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Australian Financial Review : October 17th 2006
FBA 030 The Australian Financial Review Tuesday 17 October 2006 www.afr.com 30 INFORMATION Director sanctity no excuse for pretexts HP founders Bill Hewlett and Dave Packard started a great technology company. The illusion that a board must be in complete control lies behind Hewlett-Packard's fiasco, writes David Holtzman. BusinessWeek John Davidson and This Digital Life are on holidays. I feel sorry for Hewlett-Packard. Not the company's executives, of course, they deserve whatever happens to them. I was thinking about Bill Hewlett and Dave Packard and their heirs. Sixty-seven years ago, Hewlett and Packard started a great technology company that became the prototype of today's successful Silicon Valley companies. HP established a reputation as a company that gave good value to customers and was a great place to work for employees, and it set the ethical standard for thousands of similar companies with a principled mission statement it called ''The HP Way.'' It was progressive enough to be the first company in the Dow Industrial Index to appoint a woman as CEO. For those who have missed the recent freak show coming from HP's headquarters in Palo Alto, California, here's the abbreviated version. Former chairwoman Patricia Dunn hired private investigators to spy on her fellow directors, employees, and several reporters because someone inside was leaking sensitive corporate information to the press. The detectives even took the amazing step of ''pretexting'' their mobile phone records. Pretexting is when you call up a company and lie, pretending you're the account holder, to get access to their account information. Since then the story has twisted and turned, as these tales are wont to do. Dunn quit and was replaced as chairman by CEO Mark Hurd. Hurd apparently was given a report of the investigation while it was ongoing, but claimed he didn't read it, substituting negligence for guilt as his alibi. Congress is investigating HPgate for some reason that I'm sure has nothing to do with next month's election. The California Attorney- General has filed charges against Dunn, other HP executives, and investigators. Meanwhile, attention to the company's probe continues to make headlines with the publicity blitz surrounding former HP CEO Carly Fiorina's new book. On October 8, both Fiorina and Dunn were on 60 Minutes reliving the sordid mess in separate interviews. So what's the problem here? It's arrogance. What Dunn did was arrogant on a colossal, Marie Antoinette let-them-eat-cake level. Watergate arrogance. Pretexting may or may not be illegal, but it certainly stinks. It shouldn't pass the ethics smell test on any level. But that doesn't seem to register with Dunn. She took the unusual step of going on 60 Minutes to defend herself. She was unrepentant and said that people who sit on boards give up a lot of their privacy. I suspect many boardrooms share the belief that leaking inside information to the press is so detrimental that any action to smoke out a squealer is justified. Indeed, Dunn herself validated this assumption in her 60 Minutes interview: ''If you think that Hewlett-Packard is the only company that has an investigations force monitoring, posing as other people in order to solve problems to protect shareholder value, you're being naive.'' There is a cult of arrogance behind HPgate that pervades the business community and is bigger than any one scandal. It manifests differently from time to time, but its roots all grow out of the same soil. Whether it's option-repricing, insider trading, or spying on journalists, business decisions are made at the highest corporate levels that are at best murkily legal and visibly unethical. Ethical thinking does not seem to be part of today's business environment. I am sure that Dunn is correct and many companies also spy. Many others probably think about it but don'tdo it, not because they think it's wrong, but out of fear of getting caught. Dunn also appeared before Congress last week and refused to take personal responsibility for the situation. Her excuse is the modern day Nuremburg defence. She blamed her lawyers. By asking HP's attorneys to make sure that everything she did was within the law, she believes that her actions were clean. The state of California apparently disagrees with this assertion since it did not charge HP's former general counsel, Ann Baskins, along with Dunn and others. The real problem here is the flawed business belief behind HP's thinking. To misquote Nietzsche, it can be summed up as: ''What doesn't convict us, makes us stronger.'' Corporate governance has an ethical component that exists independent of the legal environment. The real question when discussing controversial issues like spying on directors and reporters should not be ''Is it legal?'' but ''Should we do it?'' Every blue- chip company has a mission statement that lays out moral principles of behaviour in detail. It's too bad that many executives only pay lip service to their credo. In closing, here's one of the five principles from The HP Way,a company history by David Packard. ''We conduct our business with uncompromising integrity. We expect HP people to be open and honest in their dealings to earn the trust and loyalty of others. People at every level are expected to adhere to the highest standards of business ethics and must understand that anything less is unacceptable. As a practical matter, ethical conduct cannot be assured by written HP policies and codes; it must be an integral part of the organisation, a deeply ingrained tradition that is passed from one generation of employees to another.'' David Holtzman is the author of Privacy Lost: How Technology Is Endangering Your Privacy. Time catches up with YouTube KEY POINTS Google bought YouTube, the video sharing website, for $2.1 billion. While Time Warner is pursuing a copyright complaint, other big media companies have signed agreements with YouTube. The Guardian Jane Martinson Time Warner chairman and chief executive Dick Parsons has fired a shot across the bows of Google, saying his group would