How much does the Wall Street establishment dislike Google’s proposed share split plan announced Thursday alongside its first quarter earnings report? Apparently, a lot.

The plan essentially calls for Google stock to split two for one, and all shareholders will receive a share in a new class of stock that will have no voting power. The net effect will over time preserve the roughly two-thirds majority that CEO and co-founder Larry Page, co-founder Sergey Brin and Executive Chairman and former CEO Eric Schmidt have over Google’s proxy voting structure.

Shareholders expressed their opinion with their wallets, sending the price of Google shares down by more than four percent on a day when the broader NASDAQ exchange was down by only one percent. The drop reduced Google’s market capitalization by nearly $8.6 billion, which is not a trivial amount, even for a company with a market cap north of $200 billion.

At least one shareholder advisory firm, Philadelphia-based Egan-Jones, has come out strongly in opposition to the plan. “We strongly oppose governance structures, such as currently exists at Google and as proposed, in which the holders of one class of common stock have voting rights with fewer votes per share,” the firm said.

Also on the record in opposition? CalSTRS, the $145 billion California State Teachers’ Retirement System, which owns $400 million worth of Google shares, told Reuters that it’s not happy about the proposal and intends to let Google know about it.

You can expect more fireworks from the likes of Institutional Shareholder Services and Glass-Lewis after Google files its preliminary proxy statement, which will contain a lot more detail about the plan, with the U.S. Securities and Exchange Commission, which it said it will do sometime this week.

In the end, however, even shareholders as large as CalSTRS will have little they can do but vote against the proposal at Google’s next shareholder meeting. The proxy authority Page, Brin and Schmidt already have ensures that the measure will pass. Part of the deal of investing in Google when it first came public in 2004, was putting a lot of faith in management, as the company reminded shareholders this week.

That includes those moments when it puts money and time into seemingly weird things like self-driving cars and computerized eyewear. Those things may not make sense to outsiders, Page argued during a conference call with analysts, but there’s a method to the madness, and as a shareholder you’re kind of expected to roll with it.

Clearly, many with skin in the game aren’t so sure. Sean Egan, president of Egan-Jones, spoke up for that camp in an appearance on Bloomberg TV Friday. I’ve embedded the clip below.

MetroPCS, which provides cellular service to 9.3 million customers, had a market value of about $4.3 billion as of Friday’s closing price. Its shares gained 6.4% to $12.78 in after-hours trading on news of the talks.

Read the rest of this story on the original site »

This makes the second director to leave HP in as many weeks.

HP’s statement from the filing, in full:

On January 24, 2012, Lawrence T. Babbio, Jr. notified the Board of Directors of Hewlett-Packard Company (“HP”) that he will not stand for re-election at the next annual meeting of stockholders. Mr. Babbio will continue to serve as a director of HP until HP’s next annual meeting of stockholders, which is scheduled to be held on March 21, 2012.

Ten days ago, it was Sari Baldauf, a former Nokia networks executive, who said she would not stand for reelection.

Babbio (pictured at right) and Baldauf were both targeted last year by shareholder activist groups like Institutional Shareholder Services and Glass Lewis, who urged shareholders to vote against their reelection to HP’s board. Their concern was that HP’s board seemed too chummy.

ISS argued at the time that Babbio was the only member of the board’s Nominating and Governance Committee to participate in the discussions of what it called an “ad hoc committee” that brought five new directors to HP’s board during the 11 months that Léo Apotheker was CEO. Among those new directors brought on: Current CEO Meg Whitman and former Alcatel-Lucent CEO Patricia Russo.

In its report, Glass Lewis had urged shareholders to withhold a vote for Babbio — and had done so in 2007 and 2009, as well — saying that as chairman of the board’s HR and compensation committee, he hadn’t worked hard enough to link performance to pay. According to the Glass Lewis analysis, HP paid its executives more than the median of 33 other similarly sized companies. “Overall the company paid more than its peers, but performed moderately worse than its peers,” it said. On executive pay, Glass Lewis gave HP a “D” on a scale of A to F.

Now, the bigger question is: Who will be nominated to replace them? HP’s shareholder meeting is seven weeks away.

Baldauf was Executive Vice President and General Manager of Nokia’s Networks business from 1998 until 2005. She had joined Nokia in 1983 and held several executive positions there, including VP of its Asia Pacific unit from 1997 to 1998, and president of Nokia Cellular Systems from 1988 to 1996. She sat on N Executive Board of Nokia from 1994 until January 2005. She’s also a director of German automaker Daimler and of three Finnish companies one of which is the computer security firm F-Secure.

The filing reads in full:

On January 18, 2012, Sari M. Baldauf notified the Board of Directors of Hewlett-Packard Company (“HP”) that she will not stand for re-election at the next annual meeting of stockholders. Ms. Baldauf will continue to serve as a director of HP until HP’s next annual meeting of stockholders, which is scheduled to be held on March 21, 2012.

It’s not entirely clear whether HP will move quickly to put another director on its board or not.

The New York Times published something of an exit interview with Palmisano over the weekend. It read a bit like a victory lap, and that’s not undeserved. The record books will show that IBM shares during the Palmisano era (2003-2011) rose by 125 percent; sales grew from $81 billion in 2002 to an expected $107 billion; and annual profits on a per-share basis went from $3.07 to a consensus forecast of $13.38.

But it got me to thinking about one of the highlights of the Palmisano era; one that generated a great deal of attention at the time: IBM’s decision to sell its personal computer division to Lenovo, the Chinese PC maker. It was a relatively small deal, worth less than $2 billion at the time, but it was a controversial move. Despite the fact that IBM wasn’t making much money on the business, IBM PCs, especially its ThinkPad line of notebooks, were generally considered to be pretty good.

Nearly seven years later, it’s worth noting that Lenovo is now the world’s second-largest PC vendor, behind Hewlett-Packard, having vaulted past Dell earlier this year, according to the market research firm IDC. It’s also worth noting that Lenovo is in fifth place in the U.S., behind HP, Dell, Apple and Toshiba, in that order.

IBM initially owned 15 percent of Lenovo and maintained a stake in that company until February of this year, when it sold its remaining 4.3 percent shares at a profit of more than a quarter-billion dollars.

Lenovo’s biggest shareholder is Legend Holdings, of which 36 percent is owned by the Chinese Academy of Sciences, a.k.a. CAS Holdings, a state-controlled entity. The state has pared back its stake, though: When the IBM-Lenovo deal was announced in 2005, Lenovo was 57 percent state-owned.

There was a lot of natural controversy, and even national security concerns in 2005, about selling so red-blooded an American product as the IBM PC to China. But there was also a solid business case to consider. The PC business was a drag on earnings because of downward price pressure exerted by Dell and all the others, and it wasn’t even leading the market, as was the case with Hewlett-Packard, which engaged in some very public contemplation about spinning off its own PC division.

But there was also a potential strategic benefit, which Michael Useem, a professor a the University of Pennsylvania’s Wharton School of Management, pointed out at the time: Making friends with China.

By selling an underperforming asset to a buyer willing to take it and run with it, IBM got solid access to the exploding Chinese market. In paraphrased remarks to the Times, Palmisano concedes the point:

Palmisano says he deflected overtures from Dell and private equity firms, preferring the sale to a company in China for strategic reasons: the Chinese government wants its corporations to expand globally, and by aiding that national goal, IBM enhanced its stature in the lucrative Chinese market, where the government still steers business.

So how has that worked out? It’s a little hard to tell from reading Big Blue’s Byzantine financial statements. In fiscal 2005, the year the deal closed, IBM reported $18.6 billion, or about 20 percent of revenue, came from the Asia-Pacific region, including China.

And though it declined to provide specific dollar amounts, it said that year that sales in China had dropped by 19 percent, but after after stripping out the PC division, would have grown by 8 percent.

