The Big Lie

Spying, Scandal, and Ethical Collapse at Hewlett Packard


By Anthony Bianco

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Hewlett Packard is an American icon, the largest information technology company in the world. The bedrock of Silicon Valley, it employs more than 300,000 people, its market capitalization is in excess of 100 billion and its products are in almost every home in the country where there is a printer or computer.

In 2003 the company began a transition from the family management style of its founders. It made a bold statement by hiring as its new CEO the most visible female business executive in America: Carly Fiorina. Less than two years later, the board fired her, amid accusations of imperiousness that had begun damagingly to leak into the business media.

The board at that time included one of Silicon Valley’s most flamboyant venture capitalists and owner of the largest and most expensive yacht in the world, and a former CIA asset who believed he personally channeled the values of the company’s founders. Each had a long and complicated history with HP, and each believed he should determine the company’s future. They ran up against a corporate governance expert whom they could not roll, and a new CEO whose loyalties on the board were entirely opaque. In this way, the stage was set for a rancorous feud that split the board into implacably distrusting factions. In the middle of the damaging schism, HP introduced the Big Lie. The lie was pinned on the chairman, who was receiving treatment for stage 4 ovarian cancer. And it sizzled through a largely unquestioning media.

Anthony Bianco gets to heart of the ethical morass at HP that ended up damning the entire board that created it. Almost every American has an interest in how the country’s greatest corporations are run, and the character of the people entrusted with them. The story of Hewlett-Packard reflects power struggles that shape corporate America and is an alarming morality tale for our times.


For Dick, Chris, Ann,
Peter, Amy, and Andy

This book is based on interviews with many of the central players in the events it describes, as well as on thousands of internal Hewlett-Packard emails and other documents that were made public as part of an investigation of HP conducted by the House Committee on Energy and Commerce in 2006. In addition, I have obtained numerous other documents from private sources.
Hewlett-Packard refused at the outset to grant my request to interview CEO Mark Hurd and certain members of the company's board of directors. Before publication, I sent a letter to HP detailing the book's key observations about the part that Mr. Hurd had played in the events described. In response, an HP representative asserted that my letter contained "many inaccuracies and errant conclusions," but declined to specify them. "We do not believe it would be productive to provide a point-by-point response," he stated.