pursue its copyright complaints against the video sharing site YouTube.com. Google paid $US1.6 billion ($2.1 billion) for YouTube last week. There are concerns that some of the fledgling website's shared videos breached copyright rules. Time Warner, the media and entertainment group, which owns the Warner Brothers movie studio, Time magazines and the HBO TV channel, is one of several large media companies concerned about possibly illegal use of its material on YouTube. ''You can assume we're in negotiations with YouTube and that those negotiations will be kicked up to the Google level in the hope that we can get to some acceptable position,'' Mr Parsons said. He denied the decision to pursue any potential infringement had been prompted by last week's acquisition. Google, whose core search function attracted 204 million users in August, four times those who used YouTube, has a higher market capitalisation than Time Warner. ''We were going to pursue it anyway,'' Mr Parsons said. ''If you let one thing ignore your rights as an owner it makes it much more difficult to defend those rights when the next guy comes along.'' He took a more emollient stance than some when he said: ''We'd like to have our content displayed on these platforms, but on a basis that it respects our rights as the owner of that content.'' This echoes many of his media peers, who are keen to come to some agreement with sites such as YouTube, which has 35 million regular users. However, Doug Morris, the chief executive of Universal Music, attacked YouTube and MySpace, the social networking site bought by Rupert Murdoch's News Corporation last year, as ''copyright infringers'' at an investors' conference last month. News Corp is understood to be talking to Google about the possibility of extending an existing advertising deal involving MySpace. News executives say between 60 per cent and 70 per cent of YouTube's traffic comes from the social network site. With clips limited to a maximum of 10 minutes, many of the most popular videos on YouTube are music or humour based. Some music companies have recently signed revenue-sharing arrangements with YouTube. Warner Music, which is no longer part of Time Warner, agreed to make its music video library available to YouTube this month, in one of the site's earliest commercial agreements. The deal was followed by agreements with Sony BMG and US TV channel CBS. Mr Parsons said that, like many media companies, Time Warner had looked at buying YouTube but baulked at the price. ''The best buyer for YouTube was Google because it has the most advanced ability right now to monetise traffic. Whether they overpaid or not, time will tell. '' Both YouTube and Google remove content where breaches can be demonstrated. Mr Parsons said Time Warner looked at ''everything'' when it came to acquisitions. He had expanded Time Warner's cable operations and signed off a radical overhaul of its struggling AOL internet business, but said he had concerns about the ''broadcast business'' more generally. Google is facing legal challenges to Google News and Google Books. Fast facts Jigsaw joins UXC The acquisitive UXC has snapped up another tech outfit, Jigsaw Services, which specialises in consulting services around the JD Edwards applications suite. Jigsaw Services employs 85 people in Australia and New Zealand and recorded revenue of $12.9 million in the last financial year. It will become part of UXC's Red Rock Consulting business. Terms of the deal were not disclosed. Emma Connors Salmat extends offer Salmat has extended its takeover offer for speech technology specialist VeCommerce for the second time this month. Salmat has acquired just over 70 per cent of VeCommerce and needs to get 90 per cent for its offer to succeed. VeCommerce shareholders now have until October 27 to accept the $2.30 a share offer, which values the company at $28.7 million. VeCommerce shares last traded at $1.90. Emma Connors Cisco supplies Optus Optus has signed a deal with Cisco Systems worth an estimated $12 million to supply an internet protocol communications network at its new head office at Macquarie Park in Sydney. The IP system will include IP phones, a contact centre, a security solution and a wireless network for the campus. The system will be installed by IT services company Alphawest, a subsidiary of Optus Networks. Mark Jones New Quickflix director Paul Choiselat has joined the board of online DVD rental business Quickflix as a non-executive director. Mr Choiselat was nominated by Destra Corp after Quickflix raised $500,000 via a placement to Destra earlier this year. In August Lachlan Murdoch acquired 9.6 per cent of Quickflix when the company's shares were trading at about 12¢. Yesterday they closed down 1¢ at 19¢. Emma Connors Windows enjoys Vista Microsoft expects to meet its deadline for shipping the Windows Vista operating system after making changes demanded by regulators in Europe and South Korea. Microsoft will start selling the software to corporate customers next month and at retail stores in January. Microsoft said last month it might delay Vista's release in Europe if regulators demanded changes to the product. The modifications to Vista might help Microsoft ease years of discord with the European Commission over the dominance of Windows, which runs almost 95 per cent of the world's personal computers. Bloomberg More memory at Toshiba Toshiba plans to expand production of memory cards by about 50 per cent within two years to meet rising global demand, the Nihon Keizai newspaper reported. The company will increase output of SD memory cards for digital cameras and microSD cards for mobile phones to 100 million units by its 2008 business year. Bloomberg Battery compensation Toshiba, Hitachi and Fujitsu may ask Sony to compensate them for brand damage and lost business caused by a recall of Sony-made batteries used in laptop computers. The three companies said they were studying the effects Sony's battery replacements would have on their image with consumers. Sony's rush to recall cells had created a shortage, pushing up prices and causing delays in shipments, Taiwanese battery makers said last week. Bloomberg