For the first nine months of fiscal 2011, IBM reported that the Asia-Pacific region accounted for exactly the same dollar figure — $18.6 billion — amounting to 24 percent of its overall sales of $77.4 billion, and there’s still a quarter to go. That would put Asia on track to account for a little less than a quarter of IBM’s revenue.

In its earnings statement, IBM also makes a point of calling attention to what it calls “growth markets,” which are generally the BRIC countries — Brazil, Russia, India and China. These markets combined for 23 percent of sales in IBM’s most recent quarter.

This is about as close to understanding the size of IBM’s business in China as we’re going to get. On balance, it looks to have been a positive move, especially when you consider that if IBM had kept its PC division, it would have likely only gotten smaller and become more of a profit drag on a company that’s increasingly focused on high-margin businesses like services and consulting.

Nor can we judge by IBM’s headcount. Globally, as of the publication of its last annual report, IBM employed 426,751 people. But it has stopped providing a geographical breakdown. A report in the Times of India in 2010, mentioned by The Wall Street Journal, suggested that Big Blue’s headcount in India might be as high as 130,000; which, if true, would make it one of that country’s top 10 employers.

There is no question that IBM’s presence in China has grown. You can tell by the press releases. There was for example, a new IBM Research lab in Shanghai in 2008, and another in 2010. Just last month, IBM announced that it had closed a significant IT deal for a major health-care provider in Hong Kong, and another with a Chinese province to improve the safety of pork (which included a food-safety video I embedded below).

For better or worse, Palmisano will be remembered as the man who traded PCs for access to China. On balance, it seems to have been a good trade, but the jury is still out.

Tomorrow is the first business day of IBM’s Rometty era. Assuming she retires at age 60, a well-established IBM tradition, she’ll have about six years to make her mark. One wonders what she’ll be remembered for most.

While much of the attention may focus on the original letter written by Gloria Allred to Mark Hurd claiming a pattern of sexual harassment of the marketing contractor Jodie Fisher, the fact remains that he was fully exonerated of those allegations by an internal Hewlett-Packard investigation conducted by the law firm of Covington & Burling on behalf of HP’s board of directors.

In fact, what got Hurd ousted from his job as HP’s CEO on Aug. 6, 2010, were questions related to his expense reports.

So what do they show?

AllThingsD has obtained some background notes that were prepared in connection with the so-called Covington Report — which a Delaware judge has ruled will remain under seal — delivered to HP’s board during the summer of 2010. The one page of notes goes into some detail about the nature of the four of Hurd’s expense reports that specifically name Fisher as having been in attendance.

This is a key detail because HP’s official reason, as explained by then general counsel Michael Holston on Aug. 6, 2010, was that Hurd’s expense reports were prepared in a way that “had the effect of concealing Mark’s personal relationship with the contractor.”

How might Hurd have arguably used an expense report in this way? By leaving her name off of reports claiming expenses for certain dinners.

But here are four examples of expense reports where Fisher was specifically named. By way of explanation, mentions of “Fimbres” refer to Hurd’s assistant Caprice Fimbres, who had hired Fisher in the first place.

A third person is listed as being in attendance on three of the four occasions. In one instance, it is Hurd’s assistant Fimbres, who arranged the dinners — but might not, in fact, have attended.

In another, it is Denis Lynch, Hurd’s security guard, who also might have been nearby but not at the actual dinner.

In another, it is John Spires, but it is unclear exactly who he is. (Note: The expense note could be referencing John Spiers — spelled differently — who was CTO and founder of LeftHand Networks, which was sold to HP in 2008; he is now CEO and founder of NexGen Storage.)

September  12,  2007 — Fimbres later seeks reimbursement for “Dinner with HP Host for CEO Events” for the night of September 12. Dinner was billed to Sullivan’s and the listed attendees are Hurd and Fisher. Total reimbursed amount is $99.86.

October 26, 2007 – Fimbres later seeks reimbursement for dinner at the hotel the night of Oct. 26 in the amount of $319.47. The listed attendees are Hurd, Fisher and Denis Lynch (HP employee).

July 30, 2008 — An expense report filed by Caprice Fimbres shows a charge for “dinner with three people” – Fimbres, Hurd and Fisher — in midtown Tokyo for $326.50.

August 3, 2009 – A Fimbres expense report shows a $347.42 charge for dinner at W Steak in Beverly Hills. Listed attendees are Hurd, Fisher and John Spires. Stated business purpose is “Dinner while in Los Angeles with HP Customer Roundtable Host,” and there is the following expense comment: “High Cost restaurant although didn’t order that much.”

The first meeting mentioned in this group would appear to coincide with a meeting in Denver described in the Allred letter. Fisher, as Allred tells it, was being considered for a job, but the meeting “felt more like a date.”

HP has never disclosed the detailed accounts of the problems with Hurd’s expense reports that led to his resignation, and probably never will. Hurd was, after all, two CEOs ago now, and HP obviously has other priorities.

And Hurd is now co-president at Oracle, HP’s bitter rival.

But these details, if nothing else, raise some additional questions about the circumstances that led HP’s board to conclude that it had lost its trust in Hurd.

Dunn first joined HP’s board in 1998 and took over the chairmanship in 2005, succeeding ousted CEO Carly Fiorina. Dunn sought to rein in a board with a reputation for leaks to reporters.

In early 2005, following a front-page story in The Wall Street Journal about discussions held at a special HP off-site strategy meeting that included details known only to directors, she sought to get to the bottom of the leaks and discover who among HP’s directors was talking to reporters.

In 2005 Dunn hired private investigators, and some of them used a method called pretexting, in which someone impersonates the owner of a cellphone in order to get access to billing records. Not only were HP directors targeted by the effort, but also journalists for The Wall Street Journal, BusinessWeek Magazine and CNet News who covered HP. The technique proved illegal, though she later testified to Congress that she had believed the investigators had used only legal methods to get the information.

Dunn’s role in the scandal led to felony criminal charges pressed by California’s then attorney general, Bill Lockyer, for wire fraud, unauthorized use of computer data, identity theft and conspiracy. She was one of four charged. Offered a chance to plead guilty to misdemeanor, she opted instead to fight the charges and was determined to clear her name, despite the fact that she was about to undergo chemotherapy treatment. A judge finally threw out the charges in 2007.

The controversy and criminal charges led her to resign her seat as HP chairman on Sept. 26, 2006, and she was replaced by Hurd, who served in that role until his resignation last year.

Update: HP just sent the following statement:

Pattie Dunn worked tirelessly for the good of HP. We are saddened by the news of her passing, and our thoughts go out to her family on their loss.

Dunn’s written testimony to a House Committee on the scandal is below, via Scribd.

09282006 Testimony Dunn

Ballmer takes home a base salary of $682,000, and his bonus doubled it to just shy of $1.4 million. But it could have been higher. The board had the authority to award Ballmer a bonus worth up to 200 percent of his base salary and decided not to, opting instead to keep it at 100 percent.

But see, it’s not about the money. This is all the equivalent of change found under a couch cushion when compared to the worth of Ballmer’s holdings of Microsoft shares, which are worth about $14 billion or so. It’s about what Microsoft’s board thinks, especially at a time when some people have started to argue that it’s time for a change at Microsoft’s top.

There is, for instance, the issue of Windows Mobile, which Ballmer readily admits isn’t selling “as well as we would have liked.” And what about that 2 percent decline in Windows revenue?

The board’s verdict:

For fiscal year 2011, the Compensation Committee recommended and the independent members of our Board of Directors approved an Incentive Plan award of $682,500, which was 100% of his target award. The award was based on his performance appraisal and other relevant information considered by the independent members of the Board, including: Mr. Ballmer’s performance against his individual commitments; the operating income performance of the Company relative to 25 large technology companies (a group that includes most of our Technology Peers); successful product launches including Kinect for Xbox and Office 365, enhancements to Windows Azure and Bing; continued progress positioning the company as a leader in the cloud and cloud-based infrastructure; key partnerships with Facebook and Nokia; significant progress in development of the next generation of Windows; work toward the successful acquisition of Skype; lower than expected initial sales of Windows Phone 7; the 2% decline in revenue for the Windows and Windows Live Division; the need for further progress in new form factors; and an overall strong financial year in which Microsoft reported record revenue of $69.9 billion, record operating income of $27.1 billion, and record earnings per share of $2.69 representing 12%, 13%, and 28% growth, respectively.

