• These are open discussion topics. Do not think of these topics as questions you must answer.  The forum is meant for you to express your learning and questions and conclusions you have.
• Do not go to some website and copy and paste. Use your learning this week to apply your analytical skills in order to further your learning.

Week 1 Discussion topic

After you have read the J.B. Stewart NY Times article that was assigned for this week, please comment on the last paragraph of the article:  “But the reality is that H.P. can do whatever it wants, regardless of what the shareholders say. Mr. McGurn said that the Council of Institutional Investors, a trade group for large public pension funds and other investors, often follows up with letter-writing campaigns at companies where shareholders have voted their strong disapproval of directors. Most of the time, he said, it doesn’t even get a response.”

Why do you think that this is the case?  Are there more effective mechanisms for voicing shareholder disapproval of actions taken by corporations in terms of retaining “bad” directors as members of the board of directors?

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Bad Directors And Why They Aren’t Thrown Out
Author: James B. Stewart
Date: Mar. 30, 2013
From: The New York Times
Publisher: The New York Times Company
Document Type: Correction notice
Length: 1,823 words
Lexile Measure: 1490L

Full Text:
CORRECTION APPENDEDIn the annals of shareholder democracy, it’s hard to imagine a more compelling case against a
company’s directors than those who presided over the serial management calamities that have plagued the computer giant Hewlett-
Packard in recent years.

Imagine having to run on this track record:

[micro] After ousting Mark Hurd as chief executive in 2010 amid messy accusations of sexual harassment, the board hired Lo
Apotheker to replace him, even though Mr. Apotheker had been fired as chief of the European software giant SAP after just seven
rocky months. Most of the board didn’t bother to meet Mr. Apotheker, let alone ask him any probing questions about his tenure at
SAP, before rubber-stamping the choice of the board’s four-member search committee.

[micro] In 2011, H.P.’s directors unanimously approved the acquisition of the British software maker Autonomy for $11.1 billion, a deal
that was considered wildly overpriced even at the time. Less than a year later, H.P. wrote off $8.8 billion of that and claimed it had
been defrauded. (Autonomy officials have denied the allegations, which are being investigated by authorities in both the United
States and Britain.) Some consider Autonomy to be the worst corporate acquisition in business history. In the 2012 fiscal year, H.P.
wrote off a total of $18 billion related to failed acquisitions and other missteps.

[micro] With Mr. Apotheker at the helm and the board backing his strategic initiatives, H.P. announced that it was considering
abandoning its giant personal computer business, then changed its mind. After Mr. Apotheker had been on the job a disastrous 11
months, the board demanded his resignation, and then paid him more than $13 million in termination benefits.

Shareholders might have forgiven what Fortune magazine called a ”tawdry reality show” if the stock had performed well. But from the
time Mr. Apotheker was hired in September 2010 until he left in 2011, the stock went from more than $45 a share to a little more than
$22. Despite a recent rally, shares are still below $24, even as the Dow Jones and Standard & Poor’s 500-stock indexes are hitting
new highs.

”You really couldn’t have a stronger case for removing directors,” Michael Garland, executive director for corporate governance in the
New York City comptroller’s office, told me this week. ”There’s been a long series of boardroom failures that have harmed the
reputation of the company and repeatedly destroyed shareholder value over an extended period of time.”

Yet all 11 H.P. directors were re-elected on March 20.

H.P. is hardly an isolated case. According to Patrick McGurn, special counsel for one of the major shareholder advisory services,
Institutional Shareholder Services, shareholder efforts to remove directors in uncontested elections rarely succeed or come close,
even in egregious circumstances. Last year, there were elections for 17,081 director nominees at United States corporations,
according to the service. Only 61 of those nominees, or 0.36 percent, failed to get majority support. More than 86 percent of directors
received 90 percent or more of the votes. Of the 61 directors who failed to get majority approval, only six actually stepped down or
were asked to resign. Fifty-one are still in place, as of the most recent proxy filings.

