JURIST Guest Columnist Douglas Branson
of the University of Pittsburgh School of Law says that the frenzy over the Hewlett-Packard pretexting scandal overlooks not only much that is positive about the company's record, but also the dubious legal advice that the now-indicted corporate leaders received from their outside counsel...
hree weeks ago on JURIST I wrote about recent goings-on at Hewlett Packard
, a stock market leader and a worldwide, dominant player in numbers of high tech areas. For more than 4 years, until February, 2005, H-P had a female chief executive officer, Carleton Fiorina, only the second (after Jill Barad at Mattel) at a Fortune 500 corporation and the most powerful businesswoman in the world. More recently, H-P also had a non-executive board chair, Patricia Dunn. H-P was one of only 16 % of large American companies to have a non-CEO (non-executive) in the board chair position, even though a non-executive chair is considered a baseline corporate practice, a standard in 90-95% of the large corporations around the world, everywhere except in America. Moreover, the chairperson was a woman. So Hewlett-Packard is a bellwether among U.S. corporations. There is much for which the corporation deserves praise.
But recent commentary, including my own, jumps past all of that. Late observations about the company have been universally negative, especially following Wednesday's indictment of Dunn, who initiated the investigation aimed at plugging H-P boardroom leaks, house attorney Kevin Hunsaker, the corporation’s chief ethics advisor and 3 outside detective operatives.
Things that went haywire at H-P include the assumption that what occurs at board meetings is confidential. It is not. Board members are extremely discrete in what they discuss with non-directors outside of the boardroom but that is far short of operating under the seal of confidentiality.
The board chair has no legal authority to order anything like this. "Board chair" is an honorary or ceremonial position. A few corporations delineate duties and responsibilities for the position, through bylaw provisions. Through the process of accretion, a few other corporations may be said to have given content to the position. Overall, not much has been written about the duties of board chairperson, certainly nothing in legal treatises or court opinions. It is a minor post. An over-exaggerated sense of self importance, as well as the common misunderstanding of the board chair’s authority, may have been at work here.
Most of all, what occurred at H-P does violence to boardroom culture, not laws. Directors do not spy on one another. Nor do they allow others within the corporation to undertake witch hunts against directors, like this one. Directors have the highest regard for and respect their fellow directors.
If directors suspect wrongdoing by a fellow director, they bite their tongues. The corporation simply does not re-nominate the suspect for service the following year. What occurred at H-P smacks of efforts to plug leaks in the Nixon White House or, in even an earlier era, the tactics of Senator Joe McCarthy.
As the saga at H-P unfolds, additional principles emerge, giving more guidance. One very fundamental universal evident here is that, when the pendulum swings, the pendulum never stops at dead center, or anywhere near that point. As here, the pendulum continues to swing, all the way to the stops on the other side.
To use another metaphor, this one from football, with indictments and threatened criminal prosecutions, there may be a bit or more of “piling on” in the Hewlett-Packard affair.
I have no sympathy for the professional operatives here. They know what is permissible and what is not. California Attorney General Lockyer should have his subordinates prosecute them to the fullest extent of the law. Pretexting is not only prohibited by statutes but it seems morally reprehensible.
The corporate defendants (Dunn and Hunsaker) say they thought about the legality of the tactics used but were advised by counsel that pretexting was permissible. Moreover, counsel was none other than Larry Sonsini, maybe the most powerful person in Silicon Valley (at least after Oracle CEO Larry Ellison).
Is the indictment of corporate players here post-Enron, post WorldCom morality? Yes, it is. The invocation of principles from those cases is very reminiscent of “post Watergate morality” and the more than a bit of hypocrisy which surfaced in the 1970s.
Does the prospective punishment fit the crime? No, it does not. Enron and WorldCom investors lost tens of billions of dollars. No one lost a dime at H-P. Ten of thousands lost their jobs as Enron vaporized and WorldCom entered bankruptcy (although WorldCom always did remain a very large and viable company, which emerged from bankruptcy as MCI, Inc., now part of Verizon, Inc.). Except for Hunsaker and Dunn, no one at Hewlett-Packard lost their positions.
Will a prosecution succeed, teaching Corporate America a valuable lesson? Probably not. The prosecutions will more than likely entail a requirement that the state prove, beyond a reasonable doubt, that the defendants possessed an evil state of mind at the time they acted, a fairly high degree of culpability.
Ms. Dunn states unequivocally they she relied upon advice of counsel. Moreover, she did not rely on a hack lawyer passing by. She relied upon the best of the best, which brings us back to Larry Sonsini at Wilson, Sonsini, Goodrich & Rosati. The advice of counsel defence should convince the jury that she lacked the needed mental state, or introduce more than a reasonable doubt that such was the case.
Some of the offenses Attorney General Lockyer alleges may be what attorneys call police power offenses. They dispense with any requirement that the prosecutor prove any state of mind with regard to minor matters and regulatory offenses, such as weights and measures ordinances or record keeping statutes. Nonetheless, the defense will introduce exculpatory state of mind evidence which the jury may well feel dictates the outcome, across the board, as to police power offenses and “ten commandment” crimes alike.
So where might the finger be pointed? Well, as usual, it seems to point directly at the one key player who had not been indicted, attorney Larry Sonsini. He gave the wrong advice. He seemed blissfully unaware of the basic, governing corporate governance principles here. And he rendered the advice with the aura of invincibility which emantes from his many successes and long-held reputation as a corporate and securites law adviser to major corporations.
Mr. Sonsini has been implicated in the backdating of stock options, an illegal practice engaged in by greedy corporate executives for whom salary and options at higher, legal stock market prices have not been enough. He was instrumental in his law firm being among the first to buy and take in lieu of fees common shares in client companies. Even today many law firms do not permit the practice, feeling that ownership of shares prevents an attorney from rendering the objective advice clients pay to attorneys they hire.
All in all, then, perhaps Larry Sonsini may at some point become involved in the H-P mess, along with Patricia Dunn and Kevin Hunsaker. At this point, in some way holding him responsible does not seem like “piling on.”Douglas M. Branson holds the W. Edward Sell Chair in Business Law at the University of Pittsburgh and is the author of
Corporate Governance (1993). His newest book, No Seat at the Table, about the dearth of women directors in the Fortune 500, will be published by NYU Press in December.