national securities associations to prohibit
the listing of an issuer that does not comply with those clawback provisions.
The Dodd-Frank clawback provisions are significantly more expansive than is the
clawback provision under Section 304(a) of Sarbanes-Oxley. For instance, under
For companies and their executives to fully understand the scope and terms of the new
rule, the SEC will need to address several areas. Chief among them are:
• Who will be considered an executive officer for purposes of the clawback provisions?
Will the rule cover all executives in the C-suite, such as the chief compliance officer,
chief information officer, and chief legal officer?
• What is the definition of a restatement? Is a company required to have filed an amended
financial statement?
• Will every restatement be considered a result of “material noncompliance” with the
financial-reporting requirements?
• Will profits from stock sales be subject to clawback similar to the current rules?
By adopting clawback policies, companies may improve accountability within both their
executive ranks and their companies as a whole. With such policies in place, companies
