11 Questions About the HP Scandal

The boardroom scandal at Hewlett-Packard continues to mesmerize government investigators and the American business community. After NEWSWEEK.com broke the news last week that HP's chairwoman had spied on her own board of directors in an effort to find out who was leaking stories to the press, a platoon of prosecutors and agencies have announced inquiries that could lead to indictments, civil lawsuits, new statutes and updated regulations. The attorney general of California has been in the lead, with a source close to his office indicating criminal charges could be filed as early as this week. The story was on the front page of The Wall Street Journal for six straight days and dominated business coverage of other media as well.

All of that is surely disheartening to HP, which Tuesday announced a shakeup designed to mend the company and steer it away from the scandal. Company chairwoman Patricia Dunn will leave her post in January; the current CEO, Mark Hurd, will then replace her as chairman; and George (Jay) Keyworth, the leaker Dunn sought to root out, resigned immediately. And the company apologized to Tom Perkins, the HP director who resigned when Dunn first revealed her spying operation to the board and who then agitated for HP to make the reason for his resignation public. Still, the news that the company hired private investigators to spy on its own directors—as well as journalists—will not be quickly forgotten. Yes, HP remains secure in the iconography of Silicon Valley—the high-tech company born in a garage, whose "HP Way" practiced egalitarianism and civility that became the benchmark for every start-up that followed. But the question is how much—and for how long—the current controversy will tarnish that status. That, in large part, will depend on prosecutors. Herewith, 11 big questions about the corporate-spying furor:

1. Why did California Attorney General Bill Lockyer recently tell an interviewer that his office had "sufficient evidence to indict people both within Hewlett-Packard as well as outside"? After all, just last week, Lockyer said that, while he had concluded that a crime was committed, he remained unsure if any individuals would be prosecuted.

One explanation is the A.G. simply meant what he said. Another may be that he's engaged in a tactical ploy. Sources with knowledge of different government investigations tell NEWSWEEK that various officials at HP have retained independent lawyers and that those officials have told investigators their clients will not be answering questions for the moment. That kind of "lawyering up" seems at odds with HP's stated promises this week to "cooperate" with state and federal probes. But it may be that HP officials, concerned about possible criminal prosecution, have concluded that cooperation is not the wisest course at the moment. By issuing a public statement about imminent indictments, the A.G. may be trying to pressure HP officials to break their silence. An HP spokesman declined to comment and also declined to confirm which, if any, HP officials may have been contacted by government investigators.

2. Who's the loser in all this?

It depends on whom you ask, but most observers agree it's Dunn, the chairwoman, who has agreed to step down from that position in January, even though she'll continue as a director. Even as she has apologized for HP being involved in hiring private investigators who impersonated directors and journalists in order to get their personal phone records, she has defended her motivation to root out leakers from the boardroom. In attempting to separate out her ends from the means, she has given the impression she still doesn't understand the seriousness of the hacking of private phone records.

3. Is Dunn a target of prosecutors?

Prosecutors decline to name any targets, but she surely would be a primary person of interest. The question is not only, "What did she know and when did she know it?" Prosecutors also want to know if she intentionally turned a blind eye: "What didn't she know and when didn't she know it?" In addition to possibly charging Dunn, prosecutors could target the general counsel of HP, Ann Baskins, or other lawyers in that office who may have supervised the contractors who hacked personal phone records of directors or journalists. And the company itself could be indicted; while a corporate entity can't be sent to prison, it can be subject to hefty fines.

4. Why was Dunn allowed to continue on the board of directors?

It was part of a compromise. She saves face by getting to stay on as chairwoman through the end of the year and then also remaining as a director until March 2007. But don't expect her to be running for re-election to the board at that time.

5. Any winners?

Mark Hurd, the CEO. He gets to handle the day-to-day operations of the company for the four months while Dunn remains in the center of the vortex. If someone has to testify in Congress, for example, Hurd will be all too happy to let Dunn do it. By the time he becomes chairman in January, there will likely be less glare on HP. He will continue to be CEO after becoming chairman.

6. What was Hurd's view about the spying on directors, which presumably included himself?

In statements earlier this week, Hurd assailed those activities and distanced himself from what the company's contractors had done. But a key open question is what Hurd said back in May when Dunn first revealed to the board of directors that her investigators has obtained the personal phone records of directors.

7. What happened in that boardroom on Sunday and Monday? Why did it take so long?

The HP board remains fractured. According to sources close to HP who requested anonymity given the sensitivity of the information, some directors wanted Dunn to soldier on, while others wanted an immediate resignation. The deal allowing Dunn to continue as chairwoman through the rest of the year was part of a carefully negotiated settlement that also involved the immediate resignation of Jay Keyworth, the director who anonymously gave information to a CNET reporter back in January; it was that leak that launched Dunn's investigation that led to the most recent hacking of phone records.

8. He's no longer a director, so why did Tom Perkins get his apology? What leverage did he have?

Perkins, like Keyworth and other directors, could sue the company for invasion of privacy and related civil claims. Keeping him happy—and apologizing to him in a statement—were in HP's interests. And he still has supporters in the boardroom, even though the scandal became public in large part due to his behind-the-scenes actions.

9. Press accounts have said that Perkins wanted back on the board. True?

Perkins denied this in an interview with NEWSWEEK.

10. Is there not rich irony in that the leaks out of the HP boardroom seem to have continued in the press unabated?

Yes. But that says less about HP than it does human nature. When many people in a controversial situation know something, at least some of them will invariably talk to the press at some point. Sometimes they do it to promote personal agendas; sometimes they do so because they believe shareholders or the public really ought to have the information; sometimes they want to correct what regard as bad information already out there in the journalistic marketplace. That's just how it works.

11. OK, my HP printer is jammed. Does the current controversy make it more or less likely someone at customer support will be able to help me?

It doesn't matter one way or the other. As important as the scandal is as a touchstone for evaluating corporate regard for privacy, as well as a look into the dysfunctional culture of the HP boardroom, it means little to the day-to-day functioning of the company or its continuing ability to thrive. HP stock has not yet suffered since the scandal broke and few expect Hurd to be distracted, at least while Dunn continues as chairwoman of the board for the rest of the year.