HP CEO Mark Hurd resigns. Can HP manage fallout?

Technology powerhouse Hewlett-Packard is winning high marks for its quick and decisive replacement of HP CEO Mark Hurd, who resigned abruptly Friday after a company inquiry into allegations of sexual harassment.

But HP is still vulnerable in two areas, corporate ethics experts say, which the scandal has now more fully exposed: 1) Mr. Hurd's combined role as CEO and chairman leaves an especially large void in the leadership at a sensitive time and 2) his $12.2 million severance payment is likely to renew focus on the company's generous CEO pay.

Shareholders, employees, and customers will be watching closely to see how the board handles these hurdles in the coming weeks.

"Of course, when a CEO leaves, it's damaging," says Tim Smith, who heads the shareholder engagement program at Walden Asset Management in Boston. HP's board "did this as well as could be expected."

On Friday afternoon, as many journalists were heading out the door, HP announced Hurd's resignation and the appointment of its chief financial officer, Cathie Lesjak, as his interim replacement. The moves were triggered by a June 29 letter from the lawyer of an former HP contractor, who claimed that Hurd had sexually harassed her.

The board quickly began an investigation by its general counsel and outside counsel. They determined that Hurd had not violated the company's sexual-harassment policy but did break HP rules of business conduct. According to HP officials, he submitted falsified expense reports to conceal the "close" and "personal" relationship with the HP contractor. Hurd acknowledged the problem.

"As the investigation progressed, I realized there were instances in which I did not live up to the standards and principles of trust, respect and integrity that I have espoused at HP and which have guided me throughout my career," Hurd said in a statement. "I believe it would be difficult for me to continue as an effective leader at HP."

By announcing the resignation so close to the weekend, the company avoided the full force of media attention, at least temporarily. By immediately announcing Ms. Lesjak as the interim replacement, it also looked decisive and in control.

"Its also helpful that she's a woman," says Gene Grabowski, head of the crisis and litigation group for Levick Strategic Communications, a consulting firm based in Washington. "What they're going to have to do is name a permanent CEO as soon as possible."

Lesjak says she doesn't want to be the permanent CEO. HP, whose management team has conducted a dramatic turnaround in the company's fortunes, will consider candidates inside and outside the company for the CEO position.

But because Hurd was HP chairman as well as CEO, he leaves a large hole in the leadership just at the time when the company needs it most. Corporate-governance activists have complained for years that Hurd held both posts, saying the jobs are different and should be held by separate people.

"We have had governance concerns flagged for quite a while at HP," says Howard Sherman, executive director and head of global business development for GovernanceMetrics International and The Corporate Library, newly merged research companies focused on corporate governance. "Is the board going to take the opportunity to address the fact that he held both the CEO and chairman's position?"

In its statement, HP said, "The selection of a new chairman will occur in conjunction with the CEO decision. The company does not expect to make any additional structural changes or executive leadership changes in the near future."

The other sticky issue that HP will have to manage is the public fallout from Hurd's severance payment of $12.2 million as well as other benefits. Hurd is widely credited with turning around HP's fortunes since taking over in 2005, nearly doubling the company's value. While raising revenues and cutting the workforce, Hurd was well compensated, at times appearing on Forbes magazine's list of the 10 best-paid CEOs. In 2009, he received $30.3 million.

"On the surface, [the severance payment] certainly doesn't look good," says Mr. Sherman. The level of criticism will depend, at least in part, on whether the $12.2 million was legally due him or represented an extra bonus. Sherman and many corproate-governance experts want CEO pay tied more closely to long-term perforrmance.

In a bid to bolster investor confidence in the company, HP announced in the same statement preliminary third-quarter results of $30.7 billion in sales, up 11 percent from the same period a year ago. It also raised its guidance on annual sales and revenue.

In trading Friday, shares of the stock plunged nearly 10 percent.