Yay Ballmer. So how did the rest of the senior management team do? Here’s what the board says in the proxy filing.

CFO Peter Klein: He got $3.6 million, which was 120 percent of his target award, and credit for focusing on operating expenses and on the capital allocation plan, which resulted in $16.9 billion of cash returned to shareholders by way of share buybacks and dividends. He also did the due diligence on the Skype acquisition.

Kurt DelBene, president of the Microsoft Office Division: Annual revenue from the division increased 17 percent to $20 billion; Office 2010 was the fastest-selling version in the product’s history; and Office 365 got out the door. Plus Sharepoint, Exchange and Lync had “double digit growth.” Based on his fiscal year 2011 performance, DelBene received an incentive plan award of $7.25 million, 132 percent of his target award.

Steven Sinofsky, president Windows and Windows Live: Revenue is falling slightly in this group because of the decline in consumer PC sales, but Windows 8 is on the way. For all this Sinofsky, got $6.3 million or 90 percent of his target award.

Kevin Turner, COO: With Microsoft reporting annual revenue of $70 billion and operating income of $27 billion, up 13 percent, Turner earned an incentive plan award of $9.63 million, 110 percent of his target.

• A base salary of $1 per year. In doing so she’s following the example of another well-known CEO who just stepped down from his job: Former Apple CEO and now Chairman Steve Jobs.
• An option to purchase 1.9 million shares of HP under its 2004 stock incentive plan. The exercise price would be equal to the market value of the share price on the grant date. The options will vest over eight years, but are considered fully vested only if HP’s share price rises by 40 percent or more. As of today that number of shares is worth $45.2 million.
• 100,000 of those shares will vest on each of the first three anniversaries of Whitman’s anniversary of service, provided she’s still on the job.
• An additional 800,000 of those 1.9 million shares will vest after one year, provided HP’s share price has risen by 120 percent and stayed that high for at least 20 days.
• Yet another 800,000 of those shares vest on the second anniversary of her date of service, provided the share price is up 140 percent or better for 20 consecutive days.
• Whitman will also get the same annual cash bonus of $2.4 million each year, with a maximum equal to 2.5 times the target of HP’s existing incentive plan, which is tied to cash flow performance.
• If she’s fired, she receives a severance benefit payment equal to 1.5 times the sum of her annual base salary — a whole $1.50 — plus the average of her bonuses paid during the preceding three years.

Léo Apotheker is gone from Hewlett-Packard, but he left so suddenly that the board of directors didn’t have time to finalize his severance package. That is until today.

HP just filed an 8k with the U.S. Securities and Exchange Commission that outlines the terms under which he has agreed to leave. He will receive:

• A severance payment in the amount of $7.2 million payable in installments over the next 18 months.
• Accelerated vesting of 156,000 shares of restricted HP stock granted valued at $3,557,800 based on today’s closing price.
• An aggregate of 424,000 of the 728,000 performance-based restricted stock units (PRUs) awarded under his contract. Apotheker has waived his right to receive the remaining 304,000 PRUs that would have vested on October 31, 2012. He’ll only get them if HP hits its annual cash flow targets and in that case it amounts to another $10 million.

He’ll also get:

• An annual bonus of $2.4 million under the Hewlett-Packard Company 2005 Pay-for-Results Plan for his nearly 11 months of service with HP, payable Oct. 31.
• Coverage of relocation expense back to Europe, and up to $300,000 coverage he incurs on the loss of the sale of his $7 million, six-bedroom house in Atherton, Calif.
• Health benefits or payment for health insurance premiums for Apotheker and his family for 18 months.
• Reimbursement of legal fees related to the negotiation of the agreement.

It could have been worse. According to the terms of his contract, which you can read here, Apotheker stood to walk away with somewhere between $28 million and $35 million, depending on how you added things up.

HP shares are trading at levels that are roughly half of what they were when he joined as CEO last year. With HP clearly worried that angry shareholders might sue over what might be perceived as an outsize severance deal after a rocky 11-month stint — which is exactly what happened after the ouster of former CEO Mark Hurd — the board of directors and Apotheker have negotiated the final terms of his exit with less trouble, sources said.

When he left last year, Hurd initially walked away with a package worth $35 million, prompting a shareholder suit against HP and its board of directors led by a Connecticut law firm that argued the board violated its fiduciary responsibilities.

Later on, after joining Oracle, Hurd forfeited 345,000 HP stock options then worth more than $13 million — but now worth only about $8 million — that were included in his severance package in order to settle a lawsuit against him and Oracle that was brought by HP.

In a note to clients today, Sacconaghi says that HP is the “most inexpensive tech stock in the S&P 500 and the 10th most inexpensive stock overall.” There are very few precedents, he says, for large-cap technology stocks trading at HP’s current valuation. Before this month, there had not been a large-cap tech stock that traded at less than 5.5 times earnings — not in the last 20 years.

At that level, he says, HP’s current valuation implies that its annual free cash flow will decline by 9 percent a year forever or, put another way, that HP will be half its size within seven years. Usually companies that trade so low have significant structural problems. HP, for all its faults, doesn’t meet that standard. It’s not “a broken company,” he says, it’s on track to grow earnings by 6 percent this year, and it leads in three of its four key lines of business — PCs, printers and servers.

So why the crazy-low valuation? “Investor exasperation.” (There’s that word again!) Investors have discounted it too much given all the drama, making it, believe it or not, a buying opportunity for “patient investors.” He rates HP an “outperform” with a price target of $37. Investors seemed to warm to the idea. HP shares finished the day up more than 3 percent.

Then word came, via AllThingsD, that something big was coming from the board of directors. And as AllThingsD first reported (again), HP directors made one of their own, Meg Whitman, the former eBay CEO who had become a director earlier this year, the new CEO. Léo Apotheker resigned, but don’t cry for him, because according to his contract, he made out rather well. Even before it was made official, investors applauded the move, sending HP shares skyward.

Analysts did what they always do, and, well, analyzed. And though it looked more like drama criticism, it’s not as if HP hasn’t known boardroom dramas before. Finally, the deed was done, meaning it was time to hold a conference call, but not before talking first to Kara Swisher of AllThingsD.

I got to talk to Whitman and HP Chairman Ray Lane yesterday, too, but I had to wait until after the conference call. With so many critics screaming that Whitman has no experience running an enterprise hardware company — and let’s be honest, there aren’t that many who do — I asked her to elaborate on the defense, made on the conference call with analysts, that her experience as a buyer of enterprise technology, during her years as CEO at eBay, provided important experience that will help her be an effective CEO at HP. I also asked about Autonomy, the British software firm that HP is in the process of acquiring for $10 billion, and how it will fit within HP; about the company’s plans for cloud services; and about the state of the HP brand amid all the corporate mishegas that has unfolded in the last several months.

AllThingsD: Meg, the main criticism of you, since you’ve been named CEO of HP, is that your primary experience before was at eBay, which is a consumer-facing company. The response on yesterday’s conference call has been that at eBay you were a purchaser of a lot of enterprise technology and that this gives you some important relevant experience. I get the point, but could you elaborate on it a bit? How does having been an enterprise buyer help you be HP’s CEO?

Whitman: What HP needs now more than anything else is management skills, communication skills and a commitment to executional excellence, all of which I know well, and are sort of core competencies from my 35-year career in business. I know technology because I ran a company whose very existence would not have been possible without it, and was a very significant buyer of technology products. And so that brings me a unique buyer’s perspective. But I have not spent 35 years in the enterprise business. Add so what that means is that I will be relying heavily on Dave Donatelli; on Todd Bradley; on the senior executives at HP; and also, frankly, on Ray Lane, who was at Oracle for many years, and EDS, and who knows this space well. So I think what customers will get is that one plus one equals three.

