Hewlett-Packard built a legendary reputation in Silicon Valley for its kinder, gentler “HP Way” of conducting itself—but as anyone reading the headlines these days can see, how HP conducts investigations may be a different story.
The computer manufacturing giant’s ham-handed probe into media leaks holds lessons on how to conduct such investigations, and what oversight executives or the board should exercise over outsiders doing the investigating. Such lessons are especially important, says David Smith, president of the Society of Corporate Secretaries and Governance Professionals, because the potential damage from handling a probe the wrong way can go beyond criminal or civil liability.
“What we’re seeing [in the HP case] is the airing of dirty laundry in public. I don’t think that’s appropriate. It creates a kind of PR disaster,” notes Smith, who says his group’s members are “keenly interested” in the HP saga.
And the saga shows no sign of ending. The mess already has cost Chairwoman Patrician Dunn and two board members their seats. California’s attorney general says he is investigating possible civil or criminal charges, as is the Securities and Exchange Commission. A congressional subcommittee has called several HP officials to testify at a Sept. 28 hearing, including Dunn, General Counsel Ann Baskins, and Kevin Hunsaker, HP’s senior counsel and ethics chief.
Missal
Michael Missal, a partner with the law firm Kirkpatrick & Lockhart Nicholson Graham, says the HP situation “shows that, as with any kind of corporate action, it is difficult to keep anything confidential or secret. Board members and management should recognize that any of their actions may very well appear on the front page … They need to take that into consideration when authorizing such actions. Eventually these things seem to come out.”
In the HP case, the investigators hired to find the source of media leaks apparently used a tactic called “pretexting”—pretending to be someone else—to obtain phone records of members of the HP board, as well as journalists. Allegations subsequently surfaced that the company tailed members of the media and even considered planting spies in newsrooms, all to find out which director was leaking details of the board’s decision to fire former Chief Executive Officer Carly Fiorina in 2005.
Although Missal says HP’s predicament is “an unusual situation,” the company’s crisis “really underscores the need for counsel from lawyers who have done investigations before and have advised boards on proper responses to situations.”
‘Trustworthy’ Investigators Needed
Michael Warnecke, a partner with the law firm Haynes and Boone, says “significant risk” exists in doing internal investigations. “It’s something that has to be done with quite a bit of care,” he says, and hence many companies hire outsiders to do the probe for them. “But you have to use trustworthy investigators,” he emphasizes.
Jack Capers, a partner with the King & Spalding law firm, notes that hiring an outside investigator does not protect a company from liability for what occurs during the investigation.
“Management is responsible for making sure all participants in the investigation comply with the rules established for the investigation—including complying with all applicable law.”
— Jack Capers, King & Spalding
Capers
“Management is responsible for an investigation,” Capers says. “Management is also responsible for making sure all participants in the investigation comply with the rules established for the investigation—including complying with all applicable law.”
Missal says companies “have a significant amount of responsibility” for any agent of the company who may be acting on its behalf. “The issue is going to be the knowledge of what’s going or whether they should have known what was going on,” he says. “You can’t just put your head in the sand and have that as a defense.”
How much oversight a company needs to exercise over the investigator “depends on a lot of factors,” Capers says. In working with a new firm unfamiliar to the company, executives should ask what tactics the investigators are likely to employ. The company even could seek guidance from legal counsel on whether those tactics comply with the law.
Edward Harmon, a partner with the law firm Thorp Reed & Armstrong, notes that the individuals caught up in the HP controversy “are very smart people. These are not sloths or gnomes. Nobody knows whether they violated the law yet. The facts are unclear. But the appearance of what they’ve done is certainly unsatisfactory to them.”
Harmon
Harmon notes that HP, like other companies, is “entitled to rely on the representation and indemnity from a credible vendor. HP likely didn’t hire guys operating out of gypsy cabs in New York.”
Still, he adds, if a company has “any reason to believe that the [investigator’s] representation is not accurate, or they’re engaging in potentially criminal conduct, you have to end the arrangement at that point.”
Where The Line Is
James Aquilina, the managing director of Stroz Friedberg, a company that conducts corporate investigations, says “well-trained, well-experienced investigators know what’s permissible. There are ways to accomplish the objectives within the limits of the law.”
Anthony Valenti, the head of investigations for Stroz Friedberg, agrees. “The lines are pretty clear” about what
is and is not permissible to conduct an investigation, he says. “We all know where it is and we don’t cross it. I’ve told clients many times, ‘Listen, we’re not going to do anything that’s inappropriate or improper.’”
WHAT TO DO
When initiating an internal investigation ...
Hire investigators you trust;
Ask the investigators what tactics they may use;
Consult legal counsel on questionable practices;
Try to find information in alternative ways.
According to Valenti, situations where it’s important to obtain documents like the telephone records in the HP case do occur. But Aquilina notes that such information often can be acquired in other ways that don’t run afoul of privacy laws, such as looking for phone records attached to company expense reports.
Aquilina
“It would be hard for an employee or anyone else within a corporation that may be the subject of an investigation to assert any kind of privacy expectation in those records, if they are available for the purposes of expense reimbursement,” Aquilina says. “The same hold true with trash; if someone gets a [phone] bill and they throw it out, that bill can be recovered and it fully comports with the law.”
Warnecke, of Haynes and Boones, emphasizes that the HP situation is unique. “This is a fairly strange case; it’s not something I would expect to see out there a lot,” he says. “It’s very uncommon to investigate the board of directors. Usually it’s the [members of the] board of directors … who are doing the investigation of the corporation.”
Smith, of the Society of Corporate Secretaries and Governance Professionals, agrees that the HP situation is atypical.
“I would say this is not reflective of what happens in boardrooms,” he says. “Most boardrooms, if they’ve got some issues, deal with it in the boardroom at the board level, or there’s a conversation by the chairman with a board member or board members to find out what’s the cause of the deep concern that seems to be evidencing itself. That’s the proper way to deal with it.”
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