How Transparent Should Boards Be?

The case study for this month is inspired by the Hewlett-Packard board, which deserves some kind of award for continuing to supply business schools with years worth of materials on corporate governance.

One can only speculate on what Mark Hurd did to warrant being asked to resign as CEO of HP, and on the board's discussion leading up to the decision. But we know that the board let Hurd go without cause, meaning that he qualifies for about $40 million in severance pay. (We also know that his contract failed to specify what "cause" might mean, making it very difficult for the board to invoke the provision anyway.) The board announced that its reasons for the dismissal were that Hurd failed to file accurate expense reports and that he was accused of sexual harassment, the latter charge even the board itself decided was groundless. The value of the company immediately fell more than $13 billion.

Now assume that you're one of nine independent directors of the Acme Corporation. It has come to your attention that the CEO has appropriated resources for his personal use and acted in ways that violate the stated values of the organization, values that he has espoused during his five-year tenure. According to the firm's contract with him, these are "cause" for dismissal if the board chooses to invoke them. The two executives making the information available to the board are the only ones who know anything about the CEO's violations.

During the board's discussion of how to respond, those supporting his firing for cause remind the others that such an action could be easily defended by the evidence. They say that they also support firing for cause because they object in principle to paying him $25 million for options that would vest automatically if he were not fired for cause. They note that any disclosures associated with the action represent the kind of transparency to which shareholders are entitled in any event.

A second group supports his firing, but not for cause. They also object to paying him $25 million, but note that it will be accompanied by a "quitclaim" letter settling the case with an agreement that the CEO will make no further statement about the matter. This group argues that if the CEO is fired for cause, it will almost certainly result in a lawsuit in which the details of the CEO's behavior and the board's deliberation will be publicized in the business press for weeks, further depressing the price of the stock. They remind their colleagues that the board's primary responsibility is to shareholders and the value of their stock, and that firing for cause will penalize them more than the alternative.

One board member argues that the CEO should be warned, given a final chance, and allowed to keep his job.

As a director, which course of action would you support? Why? Does your action reflect your views about board transparency? How transparent should boards be? What do you think?