Lane: I agree with that. What we need here, and what we didn’t have before, is operational execution, communication skills, getting the team on the same page and leading them. The CEOs of $130 billion companies are not leading the technology development of those companies. I think Meg can go into any enterprise and visit with any CIO or CEO and do really well. So whether it is the technology side or the sales side, I don’t think anyone is giving her enough credit on those fronts. She can do just fine. And then on top of that she has strong operating executives under her who do know the enterprise business. But right now it is the need for leadership of the people, a focus on executing and operating. I could point back to Lou Gerstner at IBM, or even my own days at Oracle. When I joined Oracle, people thought the board had lost its mind, because I was a consultant at Booz Allen. People scoffed and said ‘How is a consultant going to lead the worldwide sales force at Oracle, a trained wolf pack?’ And somehow I figured it out. And I knew nothing about software, but I learned, and I learned from Larry Ellison, who is one of the best.

I want to talk a bit about Autonomy, and about unstructured data. You made a comment about that when you talked with Kara Swisher of AllThingsD yesterday. Talk to me about where you see Autonomy fitting within HP. Do you still intend to let it be independent? How do you see the alignment shaping up?

Whitman: It’s a big and fast-growing market. Of all the data out there, about 15 percent of it is structured and 85 percent of it is unstructured. And the unstructured data is growing by leaps and bounds. There are not a lot of good software companies that can help companies manage unstructured data and help companies make business decisions based on what they see in that unstructured data. So what we hope to do with Autonomy, and I’m enthusiastic about this acquisition, is take what is fabulous about Autonomy — they have a leading position in the marketplace — and put it through the very powerful HP distribution system. And I think what Mike Lynch is excited about — he is the founder and CEO of Autonomy — is taking this great product and getting it into more people’s hands. And we just need to grow this company as fast as we can; extend our lead and our accumulated experience in this area. So that’s the plan for Autonomy.

Lane: Yeah, I think the synergies are great, and I think it makes a lot of sense. It will make a lot of sense to customers if HP engages them in a dialogue of managing unstructured data.

You don’t think HP paid too much for Autonomy?

Whitman: You know what? It is what it is.

Lane: We wish we could have bought it for cheaper, but it was the market price. People thought we overpaid for 3Par, and you know what? We’re hitting it out of the park.

Is HP still going to be player in cloud services? That was a big commitment that Léo made in March. How far along is that plan?

Lane: Absolutely. The cloud is way ahead of plan. So our cloud services have gone live. So that is absolutely part of the plan, yes.

Meg, a lot of the same people who applauded your selection to HP’s board of directors are criticizing your selection as CEO. Why do you think there’s a disconnect?

Whitman: I don’t know. There’s always people who have different points of view on things. What I have to do — and I said this on the conference call — is lead this company, make it a great company again and fulfill its destiny as the icon of Silicon Valley and of California, and deliver the results. I will have to prove myself by delivering the results. If we’re going to restore the confidence that investors have in us, and that employees have in us, we have to deliver. We have to mean what we say and say what we mean and deliver the results. And that is what I intend to deliver.

Meg, you have a lot of history managing brands. I’m thinking of the job you had managing brands for Procter & Gamble. What’s wrong and what’s right about HP’s brand right now?

Whitman: I think HP is known as the world’s largest provider of information technology, and we are a trusted brand. We are a worldwide brand that touches both consumers and businesses. If you’re an enterprise, we have full suite of solutions. I know that when I bought enterprise hardware and software at eBay, I wanted one person to choke when something went wrong. I wanted one supplier to go to and say ‘Hey, this is not working.’ And so I think we have a fabulous brand in a world where technology is increasingly fundamental. I will say — and Ray would say this as well — I think we need crisper communications with all the constituencies. I think on Aug. 18 we confused people. We didn’t mean to do that, but we did. And so I think we’ve got some work to do around communicating crisply and cleanly about what we’re about — the moves that we’re making — to employees, customers, shareholders and, frankly, to the press.

Whitman made her first pronouncements to the public and to the HP rank and file on a conference call today, along with Chairman — newly named executive chairman — Ray Lane. I recorded the call and pulled out some highlights you can hear below, courtesy of SoundCloud.

The decision to oust now former CEO Léo Apotheker was made after the board of directors observed “operational weaknesses” in his management. “It became increasingly clear that we needed new leadership to focus on operating our business more effectively to meet the challenges of today’s environment,” Lane said. “The board believes that the job of CEO requires additional attributes to successfully execute on the company’s strategic evolution.”

Whitman admitted that HP hasn’t been delivering the kind of results that investors have come to expect. “We’re not happy about it,” she said, promising that HP will have no higher priority than to get HP’s operations back on track. Her first public comments as CEO are in the audio clip below:

Meg Whitman’s First Public Comments as HP CEO by ahess247

The news of Whitman’s hiring as the new CEO obfuscated some comments from CFO Cathie Lesjak, who warned that HP may have another tough quarterly earnings report ahead. Blaming soft market conditions in Europe and from government agencies, Lesjak said HP will likely meet its per-share guidance issued on Aug. 18, non-GAAP earnings of $1.12 to $1.16 a share. However, she said she feels “less certainty with regard to revenue,” specifically around hardware sales. HP had forecast revenues in the range of $32.1 billion to $32.5 billion.

I’ve talked with sources familiar with retail PC sales, who tell me that the back-to-school season was pretty good in terms of the number of machines sold, but that PC manufacturers, including HP, had to slash prices aggressively to keep consumers interested and buying. That may turn out to be a contributing factor.

Another key factor will be commercial PC sales. Since HP started talking about spinning off its PC business on Aug. 18, some of its commercial customers have been acting on their uncertainty by holding back on new deals or buying from other vendors like Dell. CIOs hate uncertainty, and HP has been playing defense with many of its biggest customers since the announcement, seeking to reassure them that they can still do business with HP.

Whitman’s hiring has brought a lot of criticism that she doesn’t have sufficient experience running a large, enterprise-focused technology company. Lane defended the choice by saying that during her years running eBay, she was a big buyer of enterprise technology and that the experience should serve her well.

Raydefendsmeg by ahess247

Why not conduct an extensive search, considering candidates from both inside and out? Toni Sacconaghi, author of last week’s stinging research report about “exasperated” HP investors, asked about that. The implication was that HP’s board of directors had acted impulsively in hiring Apotheker last year and was doing so again in hiring Whitman. Lane reminded Sacconaghi that HP’s board has eight new members since those days, so it’s not the same group of people involved with the Hurd resignation and the Apotheker hiring. Hear his answer below:

Why no search at HP? by ahess247

And yet, despite having sent Apotheker to the exit, HP still intends to follow through, in broad brushstrokes, with the strategy he laid out. HP is still studying what to do with its Personal Systems Group, the unit that sells PCs to consumers and businesses. All options — a spinoff or no action at all — are still on the table. But as Whitman says here, in response to a question from Keith Bachman of BMO Capital, “That decision is not going to get better with age,” so the sooner it’s done, the better.

Decisionpsc by ahess247

Lane, asked by analyst Shannon Cross of Cross Research about the timeline of the decision to let Apotheker go, said the decision wasn’t made suddenly, but over the course of the last few quarters. After missing earnings forecasts for two quarters in a row, and with the communications mess that occurred on Aug. 18, it became clear, Lane said, that Léo had to go. Hear him explain it below:

Ray Lane: Help surround or replace? by ahess247

It’s a mixed bag. While they all seem to agree that HP’s board is right to push out CEO Léo Apotheker, especially in light of the stock performance, a confused strategy and a jarring change in emphasis, none seem ready to endorse the ascendance of Meg Whitman, the former eBay CEO and current HP director, to that company’s top job. Yet like it or not, the HP board meeting that will make it all official is underway, and as AllThingsD has reported, Meg Whitman will be named HP’s CEO at the close of markets today.