THE BIG LIE is the story of one of the most insidious corporate scandals in the history of Silicon Valley or of U.S. business, for that matter. Although it was called "Spygate" by much of the media that first reported it—and I have used the term to refer to the surveillance that unquestionably took place—it actually was two scandals melded into one: a bone-headed covert operation to find out who was spilling corporate secrets to the press and a cover-up that exacerbated and in some ways outdid the original misdeed. Spygate was exposed to public view; the full story of the cover-up never was. To this day, the tale of what really went on inside Hewlett-Packard's Palo Alto puzzle palace in 2005 and 2006—and who was ultimately responsible for Spygate's transgressions—has been obscured by a campaign of misdirection triumphantly based on the premise that there is no lie as effective as The Big Lie.
In this case "the big lie" was the successful conspiracy to load ultimate responsibility for the spying scheme onto former Hewlett-Packard chairman Patricia Dunn, who was booted from HP's board, vilified in the court of public opinion, pilloried by a Congressional committee, and indicted by the state of California on four felony counts. Dunn, who was battling terminal cancer throughout her ordeal, was not blameless by any means. But this book makes a case for assigning the lion's share of the responsibility for what went wrong inside HP to the executive who took the lead in ousting Dunn and who replaced her as chair: Mark Hurd, the company's chief executive officer.
HP Spygate occurred roughly midway through a decade defined by audacious deceptions in every aspect of American life, from the spurious accounting practiced by the likes of Enron and Worldcom to the Bush Administration's politically motivated warnings about the imminent threat posed by Saddam Hussein's bulging arsenal of weapons of mass destruction and the artfully contrived façades of Bernie Madoff as investment genius and of Tiger Woods as straight-arrow family man. By decade's end, the investment banks of Wall Street had very nearly pulled down the global economy by creating a couple trillion dollars of recklessly risky securities done up to look like gilt-edged, AAA-rated investment merchandise, while regulators either looked the other way or cheered them on.
As measured by its financial consequences, the magnitude of HP's Spygate deceit pales in comparison to Wall Street's trillion-dollar meltdown or Madoff's thievery. In fact, the value of HP's stock has significantly appreciated over the last five years after a long stretch of poor performance. It's no wonder that Hurd, who took charge in 2005, has been hailed as one of corporate America's most effective and operationally astute CEOs. But if there is a universal lesson that can be drawn from the multitudinous scandals of the last decade it is this: Character matters in the end, if not always in the beginning. The point is not merely that moral character is as important to long-run success in business, government, or even professional sports as competency, but that it is an essential component of competency. By this standard, Hurd falls short as a corporate leader.
A great deal is riding on Hewlett-Packard's ability to properly govern itself, for it is a uniquely important, iconic American company. HP may not match Apple and Google for technological cool—as is only to be expected of a company founded in 1939—but today's HP is heir to a gilded corporate legacy that transcends the transitory nature of cool and, for that matter, exceeds the boundaries of Silicon Valley. "Innovative, enlightened, adaptive and fair, Hewlett-Packard under Bill [Hewlett] and Dave [Packard] overshadowed every company of its time, even those much better known and many times larger," observed Michael Malone in Bill and Dave, his dual biography of HP's co-founders. "The HP of those years"—essentially the 1960s and 1970s—"still haunts the business world today, as the gold standard few enterprises can ever hope to approach."1
Over the last decade, HP has reinvented itself to an extent that few old-line companies ever have, spinning off the scientific instruments business that was its founding glory in the process. Today, HP is a global industrial colossus that is the Valley's largest employer, with 320,000 workers, about the same number in General Electric's employ. It ranks not only as the world's largest computer and printer maker but also as the largest information technology company of any sort, as measured by sales and most every other yardstick that matters. Unhip as it is, HP is one of America's best hopes in a treacherous competitive global economy.
All scandals are sui generis in a sense; the vivid particularities of personality and circumstance are their woof and warp. This certainly was true of Spygate, rooted as it was in the idiosyncrasies of an exceptionally cantankerous and willful board of directors. But the HP saga also reflects universal truths about the nature of corporate life, notably the tendency for ambitious, laudable goals to be undercut by the petty and very personal politics of the boardroom and executive suite. The flaws of human nature are at least as prevalent at the pinnacle of the business world as at its entry level.
HP Spygate also evoked a distinctive set of other, more topical issues, among them the post-9/11 assault on privacy. For agencies of government to secrete security cameras in public places and to intercept personal telephone calls and email messages in the name of fighting terrorism is unnerving enough for many of us. But for a business enterprise to use the same sort of covert techniques in pursuit of a private, self-serving agenda is more objectionable to the average citizen, even when the company believes it is acting in self-defense, as Hewlett-Packard did.
Terrorism is the lesser part of the threat that inspired most large U.S. corporations to continue to build costly, sophisticated security operations right through the last recession. Their overriding fear is the misuse or theft of confidential information, which advances in digital technology have tended to make both more abundant and less secure. In a recent pitch to corporate clients touting its abilities to counter the growing global menace of "electronic espionage," the major consulting firm Deloitte listed these prospective perpetrators: "Hackers, pressure groups, foreign intelligence services, terrorists, disaffected/dishonest employees, investigative journalists, organised crime groups, fraudsters, competitors, contractors (e.g. cleaners), executives on overseas travel (hotels, bars, clubs, airports), or graduates from emerging markets."2 It's no wonder that many of the biggest U.S. corporations are following the lead of Wal-Mart Stores and reinforcing their internal security divisions with new hires from the Central Intelligence Agency and the Federal Bureau of Investigation.
Corporate spying scandals have been numerous worldwide. Deutsche Bank, Germany's biggest bank, recently admitted that its security department resorted to improperly invasive methods in four separate investigations from 2001 to 2007. In the most egregious of them, the bank targeted a dissident shareholder who'd gotten under the skin of the bank's new chairman with his public criticisms, dispatching agents all the way to his vacation home on the Spanish island of Ibiza. Another charter member of the German business establishment, Deutsche Telekom, confessed in 2009 to a "severe and far-reaching" surveillance scheme that closely paralleled events at HP.3 Among other things, Deutsche Telekom's security department monitored hundreds of thousands of phone connections in an attempt to uncover which of its board members were routinely leaking news of impending layoffs and other confidential matters to reporters. "Telekom was as full of holes as Swiss cheese," its CEO later complained.4