”People are calling them zombie directors,” Mr. McGurn said. But that hasn’t stopped them from serving on boards for what is
typically lucrative compensation for relatively little work. (H.P.’s directors received a mix of cash and stock payments ranging from
$292,000 to $380,000 in 2012.

While the H.P. board has been largely reconstituted since the Apotheker debacle, all but one (Ralph Whitworth, a well-known value

investor who joined in November 2011) approved the disastrous Autonomy deal. Raymond Lane, seen as an ally and supporter, at
least initially, of Mr. Apotheker, was named chairman at the same time Mr. Apotheker took the helm. Working closely with Mr.
Apotheker, Mr. Lane proposed five new directors. John Hammergren, chief of the McKesson Corporation, has been on the board for
eight years, and G. Kennedy Thompson, chief of Wachovia before it was forced into a merger with Wells Fargo during the financial
crisis, has been a board member for seven years. Mr. Hammergren was on the search committee that recommended Mr. Apotheker’s
appointment.

In its proxy materials, H.P. didn’t address the company’s record under these directors, but nonetheless recommended that
shareholders vote for the entire slate, citing the risk of ”destabilizing” the company by changing directors in an ”abrupt and disorderly
manner.” As to Mr. Lane, Mr. Hammergren and Mr. Thompson, it repeatedly cited their ”experience” in running global companies, but
said nothing about their roles in selecting Mr. Apotheker or other directors, the Autonomy acquisition, other failed strategic initiatives
or, indeed, anything at all about their tenures at H.P.

Both Institutional Shareholder Services and the other big shareholder advisory service, Glass, Lewis & Company, recommended that
shareholders vote against Mr. Hammergren and Mr. Thompson, citing their long tenures and extensive involvement in serious failures
of oversight, especially the Autonomy deal. Institutional Shareholders also took aim at Mr. Lane, citing his role in championing the
Autonomy acquisition without adequate due diligence and allowing the ”direct participation” of Mr. Apotheker in the selection of
directors.

In deference to H.P.’s concerns about stability, the advisory services targeted only the directors they thought most culpable.

New York City’s pension fund, which manages $133.7 billion and owns 5.5 million H.P. shares, announced that it would vote against
Mr. Hammergren and Mr. Thompson, but would support Mr. Lane. ”We didn’t want to be disruptive,” Mr. Garland said, ”but the H.P.
board needs some new blood.”

Yet even that modest effort failed.

While paying lip service to principles of shareholder democracy, companies have fought for decades to insulate directors from
shareholder disapproval.

Under the plurality voting systems still prevalent at many companies, the nominees who receive the highest number of affirmative
votes cast are elected no matter how few votes they get out of the total cast. Since the board decides the number of nominees, and
most nominate only as many as there are open seats, they’ll all be elected, even with a single yes vote (which may be their own).

An early version of the Dodd-Frank reform legislation would have eliminated plurality voting, but the provision attracted fierce lobbying
from business interests and was quietly scrapped even before the bill emerged from committee. Still, many companies, especially
larger ones, have moved to majority voting under pressure from shareholders.

Mary L. Schapiro, the former Securities and Exchange Commission chairwoman, championed a proxy access rule that would have
allowed shareholders to nominate their own candidates and required companies to put them on the ballot, making it easier to remove
incumbent directors. The commission passed the rule in 2010, but the Business Roundtable and United States Chamber of
Commerce filed suit, and last year a federal appeals court blocked the rule, saying that S.E.C. hadn’t engaged in an adequate cost-
benefit analysis. The S.E.C. hasn’t revived it.

But H.P. has majority voting, and shareholders approved a proxy access rule similar to the one passed by the S.E.C., and
shareholders still couldn’t muster a majority against even a single board candidate.