Toni Sacconaghi of SanfordBernstein, the author of a widely circulated note last week describing how “exasperated” HP investors are, weighed in again. “We are not surprised by HP’s stock’s reaction yesterday, given that our conversations with shareholders and investors over the past month revealed a level of exasperation that we have not seen directed at HP or any other company in our universe in our 13 years following the sector,” he wrote in a note today.

He also slammed HP’s board. “Our conversations with major shareholders also indicate that they have been disgruntled with the board, given it has made and approved a series of decisions” — including the ouster of the prior CEO Mark Hurd, the Autonomy deal, the premature announcement of the PC-spinout — “that many shareholders believe were poor decisions and misaligned with their interests,” he wrote.

Nor is he a fan of the Whitman hiring. HP needs to search far and wide and also internally for another CEO, Sacconaghi says. “We would view any decision not to conduct a comprehensive search of internal and external candidates for a permanent CEO role as unsatisfactory and unnecessarily hasty,” he wrote. “We also believe that shareholder reaction to Whitman as a permanent CEO would be mixed.” He also thinks CFO Cathie Lesjak, notable for filling in as interim CEO during the Hurd-to-Apotheker transition, may be leaving.

Shaw Wu of Sterne Agee is pretty much in agreement with Sacconaghi. “Given the disappointing financial performance over the last few quarters and some questionable decision making including the high purchase price of Autonomy, handling of the spinoff of its PC operation, and abrupt shutdown of its webOS hardware business, we are frankly not surprised that a change is being considered,” he wrote in a note to clients today. “So far, investors and even some customers we have talked to don’t seem confident in where HPQ is heading so a change is likely needed.”

But he’s not sold on Whitman. “While we believe she has proven to be a very capable manager helping grow eBay from a start-up into one of the largest internet companies, we think an ideal candidate for HPQ should have extensive experience in the enterprise market. In addition, we believe expertise in supply chain management would be helpful as well.” He goes on to name a handful of insiders and outsiders he’d consider possible successors: Dave Donatelli, who runs HP’s enterprise business; Todd Bradley, who runs the personal systems group and would be a likely CEO of that unit if it’s spun out; Steve Mills, who runs software and hardware at IBM; and Gary Moore, the COO of Cisco Systems.

Wu also says it might be a good idea for HP to keep its PC unit after all is said and done. “We estimate the business generates $2 billion in operating income per year and is the second most profitable behind Apple,” he wrote. Also the PC business isn’t so bad when you think of it as being one and the same with the tablet market. He maintained a neutral rating on HP for now.

Lou Miscioscia of Collins Stewart isn’t encouraged by the shake-up, either. Many of HP’s problems aren’t necessarily Apotheker’s fault, he says in a note to clients issued today. And he’s not sold on Whitman, arguing that she’s never run so large a company as HP and has never run one focused on the enterprise before. He maintained a neutral rating.

And while a post-Apotheker HP may undo some of his decisions, like spinning off the PC business, one thing it probably can’t do is walk away from its $10 billion purchase of Autonomy Software, says Jeffries and Co. analyst Peter Misek. Corporate takeovers are governed by strict laws in the U.K., making it nearly impossible for HP to pull out of the deal now. He rates HP shares a buy.

Potentially, he could walk away with a lot. His contract, on file with the U.S. Securities and Exchange Commission, grants him a series of cash payments, company shares and other things, some of which he’ll keep, some of which he won’t.

First off is the cash: Apotheker’s base salary was $1.2 million a year and according to my reading of his contract, he’ll be eligible for a severance plan that will pay him that salary for 18 months after termination.

He also received a $4 million cash signing bonus for joining HP. But depending on when and how he’s fired — with or without cause — he may have to give some of it back. The contract says that if he’s terminated within 18 months he has to return some of that signing bonus, specifically: “an amount equal to the Signing Bonus multiplied by a fraction with the numerator equaling 18 less the number of whole months that have elapsed from the Effective Date to the date of Executive’s termination of employment (the “Date of Termination”) and a denominator equal to eighteen (18).” I’m not going to do that math for you because I don’t get what the contract aims to say. Given that it’s been less than 12 months since he joined HP, let’s just assume he’ll be required to return most about 40 percent of it.

He’s also entitled to an incentive bonus that amounts to between 200 percent and 500 percent of his annual salary, based on HP’s existing incentive plan. The incentive plan isn’t spelled out in the contract, but since these plans are usually tied to stock performance I can’t imagine what payment he’d be entitled to under it. The contract stipulates that he gets at least some of it. More on that below.

Apotheker has also accumulated a fair amount of HP stock. He was granted 76,000 shares of HP stock, half of which vested on Oct. 31, 2010. The next day, HP shares closed at $42.49 a share, making the grant worth $1.6 million. Another grant of 38,000 shares is due to vest on Oct. 31 of this year. This block is worth a lot less: $889,000 as of the price of HP shares at the moment.

There were also one-time grants that were essentially a signing bonus package: 80,000 non-forfeitable shares, half of which are due to vest on Oct. 31, 2011, and the other half due to vest on Oct. 31, 2012. If terminated without cause within three years, these shares become fully vested. That’s another $1.9 million worth of HP shares. However, if terminated “with cause” then all the unvested equity goes poof and isn’t considered vested. This will make the “with cause” and “without cause” portion of the discussion with the board important.

Apotheker also got a lot of cash in relocation benefits, and was said to have purchased a six-bedroom house in Atherton, Calif., for $7 million. His relocation allowance amounted to $4.6 million, of which $2.9 million was to be devoted to the actual, uh, relocation, and $1.7 million of which was to compensate him for the forfeiture of payments and benefits he lost upon leaving his old job at SAP. This payment was fully vested right away and is not subject to repayment.

Update: Many thanks to reader Yogi who in the comments below appears to have done all the math much better than I could. His findings:

• $8.6 million: signing ($4 million) and relocation ($4.6 million) bonus.
• $3.6 million earned for one year of service (base $1.2 million + $2.4 million minimum bonus minimum according to contract).
• 156,000 shares of HP works out to about $3.8 million based on today’s price. Remember that all stock grants vest upon termination.
• $4.8 million severance payment: 2x the base salary plus minimum 2x bonus. This would be paid over 18 months and would stop if he gets a job with a competitor.
• 728,000 PRUs: This one is flexible, and is based on performance of the company, but automatically assuming cash flow has been achieved. Since PRUs are used as incentive for all HP management, Apotheker’s estimated achievement will be the same as for everyone else. Even at 50 percent, this would be worth about $9 million (364,000 shares), and at 75 percent it would be worth $13.5 million.

The range works out to be in the neighborhood of $28 million to $33 million.

See the clear-as-mud contract below.

apothekercontract

Bryant is one of the chip industry’s lions. His frank and informative explanations at Intel analyst and shareholder meetings during his 13-year stint as CFO were always interesting and always detailed in a way that couldn’t help but make you appreciate the complicated process of making chips. Semiconductor manufacturing is not only one of the most complex processes that humankind has ever engineered, it’s also a highly intricate accounting problem because the factories and equipment are so expensive.

When it came time for Intel and its rival Advanced Micro Devices to settle a long-running and contentious private antitrust lawsuit that AMD had brought in 2005, one of Intel’s master strokes was to bring Andy Bryant in on the negotiations.

As I reported for BusinessWeek in 2009, at a crucial moment when Intel’s lawyer, Bruce Sewell, had left unexpectedly for a job at Apple, Bryant’s presence at the negotiating table helped keep the talks on track. And when Intel and AMD couldn’t agree on the value of a patent portfolio that was a key element in the dispute, it was Bryant who convinced both sides to take the issue to a mediator, who, oddly enough, was located in Maui.

Bryant’s elevation to the board follows what Intel is describing as a “long corporate practice of senior officer and board succession planning.” Bryant knows Intel probably better than anyone else, probably better in many ways than CEO Paul Otellini. “I am excited about this new position for Andy and look forward to continuing to work closely with him as he assumes his new responsibilities” said Otellini.

