WITHIN weeks of her unexpected ascent to the chairmanship of Hewlett-Packard last year, Patricia Dunn found herself in open warfare with another director: the wealthy venture capitalist Tom Perkins.
They argued over how the board should be run. He has called her a “stickler for process and procedure”. She says he was a “controller”. For new board members, he pushed for Silicon Valley entrepreneurs with ties to his venture firm. She rejected his suggestions in favour of big-company leaders from other industries.
They even bickered over Perkins’s steamy novel, “Sex and the Single Zillionaire”, which he wrote with the encouragement of his former wife Danielle Steel. The 74-year-old Perkins says he jokingly called for all HP employees to buy the book. Dunn, 53, says she didn’t hear anything playful in his tone and vetoed that plan. When Dunn told Perkins at a party that the book “isn’t my thing”, he angrily accused her of embarrassing him in public.
At heated moments, two witnesses say, Perkins would declare in front of board members: “We need a new chairman.” Dunn says at other times he would poke her in the clavicle and say: “I made you chairman.” Perkins’s actions were, in the words of another director, former Medtronic executive Robert Ryan, “chairman abuse”.
The clash between Dunn and Perkins lies at the root of the spying scandal at HP, a saga that ended catastrophically for Dunn. The California attorney- general has charged her on four felony counts of fraud and conspiracy, saying she led the HP board into criminal violations of privacy when the company pried into personal phone records to investigate boardroom leaks.
Perkins set the charges in motion by storming off the board and alerting authorities to the snooping. He contacted the Securities and Exchange Commission and California’s attorney-general, pressing them to take action. But their fight was much broader than that, reflecting a fundamental conflict over how to run big companies in the post-Enron world.
Dunn brought a careful, rules-based approach to life. She rose from a modest child- hood and endured a three-bus commute to attend the Univers- ity of California, Berkeley, on a scholarship. She become head of Barclays Global Investors, where she succeeded in the orderly world of index funds, which control risk and take the guesswork out of investing.
When asked to be HP’s chairman, she brought a similar diligence to her new job. She studied a British book on governance, attended directors’ workshops at Stanford University and hired consultants to update board handbooks. Her first thought, she says, was: “How do I avoid screwing up? Failure-avoidance has been a large motivator my whole life.” For Dunn, plugging the leaks became a crucial test of her ability to oversee the board.
Perkins, by contrast, is a boisterous Silicon Valley legend, in love with fast cars, large sailboats and getting his own way. He worked for HP in the 1950s and 1960s and helped the company start its computer business. In 1972, he co-founded Kleiner Perkins Caufield & Byers, a leading venture-capital firm that made billions for its partners and investors by bankrolling start-ups such as Genentech and Netscape.
Perkins returned to HP in 2002 as an outside director, serving until March 2004 before stepping down at retirement age. He was brought back 11 months later at the urging of fellow director George “Jay” Keyworth, who said the company needed Perkins’s expertise.
“I have been chairman of a hell of a lot of boards,” said Perkins in an interview late last year. “I have always been very, very active in the strategy and tactics of these companies.”
When the leak issue came to a head, Perkins tried to play down the matter and protect his friend, Keyworth, who was fingered as the leaker.
While it may take a court to assign legal culpability, internal HP documents depict Dunn at the centre of the leak probe at the computer and printer company. Imbued with zeal about directors’ responsibilities, she focused on rooting out a boardroom traitor and failed to question or rein in investigators. They impersonated reporters and directors to pry personal records from phone companies. They used operatives to tail HP directors and journalists. And they sprang a sting operation on an unsuspecting reporter in an effort to get her to reveal her source.
The charges are the culmination of a fierce boardroom battle that, in the end, Dunn lost. At the board’s request, she quit as a director in late September.
Dunn says she relied on the advice of HP lawyers and thought obtaining phone records was customary practice. She portrays herself as a victim and says she bears no responsibility for any misdeeds that were done.
“I think I’ve been at the nexus of a conflict between the old and new ways of governance,” she said during a three-hour interview last week. “And I made a very rich and powerful enemy without meaning to. He was in a position to finance an extremely effective and elaborate campaign to get me off the board. It went beyond what he ever expected.”
