Hewlett-Packard's New Directors: Bad Process, Right Result?

HP has had its share of governance issues over the past several years, including concerns about Carly Fiorina's severance package, corporate spying and Mark Hurd's departure in the wake of a scandal. Now, Institutional Shareholder Services (ISS) has HP in its crosshairs over the nomination of several new directors.

A few days ago, ISS recommended that shareholders vote against 3 nominees. Their selection was, according to ISS, too heavily influenced by the participation of HP's CEO. The board's nominating committee failed, according to ISS, to lead the nominating process, which is that committee's core function. ISS opined that because of CEO Leo Apotheker's involvement in the process, and the interlocking directorates (he serves on boards with some of the nominees), the selection process was tainted.

So the question in my mind is whether, if the process is tainted at an early stage, can the ultimate result still be right? I think the answer is yes.

While some involvement from corporate staffers and the CEO might be expected (such as facilitating meetings and making sure the search firm gets paid), the question is whether the CEO's involvement was too much and whether that involvement invalidates a result reached by a committee of disinterested directors. More information would be helpful, such as whether the committee rejected any of the potential nominees suggested by the CEO and others.

Ideally, each nominee would have no prior connections with Apotheker. But in the real world, there are all sorts of connections between people at this level and between companies. If the CEO knows of good candidates, it would be irresponsible not to suggest those candidates to the nominating committee. And many companies would expect the CEO to meet with candidates at some point before a nomination is finalized. It's a bit of a beauty contest both ways; the nominating committee will likely be interested in the CEO's thoughts and the potential nominees needs a chance to evaluate his or her interest in serving. A visit with the CEO is one of the best ways to gauge this.

I've always had great respect for Pat McGurn and ISS and I am a strong advocate of director independence, but on this one, I think they've made a recommendation that fails to recognize the realities of board selection processes.