When he becomes chairman in May, Bryant will step down from his CAO position. Bryant also sits on the board of McKesson, a health care distributor, and he is a director of Columbia Sportswear Company and Kryptiq, Inc.

Bryant first joined Intel in 1981 as controller for its Commercial Memory Systems Operation, back near the end of the days when the company made its crucial decision to get out of the memory business. (It had been a big player in memory until Japanese chipmakers turned memory into what would eventually be considered a commodity business.) In 1983, Bryant became Systems Group Controller, and in 1987 he was promoted to director of Finance for the corporation. In 1990, he was was appointed vice president and director of Finance of the Intel Products Group. He assumed the CFO title in 1994, and added Senior Vice President in 1999.

I found a Reuters video of Bryant speaking about Intel’s outlook from late 2009 and embedded it below.

RIM already has the unusual structure of having co-chairmen and co-chief executive officers, but both those positions are held by the same two people: Mike Lazaridis (pictured here) and Jim Balsillie.

A shareholder proposal, to be considered at the company’s shareholder meeting next month, calls on the company to split the roles so that the chairman and CEO are not the same (even if there are two of them) with the chairman position to be filled by an independent director — unless none is available or willing. RIM, for its part, is urging shareholders to vote against the proposal. The company notes that good corporate governance is ensured by the position of a lead independent director in the current structure.

The shareholder move was disclosed on Friday as part of a regulatory filing by RIM ahead of the July 12 shareholder meeting. The proposal comes as investors are growing less patient with the company following an April warning that sales and earnings would fall below prior estimates amid tough competition, particularly in North America.

The company did say it still expects to have full-year earnings of $7.50 a share, though analysts are starting to doubt that prediction as well.

Oracle’s statement yesterday called the appointment of Safra Catz as president and CFO “permanent.” While that’s clearly meant to convey that this is no interim appointment, which was the case in her first turn as CFO during a three-year period that ended in 2008, does it also imply that Catz has reached her peak on the management ladder?

At least one analyst has concluded that it does. Pat Walravens, an analyst at JMP Securities tells Bloomberg that Catz’s appointment sets the pieces in place for President Mark Hurd, the 54-year old former Hewlett-Packard CEO, to take the reins from CEO Larry Ellison at some point in the future. Hurd, he says, gains more day-to-day control over the company, giving him a logical springboard to the corner office.

But is it really so clear? Before Hurd arrived on the scene, it was Catz who had always been described as Ellison’s heir apparent. She won her stripes primarily overseeing Oracle’s $10.6 billion takeover of Peoplesoft in 2005. At an Oracle event in 2005, Ellison said “If I dropped dead tomorrow, Safra Catz would be CEO of Oracle.” That implies that a formal succession plan saying exactly that was once–and may still be–in place. And by getting a title that begins with C, something Hurd doesn’t have, there’s a further implication of seniority that effectively makes Catz appear to be the second most powerful person at Oracle after Ellison.

Obviously there will be more tea-leaf reading to come from all this. And there will be more signals from Oracle that will be interpreted and re-interpreted again. Ellison is 66 years old and has been running Oracle since the days of the Carter Administration. He’s showing no signs of letting go of the pilot wheel just yet. (You just know he’s going to live to be 180.) Hurd is 54 and Catz is 49. Ellison likes them both. Time will eventually tell who gets the nod.

For one thing, January’s restructuring of the board of directors has left a bad taste in the mouth of a pair of shareholder advisory firms, who have publicly called upon HP investors to vote against the re-election of as many as three sitting directors and against some say-on-pay proposals.

Sources familiar with the situation confirmed to me that after today’s event, HP’s investor relations team plans to mount what’s being described as a “road show” to counter the recommendations to vote against management made by Institutional Shareholders Services and Glass Lewis among retail investors. Exactly who is involved and whom they plan to visit couldn’t be determined. HP had no comment about it.

At least part of the road show’s mission will be to drive home the highlights of the strategy that Apotheker lays out in his keynote today. But there is some nagging concern that a sufficient number of shareholders, put off by repeated instances of board room drama over the last decade — Carly Fiorina’s ouster in 2002, the pre-texting scandal in 2006, and last year’s departure former CEO Mark Hurd — may vote against the three directors standing for another term: Lawrence Babbio, Sari Baldauf, and Ken Thompson.

That enough investors would vote against management to make a difference may seem unlikely at first until you consider the number of shareholder lawsuits stemming from the Hurd affair that are currently pending both in federal courts and in the Delaware Chancery Court. The fear of an embarrassing defeat for HP and its new board at the annual meeting on March 23 isn’t an unreasonable one.

Then there are the larger questions. As Bernstein analyst Toni Sacconaghi pointed out in a recent note to clients, HP’s stock has underperformed the S&P 500 since Hurd’s departure, and the lag has been driven mostly by uncertainty among investors about its strategy and about Apotheker himself. Its disappointing results in the first quarter didn’t help matters.

There are numerous questions around HP’s hardware strategy, particularly around the PC business. While it has promised to put the WebOS platform it acquired last year when it absorbed Palm into tablets and into every PC it ships, HP is still seen as far behind Apple on the tablet front. We all know why that is.

But the questions go deeper than that. Apotheker, a former CEO of the business software giant SAP, last week sent a strong signal in an interview with Bloomberg News that he plans to acquire some software companies.

What kind of acquisitions? He’s ruled out SAP, for one thing. And in a meeting with Bernstein’s Sacconaghi last month, he said any acquisitions would not be so large as to “keep investors awake at night,” meaning, Sacconaghi suggests, that they would probably not exceed $5 billion. Aside from buying software companies, he’s also signaled that the days of cuts–the hallmark of Mark Hurd’s tenure–are over. Cutting costs is out, investing is in.

But then there’s the larger issue about whether or not Apotheker can steer Hewlett-Packard, the storied Silicon Valley icon, on a course that restores its former glory. The question marks around him on this score are considerable because the task is just so huge. HP is a sprawling $126 billion juggernaut meaning change comes slowly, often in barely perceptible steps that leave impatient investors wondering what’s taking so long.

At the outset, the Apotheker’s strategy appears to be summed up pretty simply: Bring the market-leading position in hardware to bear and combine its offerings with a newly ascendant software business, which together will feed into an IT services business that aims to compete with IBM. It’s not going to be easy and the most important important thing that Apotheker has to do is inspire both analysts and shareholders alike that he’s the man to get the job done. As yet both are understandably skeptical mainly because Apotheker is an unknown quantity.

When Apotheker’s predecessor Mark Hurd took over at HP in 2005, there was very little doubt about what kind of CEO he would be: A relentless, unsentimental cost-cutter, and this much was clear before he was even officially on the job.

And while Apotheker has pointed tentatively in the direction he’d like to take HP, there are still more questions about him than there is certainty. His most important job will be to convince all concerned that he’s the man who can steer HP back on a course to greatness.

PREVIOUSLY:

• Another Advisory Firm Singles Out HP Director Babbio
• Shareholder Group Contends HP’s New Board Is Too Chummy
• “Peripatetic Polyglot” Léo Apotheker Wants to Save HP’s Soul by Buying Software Companies
• HP Earnings Today: Will Léo Apotheker Speak?
• Michael Dell Thinks HP Paid “Way Too Much” for 3Par
• Judge: HP Can Re-Investigate Hurd Departure
• Is This the HP Board That Will Allow Us to Stop Thinking About HP’s Board?
• Meg Whitman, Patricia Russo Among Five Joining HP Board
• HP Plans Another Probe Into Hurd Departure
• Léo Makes It Official: SAP’s Bill Wohl Joins Hewlett-Packard
• Want Enterprise Growth, HP? Think Services
• Mark Hurd Really Wants to Keep the Jodie Fisher Letter Private
• Mark Hurd Doesn’t Want You to Read the Letter That Cost Him His Job
• HP Networking Head: “People Are Tired of Paying for Cisco”
• HP Names Ex-SAP Chief Apotheker as CEO

While ISS advised shareholders to vote against the re-election of three directors Lawrence Babbio, Sari Baldauf, and Ken Thompson, a second report, this one from Glass Lewis, advised a vote against only one director: Babbio, the former vice chairman and president of Verizon, and currently an advisor to the private equity firm Warburg Pincus. (Pictured.)