Perkins also saw their battle as a fight over how best to run the company. In a July 18 e-mail to HP chief executive Mark Hurd, he worried that Dunn would “pack the board with the kind of directors she so admires — ciphers from high-cap companies, with no fast-cycle technology background, and certainly no Silicon Valley entrepreneurial genes. I worry that you will wind up with a ‘blue ribbon’ board that will be of zero, or even negative, value to you when the going gets tough.”
In an interview with Newsweek magazine last month, Perkins said: “My No1 thing was to get Pattie out as chairman, and I got that. So I’m happy.”
As she fights her legal war, Dunn has been waging an increasingly serious medical battle. After brushes with breast cancer and melanoma, she was diagnosed with stage four ovarian cancer in January 2004. Intense chemotherapy, which lasted through August 2005, appeared to have beaten back the disease. But in August, Dunn had surgery to remove cancer that had spread to her liver. She has now begun a new six-month round of chemotherapy.
“I hope I live long enough to see my reputation cleared,” she says.
The story of Dunn’s undoing comes from interviews with her, her associates, other HP directors and 700 pages of HP documents.
Dunn spent her childhood in Las Vegas, where her father was an entertainment director at a casino and her mother was a retired showgirl. She says her formative experiences came as a teenager after her father died and her mother moved the family to California.
Cash was tight. She won a national merit scholarship in 1970 to go to the University of Oregon but had to drop out when her mother lost social- security death benefits. For a year, Dunn worked days as an apartment rental agent and evenings cooking and house-cleaning for a family in return for room and board. Her mother was homeless and slept in her car for a while.
In 1973, Dunn got enough scholarship and grant money to return to college at the University of California, Berkeley, as a journalism major. Immediately after graduating, she won a temporary secretarial job at Wells Fargo, the big San Francisco bank.
She had no interest in finance. “I thought I would rather drink chloroform and die than work for a bank,” she recalls. But it was the only job available and she grew to like it.
Dunn eventually became chief executive of the business, which went through a series of owners before being sold to Barclays Bank, which renamed it Barclays Global Investors.
Former colleagues say Dunn was a superb listener who usually knew exactly what she wanted. “You underestimated her at your peril,” recalls Jeffrey Skelton, a former investment specialist at the bank. “People who got booted out can attest to that.”
In 1998, Dunn was invited on to the HP board, which was looking for fresh faces. At that time it was dominated by people picked by the company’s legendary founders, Dave Packard and Bill Hewlett. A year later, HP recruited its first outsider as chief executive, Carly Fiorina, a flashy telecommunications executive.
HP and Fiorina bet their future on the hotly contested 2002 takeover of the computer maker Compaq.
In her autobiography, which has just gone on sale, Fiorina snipes at the low-key Dunn, writing that it was “frequently hard to discern” what point Dunn might be trying to make.
Dunn says: “I never viewed myself as a leader on the board until late 2004.” That’s when some HP directors started voicing dissatisfaction with their chief executive. A rift developed between Fiorina’s supporters and critics. As the board struggled to find agreement, Dunn helped negotiate a 500-word statement testifying to its concerns. “I was the scribe” who wrote down the emerging consensus, says Dunn.
On January 10, 2005, Dunn and two other directors — Keyworth and Richard Hackborn — delivered the statement to Fiorina. The meeting surprised the embattled executive, who conceded little in talks over the next few days about her role, but seemed to recognise the need to be more open with her board.
“We were getting somewhere with Carly,” Dunn maintains. “She was taking on board what directors were saying.”
Two weeks later, a detailed account of directors’ qualms about Fiorina’s leadership appeared in The Wall Street Journal. Fiorina was furious and started focusing on leaks instead of directors’ concerns about her management. Her relations with the board disintegrated. At a February 7 board meeting in Chicago, with Perkins among those pushing hard for change, Fiorina was voted out of office.
The leak “set the tone for distrust”, says Dunn. “It threw a spanner into the whole process” of running the board.
At the same Chicago session, the board asked Dunn to become non-executive chairman. She says her elevation was due largely to the fact that “I was one of the few directors who was still talking to everyone”. She saw herself as a peacemaker.
