The shareholder group says CEOs shouldn't play a direct role in choosing directors, but attorney Lipton sharply disagrees
(Bloomberg) -- Hewlett-Packard Co. didn't run afoul of corporate governance rules when it appointed directors who are acquainted with its chief executive officer and board chairman, attorney Martin Lipton said in a memo.
Lipton, a founding partner of Wachtell, Lipton, Rosen & Katz in New York who helped draft New York Stock Exchange governance rules, faulted Institutional Shareholder Services Inc., an adviser to investors on corporate governance matters, for its criticism of Hewlett-Packard. The company's directors shouldn't have let CEO Leo Apotheker play a direct role in selecting the directors, ISS said earlier this month.
"Having served as a member of the NYSE committee that created the NYSE's post-Enron corporate governance rules, I have watched with dismay as those rules have been misunderstood, misapplied and polluted by one-size-fits-all 'best practices' invented by proxy advisory services and other governance
ISS counseled clients in a March 2 report to vote against three Hewlett-Packard directors at the company's March 23 shareholder meeting for their role in letting Apotheker help select new board members in January. Apotheker's participation in the appointment of new directors "raises red flags," ISS said in its report.
The concern is that directors who have ties to the CEO may be less inclined to exert independence and hold management accountable, corporate governance experts have said.
ISS Recommendations
ISS recommended that shareholders vote against three sitting directors -- Lawrence Babbio, Sari Baldauf and G. Kennedy Thompson -- who are up for re-election at the annual meeting, because they shouldn't have permitted Apotheker to play a role in the nomination.
Gary Hewitt, a spokesman for ISS, said in an interview that the organization examines companies on a case-by-case basis and doesn't issue blanket proclamations.
"We're always being asked to take into account a company's individual facts and circumstances. We did in the HP case," he said.
Lipton said in his memo that friends of a CEO can serve as independent directors, and that there is no basis for second-guessing a board's determination that a friend of a company's CEO, or of another director, can act independently.
"Friends can and should be independent directors," Lipton said. "As long as a majority of the board is independent, the other members can be men and women who are not independent and who bring special skills, experience, or other qualities that are important to the board's understanding and monitoring of the corporation's business and risks."
New Board Members
Hewlett-Packard in January replaced four directors with five new board members, several of whom had business ties to Apotheker and Hewlett-Packard Chairman Ray Lane. The directors who joined the board were Shumeet Banerji, CEO of Booz & Co.; Patricia Russo, former CEO of Alcatel-Lucent SA; Dominique Senequier, CEO of AXA Private Equity; Meg Whitman, former CEO of EBay Inc.; and Gary Reiner, former chief information officer of General Electric Co.
"The effective functioning of the board is often impaired, if everyone is a stranger," Lipton said. NYSE rules permit CEOs to attend board committee meetings, make recommendations to a committee or request discussion of matters by the full board, Lipton said.
Clients of proxy advisers "owe a duty not to slavishly follow advice from such services," Lipton said.
"ISS's clients are intelligent investors and do not slavishly follow anyone," Hewitt added in an e-mailed statement.
Mylene Mangalindan, a spokeswoman for Palo Alto, California-based Hewlett-Packard, declined to comment.
Hewlett-Packard fell 79 cents, or 1.9 percent, to $40.14 yesterday in New York Stock Exchange trading. It has declined 4.7 percent this year.
Ricadela is a technology editor for Bloomberg Businessweek.com in San Francisco.
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