It’s not the first time the firm has targeted Babbio. It made similar recommendations in 2007 and 2009. Its main concern is executive pay, and the way Lewis Glass sees it, Babbio as chairman of the board’s HR and compensation committee hasn’t worked hard enough to link performance to pay. According to the Glass Lewis analysis, HP paid its executives more than the median of 33 other similarly sized companies. “Overall the company paid more than its peers, but performed moderately worse than its peers.” On executive pay, Glass Lewis gave HP a D on an A-F scale.

The report also faults Babbio for the $35 million severance payout to former CEO Mark Hurd, now a president at Oracle. The costly agreement that has since triggered several shareholder lawsuits was executed on Babbio’s watch. “While it remains to be seen whether Mr. Hurd was truly terminated ‘without cause’ and therefor entitled to his severance payment, we believe members of the HR and compensation committee should be held responsible when severance payments trigger arguably unjustified payouts resulting in litigation,” the report says.

I’ve asked HP for a comment and will add one here when I hear from them. But from the way these advisory reports are reading, and depending on how influential these things usually are, it sounds like HP is facing the potential of a bit of a shareholder revolt. The annual meeting of shareholders is on March 23.

(I initially referred to the advisory firm as Lewis Glass and have now fixed that. Sorry about that.)

The report raises several questions about exactly how five new directors, including former eBay CEO Meg Whitman and former Alcatel-Lucent CEO Patricia Russo, were selected to join the board. They were, the report says, identified by an “ad hoc committee” formed in November of last year consisting of Apotheker and three non-employee directors, whose identities were not disclosed in a subsequent proxy filing with the U.S. Securities and Exchange Commission.

ISS said it had learned from its discussions with HP that the members of this committee were Ray Lane, now HP’s chairman, Lawrence Babbio and John Hammergren. Of those, only Babbio serves on the Nominating and Governance Committee, which is the board committee usually tasked with finding new directors. The report then cited a paraphrased comment from Lane to The San Jose Mercury News: “Lane said he and Apotheker personally reached out to the candidates they wanted to join HP’s board.”

The result: Only two of the seven director nominees were properly identified by the board’s nominating committee, while the other five were named by this ad hoc committee, which included Apotheker.

ISS then went on to question their independence, saying that at least four of the five director nominees have connections with Apotheker. HP director Dominique Senequier, CEO of Axa Private Equity, sits on the board of Schneider Electric with Apotheker. And at least three of the director nominees had been customers of SAP, where Apotheker was the CEO.

While ISS conceded that it’s not uncommon for directors and executives to serve together on outside boards, or for one’s company to be a customer of another, in HP’s case, this combined with Apotheker’s participation in the selection of the new directors “raises red flags,” it says.

“Given the problematic board issues that have arisen at the company in the past (including the forced resignation of a former independent chair in 2006), shareholders would have expected the company to adhere to the highest standards of board governance,” the report said. “A CEO’s participation in the appointment of directors, especially if the director has significant relationships with the CEO, can make it difficult for such directors to be objective.”

So what to do? ISS suggested that shareholders vote against the nominations of three directors up for relection: They are Babbio, Sari Baldauf, the former head of Nokia Networks, and Ken Thompson. HP’s shareholder meeting is on March 17.

HP didn’t comment right away on the ISS report, and I’ll add anything it says when I hear from someone there. The ISS report does say that the ad hoc committee acted like a search firm and that board candidates ultimately were vetted by the board’s nominating committee and finally approved by the full board. Still, the ISS said, the fact remains that the new CEO was involved from the earliest stages of the process.

These shareholder advisories always make for interesting reading, though to be frank, they’re usually an exercise in holding up reality to an improbable ideal. They also rarely have an effect on the outcome of shareholder votes.

Yet given the the history of turmoil on HP’s board, you’d think that HP might have gone a few extra miles in making sure the director selection process followed every last rule in order to avoid these very criticisms, and injected a little more transparency into the process. As the management guru Gary Hamel recently wrote, “Transparency is as effective as a rigidly applied rule book, and usually more flexible, and less expensive to administer.”

Update:HP just sent me a statement on this:

“HP has strong and robust governance practices. We believe that ISS’s recommendation is based on their misinterpretation of the process that HP employed in identifying, selecting and nominating our directors. We do not believe that it would be in the best interests of HP’s stockholders to lose the service of the experienced and dedicated Board members who have been delegated primary responsibility for establishing and maintaining those governance practices and who, by any standard, have carried out their obligations in a fully compliant manner.”

The various boardroom dramas that have roiled HP’s directors during the last decade have often overshadowed HP itself. Last August’s blowup involving the departure of CEO Mark Hurd following accusations of sexual harassment occurred against the backdrop of lingering memories of the 2006 scandal involving the use of illegal methods to spy on journalists that ended the tenures of three HP directors.

Before that there was a public fight against HP’s 2002 acquisition of Compaq, led by dissident director Walter Hewlett, who eventually lost his seat. The Compaq deal ultimately cost Carly Fiorina her job at HP after a boardroom confrontation in 2005.

The result of all this is that boardroom drama has become something of an HP specialty, along with printers, computers and IT services. Criticizing the board’s actions has become something of a sport, with Oracle CEO Larry Ellison serving as the most public practitioner.

Shareholders appeared to agree that a change was overdue. HP shares shot up right away as word of a shake-up began to leak right before markets closed yesterday. HP shares closed up one percent today, trading at levels not seen since before Hurd’s abrupt departure in August.

The four departing directors were deeply involved in the Hurd kerfuffle. Two were Hurd defenders, and the other two wanted him out. All four volunteered. Chairman Ray Lane, in an interview with The Wall Street Journal, said the debate over Hurd’s status “took a lot out of this board.”

It’s highly unusual for a company to change its board so deeply and so suddenly. The five new additions became directors effective today without any input from shareholders, and will serve until a vote can be held to approve them for a full one-year term at the next shareholder meeting in March.

Shareholders in theory have the power to offer their own slate of directors, but there’s little time for that, and even if some group were to do so, its only option would be to do so at its own expense. SEC rules governing the access to the proxy nominating process are currently being challenged in court by the U.S. Chamber of Commerce and Business Roundtable, and so the rules that would allow shareholders to more easily submit their own list of names are on hold pending the outcome.

Absent a proxy challenge, HP shareholders will be put in the position of accepting a board on which seven of 13 directors are brand-new. That’s a lot of new blood and may turn out to be the kind of change HP’s board needs. And getting the change done all at once rather than gradually may prove the better option.

However, I can’t help but wonder: In seeking to close out a period in which HP’s board became known more for its drama than anything else, is more drama the right answer?

The other three at Shumeet Banerji, CEO of Booz and Co, Shumeet Banerji former CIO at General Electric and Dominique Senequier CEO of AXA Private Equity.

Four sitting directors Joel Hyatt, John Joyce, Robert Ryan and Lucille Salhany will not stand for re-election, at the next company shareholder meeting in March, the company said.

The move is by far the most sweeping change to hit HP since Léo Apotheker, took over the reins as CEO last year following the departure of Mark Hurd following a allegations of sexual harassment against Hurd by Jodie Fisher, a onetime HP contractor.

Once the latest shake-up is complete, HP’s board will have undergone a nearly complete makeover in recent years. None of the continuing board members will pre-date the Compaq acquisition, with Lawrence Babbio, Jr. the former Verizon President as the longest standing board member having joined at the completion of the HP-Compaq deal. Babbio was a member of Compaq’s board before the merger. All of the others have joined since 2005.

