All is well these days with electronics giant Hewlett-Packard and mortgage mammoth Fannie Mae. But both suffered recent—and very public—governance crises, and regaining their footing required a good deal of organizational change.
Jon Hoak, an HP vice president and chief ethics and compliance officer, and Bill Senhauser, senior vice president and chief compliance officer at Fannie Mae, shared their experiences overcoming adversity last week at Compliance Week 2007.
Both men owe their jobs to the changes their companies made in the wake of their respective scandals. And their jobs won’t be easy to take away—by design. It would take a vote by the board of directors for termination, implying a degree of independence with at least a bit in common with a tenured academic.
The HP scandal came to a head in late 2006, when the board took extreme (critics said illegal) measurers in an attempt to identify a board member who had been leaking proprietary information to the press. HP CEO Mark Hurd brought in Hoak, an old friend, to help clean up the mess.
Hoak
Hoak said that while the leaks were “a really bad thing,” and that it was justified to stop it, “pretexting”—pretending to be someone else to garner information, in this case phone records of board members and even several journalists—breached ethical, and possibly legal, lines.
“And the damage of reputation and the fallout can be just as severe whether it was legal or not,” Hoak said.
The scandal was a hard blow to HP, particularly among employees who were proud of the company’s traditionally ethical culture. In addition to dismissing the board chair and several others, HP took several steps, Hoak said.
His position was added; he reports to HP’s general counsel and audit committee, but has direct access to the CEO, he said. Hoak doesn’t do investigations, but does oversee them, “so I'm not so vested in any investigation that I don’t have balance,” he said.
HP also has an “independent director,” singled out to supervise all HP’s investigation practices and activities. The board of directors now gets special ethics training. A “compliance council” of senior members of HP business units looks at compliance, considers gaps, puts together remediation plans, and monitors how well the plans are carried out, Hoak said.
Fannie Mae’s problems had far different roots: “a cultural story manifesting itself in an accounting problem,” as Senhauser described it. Fannie Mae rode the housing boom of the early 2000s to wild success, he said, and “we really started believing our own press.”
In September 2004, a 300-page indictment shattered that self-image, Senhauser said. It cited improper hedge accounting that would lead to a $10 billion restatement, the largest in history. Within months, the CEO, CFO, internal auditor, controller, general counsel, and external auditor were all ousted.
“For a while it was like, does anybody work here anymore?” Senhauser quipped.
He focused on repairing relationships with regulators, in particular with the Office of Federal Housing Enterprise Oversight, which is Fannie Mae’s primary overseer.
“Hell hath no fury like a regulator scorned,” Senhauser said. “I said I'm coming down here every week. If you kick the crap out of me for a year, that’s OK.”
Senhauser now chairs a new compliance committee. There’s also is a new ethics code and new training, he said. The company has beefed up its skills in derivatives hedge accounting and other areas; 23 financial reporting experts now work where three had caused so much trouble without oversight. He has the resources to hire outside forensic accountants and econometricians should they be called for, Senhauser said.
In addition, he said, external auditor Deloitte & Touche “is all over us like a cheap suit—a $50 million cheap suit.”
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