Dunn was in the middle of a 20-month chemotherapy regimen to battle ovarian cancer. Her face was bloated. Hair loss forced her to wear wigs. She adopted a macrobiotic diet and consulted a Chinese herbalist. Each day, she took more than a dozen nutritional supplements that she kept in a heart-shaped box.
Tom Christopherson, a long-time colleague at Barclays Global Investors, says he asked her about her medical stoicism and recalls being told: “I keep all of this in a corner. The quality of life I want has nothing to do with being a cancer patient.”
Months before, Fiorina had tried to find the boardroom leakers. Dunn felt it was time to try afresh. It didn’t matter whether the indiscretions were big or small. They all were bad. As she testified to a congressional panel last month: “Even trivial information that finds its way from the boardroom to the press corrodes trust among directors.”
Sympathetic directors urged Dunn onward. HP board documents show that Ryan offered to hand over his phone records so she could see if he had called reporters. She demurred. Someone suggested that directors take lie-detector tests. Perkins declared: “I’ll be the first in line.” Dunn took that as a serious suggestion. Perkins, through a spokesman, says he was kidding. Such tests were never used.
To dig into boardroom conduct, Dunn turned to Ronald DeLia, whom HP management recommended to her. He ran Security Outsourcing Solutions, a small firm in Needham, Massachusetts. Dunn says she wondered if a bigger firm would be better, but opted to keep the job in-house.
DeLia, in a phone call, asked her to pick a codename for the project. Dunn was staying in Kona, Hawaii, at the time, where she has taken holidays since her honeymoon. She decided to call the project Kona and said recently the word will never sound the same to her.
DeLia decided to get directors’ phone records without their permission. This technique, called “pretexting”, involves fooling phone firms into handing over call logs by impersonating a customer, which is illegal in California.
Dunn said in her testimony before Congress last month that she didn’t recall hearing the term pretexting during the 2005 probe. But according to meeting notes from HP’s then-general counsel, Ann Baskins, someone with the initials “PCD” asked direct questions about the matter. Dunn’s full name is Patricia Cecile Dunn. A spokesman for Dunn declines to comment on Baskins’s notes.
Later, low-level HP managers squirmed about such deceit. “It’s very unethical at the least and probably illegal,” wrote Vincent Nye, an HP security official, in a February 2006 e-mail. His warnings seemed to fall on deaf ears, and there is no indication they ever reached Dunn. It’s unclear how people reacted to pretexting last year.
By summer 2005, the Kona team conceded failure; it hadn’t pinpointed any board blabber. The leak issue receded in prominence until January 23, 2006, when Dawn Kawamoto, a technology reporter for CNet.com, posted an online article headlined: “HP outlines long-term strategy.”
The story was cast as a summary of a closed-doors retreat for directors and top executives two weeks earlier — and it was accurate.
“I thought: ‘Here we go again’,” Dunn recalls. “You can’t appreciate how raw the sensitivities were on the board. That a director would have disclosed this is staggering.” Even HP’s chief executive, Mark Hurd, was outraged, said Dunn, telling her he couldn’t run the company this way.
As the leak problems worsened, Dunn’s relations with the powerful Perkins were also deteriorating. In the summer of 2005, she brought in consultants from Mercer Delta to suggest how HP could tidy up its director guidelines. Perkins hated their meddling. As HP general counsel Baskins put it in a later interview with HP’s outside lawyers: “Perkins generally felt he could write a book on governance and didn’t need any outside help.”
Dunn chafed, too, when Perkins repeatedly brought up her $100,000 annual pay as chairman, insinuating — to her ear, at least — that she ought to be grateful to him. Also on Dunn’s gripe list was how Perkins, as a member of the board’s powerful technology committee, was running high-level strategy discussions that belonged in front of all directors. “It was becoming a board within a board,” she says. She didn’t have a seat on the committee and while she was free to attend some of its events, lacked a vote there.
A spokesman for Perkins says: “I wouldn’t even know how to comment on that.”
Did Perkins want an aggressive leaks probe? In an interview in August with HP’s outside lawyers, Wilson Sonsini Goodrich & Rosatti, Dunn said that she felt “under tremendous pressure from Perkins to find the leaker”. Dunn reiterated in her interview last week that she thought Perkins was “the most hawkish of the directors” in pressing for action. Perkins’s spokesman disputes that, saying the venture capitalist regarded the CNet article as harmless.