During the last decade HP’s board has been rocked by more than a few scandals, one involving a scheme to spy on journalists in an effort to ferret out the source of a persistent leak. More recently the board has been facing questions about its judgment, first for seeking Hurd’s resignation following the revelation of the sexual harassment complaint, and then for allowing him to leave with more some $53 million in compensation as he went on to become a president HP rival Oracle. HP is facing lawsuits in Delaware and California from shareholders over the incident, and was reported yesterday to be planning a new independent investigation into the circumstances leading up to Hurd’s departure.

Shares of HP shot upward when word of the shakeup first began to leak. The shares rose during the last 20 minutes of trading, closing up 46 cents or nearly 1 percent $46.78 a share.

HP’s statement is below.

HP Announces Changes to Board of Directors

Five highly accomplished business leaders to be added to board
PALO ALTO, Calif., Jan. 20, 2011

HP today announced that its board of directors has appointed five new members, effective Jan. 21. The appointments bring the total number of board members to 17 until HP’s next Annual Meeting of Stockholders in March, at which time the size of the board is expected to be reduced to 13 members.

The new directors are Shumeet Banerji, chief executive officer of Booz & Company; Gary Reiner, former chief information officer of General Electric Company and a current special advisor to private equity firm General Atlantic; Patricia Russo, former chief executive officer of Alcatel-Lucent; Dominique Senequier, chief executive officer of AXA Private Equity; and Meg Whitman, former president and chief executive officer of eBay Inc. The five new directors also will stand for re-election at HP’s next Annual Meeting of Stockholders in March.

In addition, HP announced that incumbent directors Joel Hyatt, John Joyce, Robert Ryan and Lucille Salhany are not standing for re-election at the company’s Annual Meeting of Stockholders.

“The addition of these new directors will further diversify the outstanding talents and wide-ranging experience that our directors already bring to HP,” said Raymond J. Lane, non-executive chairman of the board of directors, HP. “Each is a widely respected and deeply experienced business leader, and together they will provide our board and management team with new insight and perspectives relating to HP’s business and the rapidly changing technology industry.”

Lane discussed the new directors’ backgrounds: “Shumeet Banerji is a respected strategic adviser and will bring to the HP board international, financial, operational and management experience and a true understanding of the issues facing companies and governments in both mature and emerging markets around the world. Gary Reiner will be an important voice of the customer on our board, thanks to his deep insight into how IT can help global companies succeed and his decades of experience driving corporate strategy, information technology and best practices across complex organizations.

“Pat Russo is an experienced executive with extensive global business experience, a broad understanding of the tech industry, and strong management, operations and governance skills. Dominique Senequier is a highly regarded and influential financier who brings broad international perspective, strong financial acumen and a keen focus on long-term performance. Meg Whitman is a true visionary and thought leader who brings to the HP board unique experience in developing transformative business models, building global brands and driving sustained growth and expansion.”

“I am confident that HP’s stockholders, customers and employees will benefit from all of their talents and ideas, and I look forward to working closely with the entire board and management team as we pursue the exciting opportunities in front of us,” Lane concluded.

About Shumeet Banerji

Shumeet Banerji, 51, is chief executive officer of Booz & Company, a global management consulting firm. Most recently, he has focused on counseling government ministries and financial services institutions on the impact of changing demographics around the globe. Banerji joined Booz Allen Hamilton in 1993 and has served clients in both the public and private sector. Earlier in his career, he was a member of the faculty at the University of Chicago Graduate School of Business.

Banerji, who is based in London, earned a Ph.D. from the Kellogg Graduate School of Management at Northwestern University and a B.A. and MBA from Delhi University.

About Gary Reiner

Gary Reiner, 56, serves as a special advisor to private equity firm General Atlantic, providing strategic counsel to the firm and the companies it partners with worldwide. During his career at GE, he served as senior vice president and chief information officer, head of GE Information Services, and as vice president, Corporate Business Development. Reiner’s responsibilities included overseeing IT, operations, sourcing, mergers and acquisitions and quality for the company’s global operations, including GE’s renowned Six Sigma quality initiative. Earlier in his career, Reiner was a partner at Boston Consulting Group, where he focused on strategic and process issues for high-technology businesses.

Reiner earned a B.A. in economics from Harvard and an MBA from Harvard Business School.

About Patricia Russo

Patricia Russo, 58, is the former chief executive officer of Alcatel-Lucent, a global communication solutions provider. She also previously served as chairman and CEO of Lucent Technologies, president of Eastman Kodak and chairman of Avaya, which was spun off from Lucent. Earlier in her career, she held management positions at AT&T and IBM. Currently, Russo serves on the board of directors of General Motors, Merck & Co. and ALCOA, Inc.

Russo earned a B.A. in history from Georgetown University and completed Harvard Business School’s Advanced Management Program.

About Dominique Senequier

Dominique Senequier, 57, is chief executive officer of AXA Private Equity. She joined AXA Investment Managers in 1996 and founded the subsidiary AXA Private Equity that same year. Senequier is a member of the Institut des Actuaries Français (French Actuarial Institute) and a non-voting member of the supervisory board of Schneider Electric SA. Prior to joining AXA Investment Managers, she created and developed the subsidiary “GAN Participations” at GAN, an insurance firm.

Senequier is a graduate of École Polytechnique and holds a DEA (post-graduate degree) in banking and monetary economics from the University of Sorbonne, Paris.

About Meg Whitman

Meg Whitman, 54, is best known for her 10-year tenure as president and CEO of eBay Inc., a global ecommerce and payments company. She ran the company from 1998 to 2008. Prior to working for eBay, she held management positions at Bain & Company, the Stride Rite Corporation, the Walt Disney Company, Procter & Gamble Co., FTD and Hasbro. She also is a former board member of the eBay Foundation, Procter & Gamble and DreamWorks SKG, having resigned in 2009 in preparation for her California gubernatorial bid. Whitman became the third woman in a 20-year period to run for the office and won the Republican primary in 2010.

Whitman was born on Long Island, N.Y. She earned her bachelor’s degree in economics from Princeton University in 1977. She received an MBA from Harvard Business School in 1979.

Four directors are not standing for re-election

“Joel Hyatt, John Joyce, Bob Ryan and Lucille Salhany have offered invaluable service to HP over many years, and we are deeply grateful for their insights, counsel and commitment to HP’s business,” said Lane. “These directors worked tirelessly and effectively to navigate HP through a difficult leadership change in the last six months.

“As a recent addition to HP’s board, I have been incredibly impressed by Joel, John, Bob and Lucille’s experience and talents. I know the entire board of directors joins me in thanking each of these directors for their many contributions towards the long-term success of HP.”

Ryan, the former lead independent director of the board, said, “It has been a great privilege to serve on the HP board and see this outstanding company build on its legacy as a technology leader and innovator. HP is well-positioned to drive – and profit from – the changes under way across the technology industry, and I am confident that, with Léo as CEO and Ray as chairman, HP has a strong leadership team in place to continue moving the company forward.”

The board plans to nominate the following current directors to stand for re-election at the Annual Meeting of Stockholders:

Raymond J. Lane

Non-executive Chairman of the HP board and Managing Partner of Kleiner Perkins Caufield & Byers

Marc L. Andreessen

Co-founder and a general partner of Andreessen Horowitz

Léo Apotheker

HP President and Chief Executive Officer

Lawrence T. Babbio, Jr.

Senior Advisor to Warburg Pincus and former Vice Chairman and President of Verizon Communications

Sari M. Baldauf

Former Executive Vice President and General Manager of the Networks business group of Nokia Corporation

Rajiv L. Gupta

Senior Advisor to New Mountain Capital, LLC, and former Chairman and Chief Executive Officer of Rohm and Haas

John H. Hammergren

President, Chairman and CEO of McKesson Corporation

G. Kennedy Thompson

Executive Advisor to Aquiline Capital Partners LLC and former President and Chief Executive Officer of Wachovia Corporation