That may be because the largest shareholders have little incentive to defy management recommendations. These days, the largest
shareholders are almost always big asset management firms, and in many cases, managers of index funds. Shareholder activists
have long complained that mutual fund and asset management companies have an inherent conflict of interest, since they may be
managing company retirement plans, or hoping to gain access to them. H.P.’s 401(k) plan holds more than $14 billion, and
participants can choose from more than 30 asset managers. H.P. declined to identify them. In theory, asset managers are required to
maintain a Chinese wall between their funds and their advisory services.

H.P.’s two largest shareholders are Dodge & Cox, a large mutual fund company in San Francisco, and Vanguard, one of the largest
asset managers, which offers a range of mutual funds and index funds. Index funds have no choice but to own H.P. shares, since the
funds mirror indexes and H.P. makes up a significant part of the Dow Jones industrial average and the S.& P. 500.

Vanguard wouldn’t say how it voted its H.P. shares, and Dodge & Cox didn’t respond to my inquiries. But a source with knowledge of
the voting, who asked not to be identified because he isn’t authorized to disclose the results, said both Dodge & Cox and Vanguard
voted in favor of the full H.P. slate of directors. (Both companies will eventually have to disclose their votes, but not until September.)

According to disclosure forms covering the period from January 2009 through June 2012, Dodge & Cox supported management’s
recommendations on the directors 100 percent of the time. At Vanguard, it was 97 percent.

A Vanguard spokesman wouldn’t say whether Vanguard provided services to H.P., but said: ”Whether or not H.P. is a client is not
relevant. We vote proxies with a singular focus and with a singular constituency in mind — to maximize value for the funds’
shareholders.”

Even with the funds’ support, Mr. Lane, Mr. Hammergren and Mr. Thompson didn’t exactly get a ringing endorsement from
shareholders, with just 59 percent for Mr. Lane, 54 percent for Mr. Hammergren and 55 percent for Mr. Thompson. By the admittedly
low standards of shareholder democracy, that’s considered repudiation. (By comparison, the company’s current chief executive, Meg
Whitman, who has brought some much-needed stability to the company, received 98 percent, the highest number.)

New York City’s comptroller, John Liu, who oversees the city’s pension fund, seized on the results to press for change. ”The onus is
on the board to install new, independent directors, or it will face an even greater loss of investor confidence,” he said. ”We expect the
board to quickly overhaul its membership.”

An H.P. spokesman responded: ”The shareholder vote speaks for itself. The board will evaluate the results and determine what steps
to take. Everyone on the board is interested in doing what’s best for H.P. and its continuing turnaround.”

But the reality is that H.P. can do whatever it wants, regardless of what the shareholders say. Mr. McGurn said that the Council of
Institutional Investors, a trade group for large public pension funds and other investors, often follows up with letter-writing campaigns
at companies where shareholders have voted their strong disapproval of directors. Most of the time, he said, it doesn’t even get a
response.

Correction: April 3, 2013, Wednesday

This article has been revised to reflect the following correction: The Common Sense column on Saturday, about the difficulty in
removing poorly performing corporate directors, misidentified the group that follows up with letter-writing campaigns at companies
where shareholders have voted disapproval of directors. It is the Council of Institutional Investors, not Institutional Shareholder
Services.

CAPTION(S):

PHOTO: Raymond Lane was named H.P.’s chairman at the same time Lo Apotheker took the helm. (PHOTOGRAPH BY ROBERT
GALBRAITH/REUTERS) (B4)

By JAMES B. STEWART

Copyright: COPYRIGHT 2013 The New York Times Company
http://www.nytimes.com
Source Citation (MLA 8th Edition)
Stewart, James B. “Bad Directors And Why They Aren’t Thrown Out.” New York Times, 30 Mar. 2013, p. B1(L). Gale General

OneFile, https://link-gale-
com.ezproxy.library.berkeley.org/apps/doc/A324109139/ITOF?u=nysl_me_berk&sid=ITOF&xid=489e639a. Accessed 5 Mar.
2020.

Gale Document Number: GALE|A324109139

http://www.nytimes.com