In any case, investigators had a likely suspect: Keyworth. He had given interviews to Kawamoto before and some of the quotes from the story’s single anonymous source matched his cadence. He had also been suspected of leaking to the press a year earlier. Dunn engaged HP’s chief ethics officer, Kevin Hunsaker, who agreed to supervise what became known as Kona II.
Within two weeks, Hunsaker and DeLia had a whirlwind of spying initiatives in place. They paid surveillance teams to sit outside Keyworth’s home. They hired other snoops to follow an HP publicist at a conference, logging what time he visited the dessert stand. And they commandeered the phone records of a dozen people.
As one episode got under way, even the originally squeamish Nye e-mailed colleagues in capital letters: “STRAP ON YOUR HELMETS, FELLAS, WE’RE GOIN IN!!!” Another investigator in an e-mail likened one of his ploys to “waiting for the Apollo 13 spacecraft to emerge from the dark side of the moon”.
Dunn generally kept her emotions on tighter rein. In e-mails to the investigative team, she underscored the importance of keeping Hurd in the loop. She wrote to Hunsaker on February 3:
“This effort is on the right track. I will count on you and the team.” On February 22, she wrote to Hunsaker to tell him that an e-mail sting involving Kawamoto, the CNet reporter, was “very clever”.
During her testimony to the investigations subcommittee of the House Committee on Energy and Commerce, Dunn said she was sorry she had used that phrase.
All told, HP investigators spent more than $350,000 to establish that Keyworth and Kawamoto had spoken before her CNet story appeared. Nobody officially interviewed Keyworth until the entire draft report was complete. Instead, the company operated for about two months in a clandestine world that congressman John Dingell later said “would make Richard Nixon blush”.
On May 18, it was time to present the fruits of Kona II to the full HP board. Ryan, head of the audit committee, revealed the results of the investigation to Keyworth that morning, and Keyworth confessed.
At the board meeting, Dunn informed fellow directors that a leaker had been found and Ryan filled in the details. Directors asked Keyworth to leave the room while directors deliberated his fate. Ultimately, they decided to ask for his resignation.
Dunn, who thought this would smooth her rocky relations with Perkins, had a nasty surprise coming. Perkins said Keyworth’s contributions to the board were so sizable that his longtime friend should be let off with a private apology and a promise not to hold unauthorised chats with reporters again. Dunn refused, she says. Perkins shouted at her and announced he was quitting the board.
Within weeks, Perkins was marshalling his forces for a battle. He retained a high-powered lawyer, the former White House attorney Viet Dinh. He asked the phone company to see if his records had been peeked into by “pretexters”. When he discovered that they had, he brought the evidence to authorities in July, including California’s attorney-general.
Over the past three months, HP has been coming to terms with the magnitude of the scandal. It began disclosing the leak investigation in early September. Two weeks later, it said Dunn would step down as chairman in January. As more details about the leak probe tumbled forth, HP at the end of last month said Dunn would resign immediately.
From Dunn’s testimony, e-mails and indirect comments, it is possible to piece together an explanation for how a well-regarded chairman could go so catastrophically off course. Adamant in her desire to “fix” the leak problem, she succumbed to tunnel vision.
She had begun to see stopping leaks as one of the most crucial tasks in her chairmanship. In doing so, she neglected issues such as prudence, fairness and the potential impact on HP’s reputation.
Reprinted with permission of The Wall Street Journal Europe. Copyright 2006, Dow Jones & Company. All Rights Reserved
Rebooted
Brief biography of Patricia Dunn
- March 27, 1953: Born in Burbank, Calif.
- 1975: Earns BA from University of California, Berkeley
- 1976: Joins Wells Fargo Investment Advisers; later rises to chief executive
- 1998: Joins board of Hewlett-Packard
- 2004: Diagnosed with advanced ovarian cancer; has recurrence in 2006
- February 2005: Named non-executive chairman of HP
- May: Initiates probe into board leaks
- January 2006: Initiates second probe
- September 22: Resigns from HP
- October 4: Indicted, with four others, for fraud and conspiracy
