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Why Are Silicon Valley Stars Finding Trouble? By LEE GOMES (The Wall Street Journal) Oct. 12, 2006 (Associated Press) It used to be the whiff of scandal was given off by companies in the financial category of "soon-to-be distressed." Some Enron-like bit of accounting irregularities would be exposed as an early warning signal, and not long thereafter, things would fall apart. These days, however, some of the very best companies in Silicon Valley - places where no one doubts their prospects - are the ones having problems with the law. The idea that a director of Hewlett-Packard would be indicted in connection with the performance of her official duties, as happened to former chairman Patricia C. Dunn last week, is surely among the least-likely business events of the year. So is the fact that H-P's board might be compared with the Nixon White House, as occurred two weeks ago during a congressional hearing into the company's catastrophic leak investigation. Actually, there is a link between H-P and the Nixon White House. Hewlett-Packard co-founder David Packard served as the deputy secretary of defense for the first Nixon Administration. That appointment, though, was a sign of the man's probity; it was a case of a respected, patrician California executive (Silicon Valley barely existed in 1968) being called to Washington to do public service for his country. And so it was with H-P. It was the industry's class act; the worse you could say about it was that it was a little dull. There may be a few companies that you can imagine hiring gumshoes to trail reporters and pore over phone records of board members, but H-P was never among them. The company got its start selling measuring equipment, but those who took it over the cliff in the past few months appear to have lost all sense of scale. Leaks from board members probably aren't at the top of the list of best practices for corporate governance, but there are many things that are much worse, such as recreating the atmosphere of a Medici court in the top ranks of your company. Or suffering the consequences of having created a hazy chain of authority, involving contractors and subcontractors, where someone two degrees of separation away ends up bringing out the prosecutors for actions such as getting phone records via "pretexting," as has been charged in H-Ps case. In comparison, reading leaked stories about your company doesn't seem so bad, does it? Indeed, the occasional leak - which is really all that H-P had to contend with - is just the flip side of being a high-profile operation. The proper response is to lock all the directors in the board room, give them a good talking to about acting like adults, and then hope for the best. One of the ironies of the events of the past few weeks is that the other company currently dealing more than it would like to with a branch of the government - Apple Computer - is actually the one with the fixation on leaks. The company is famously secretive. For instance, it seems to scarcely tolerate bloggers. (It is a source of never-ending puzzlement to this columnist that the blogosphere venerates the essentially blog-free Apple while forever mocking Microsoft, where even the cafeteria workers have their own blogs.) The company's penchant for secrecy has First Amendment implications, too. Apple has launched several high-profile lawsuits against outside Web sites that printed leaked information about upcoming Apple products. What most people would call a scoop, it has tried to get a court to call a misappropriation of intellectual property. Apple, however, wasn't busted for trying to plug leaks, but instead, for backdating stock options, a practice - like pretexting - that essentially no one had heard about before this year. Or, more precisely, no one in the public had heard of backdating, even though companies both inside and outside of the technology industry seem to have practiced it regularly until Mr. Sarbanes and Mr. Oxley made it clear that boards would need to make sure their executives didn't do it. Apple admitted last week to backdating options, and faces shareholder lawsuits as well as continuing questions by the SEC and a Federal prosecutor who has already indicted others in connection with backdating. Steve Jobs was forced to issue an apology. It's not expected that much worse will happen to him, though the outlook for other current and former Apple executives isn't as clear. How do bad things happen at good companies? Usually quickly, without a lot of questions being asked, and with the assumption being that if other people are doing it, it's probably OK. Instead of yeses, there are mumbles and shrugs. But these sorts of legal gray areas have a nasty habit of changing their color with the passage of time. Now, both pretexting and backdating stock options couldn't be more black and white. Both H-P and Apple were, before recent events, the models of upstanding companies. At their core, they still are. That they now could be in the difficulties they are doesn't augur well for other companies. Maybe the secret of staying out of trouble is never to take a shrug for an answer. |
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