The Big Lie also is a tragicomic case study of corporate board dysfunction—a pervasive failing of the American way of big business that was an important contributor to the great financial crisis of 2008-2009. The boards of Lehman, Bank of America, Fannie Mae, Countrywide, and the rest were throw-backs to the bad old days when, as a recent Yale University study observed, "directors were, in practice, no more than decorative figures beholden to the imperial CEO."5 For most of the last century, CEOs bred docility into boards by populating them with corporate subordinates, hired-gun lawyers and bankers, close relatives, miscellaneous dignitaries, and golf buddies, many of whom ran other companies. For as long as Bill Hewlett and Dave Packard were around (and they both lived into their eighties) the HP board was old-school incompetence epitomized, though it was only in their dotage that the co-founders packed the panel with assorted sons, daughters, and sons-in-law, many of whom were business neophytes. The clueless passivity of boards made them an obvious target of reform. "In the aftermath of each corporate scandal or crisis," the Yale report noted, "the same question emerged: Where was the board?"6
In some ways, the so-called corporate-governance movement that started to coalesce in the 1970s around big activist investors like the California Public Employees Retirement System (CalPERS) has been hugely effective. No one (outside executive suites anyway) argues any more that a board's essential role is to support a CEO in all things and offer advice if asked. The new consensus is that directors are supposed to train a gimlet eye on CEOs, to boss them as circumstances require, and to fire them when need be. To this end, a host of new laws and regulations have drastically altered the composition of big company boards, which today are far more demographically and professionally diverse than ever before. Cronyism is now the exception, not the rule, on U.S. boards; more than 80 percent of directors are nominally independent of management, compared with less than 20 percent in 1950.
And yet the fact is that most boards still don't work—or not nearly as well as they should after three decades of shareholder agitation and reform. "There is something wrong with the culture of boards," says George "Jay" Keyworth II, who was an HP director for twenty years and one of the central figures of the Spygate story. "People don't know what their responsibility is. I just don't think most boards do a good job of asking, What is our job? How well is this company doing? How well is it going to be doing a year from now? What are its points of vulnerability and is the CEO doing a good job?" As Keyworth sees it, "Corporate boards are the last bastion of unexamined corruption in America."7
The typical board does indeed seem to be dozing at the wheel, incapable of acting decisively, much less courageously, until crisis is upon them and the value of the company's stock has already been eviscerated. A colossal case in point is General Motors, which has been a prime target of CalPERS and other activist shareholders since the early 1990s. After the federal government finally assumed control of General Motors in 2009, it lost no time in booting seven of the automaker's twelve directors, including CEO Rick Waggoner.
Hewlett-Packard's board proved spectacularly dysfunctional in the end, but passive it was not. In fact, before the HP board was overwhelmed by the ignominy of Spygate, it appeared to have ascended into the vanguard of governance progressivism by sacking the ultra-imperious Carly Fiorina and restraining the power of her successor by splitting her offices of CEO and chairman, and appointing one of the first female non-executive chairs in business. Were HP's achievements illusory? More broadly, has the governance movement mistaken the form of improvement for the actual substance of it? Or has genuine reform been thwarted and even subverted intentionally?
What follows is a corporate tragedy in four acts. Act One revolves around an improbable alliance of two directors with diametrically opposed philosophies. Act Two culminates in as contentious and high-profile a corporate firing as U.S. business has ever seen. Act Three is dominated by the fecklessness of the board's oldest member and his loose-lipped ally. The fourth and final act involves the coopting of a new CEO who is not all that he seems to be.
LIKE ALL GREAT dramas, Spygate had a larger-than-life protagonist, a character whose colossal impact for better or worse defied the limits of his peers and whose visions, dreams, and passions existed on a scale that overwhelmed most of those who encountered him, let alone those he felt had crossed him. Tom Perkins is the Grand Old Man of Silicon Valley—or he would be if he were not temperamentally unsuited to dignitary status. Born in 1932, the brilliant but emotionally combustible Perkins helped invent a lucrative new wealth-making vehicle for the elite: the high-tech venture capital partnership. Kleiner & Perkins, the firm that he founded in 1972 with the late Eugene Kleiner, turned millions into billions of dollars by putting up seed capital for some five hundred companies, among them world changers like Genentech, Amazon, and Google.
The quality that set Perkins and his partners apart definitively from lesser rivals in Silicon Valley wasn't brainpower but willpower. Before Perkins, start-up investing was an altogether more passive enterprise. Most venture capitalists spent their days crunching numbers from the business plans brought to them by entrepreneurs seeking funding or the financial reports submitted by companies already in their portfolios. They did not dirty their hands on the corporate machinery. But Perkins was himself a technologist and business operator, not a financier, and he was as incapable of passivity as of breathing underwater.
Perkins enfolded his entrepreneurial collaborators in a bear hug of attentiveness that, as a rule, he relaxed only slightly as Kleiner & Perkins's start-ups grew and prospered. "We were the masters of meddling," Perkins declared. "We were famous about calling the entrepreneurs weekly if not daily. . . . We were part of a team—whether they wanted us to be or not."8
Perkins embroidered his VC legend with a strenuously macho style of extra-large living. He assembled one of the world's great collections of exotic sports cars and raced sailing ships of ever increasing size and value in competitions around the world. Most other yacht owners were content to let professionals captain their boats, but not Perkins, who was "recognized as a bellicose but brilliant tactician."9 In 1996, a court in France convicted Perkins and others of involuntary manslaughter after his yacht collided with a much smaller boat during a race in Saint-Tropez, drowning a French sailor. He paid a $10,000 fine and went back to racing to win. Starting in 2000, Perkins spent six years and $130 million building The Maltese Falcon, a sleekly futuristic yacht as long as a football field. When Perkins wasn't aboard the Falcon , he divided his time between a Marin County mansion with a spectacular view of San Francisco Bay from nearly every window, and a moated Elizabethan manor house in England purchased from Led Zeppelin guitarist Jimmy Page.
Perkins had begun gradually winding down his involvement in venture capital investing in the mid-1980s. He was fifty-four years old when he stepped down as managing partner of Kleiner Perkins Caufield & Byers and began distributing his part of the firm's equity among his colleagues. Co-founder Kleiner had done the same a few years earlier. (Kleiner died in 2003.) As a partner emeritus, Perkins still keeps an office in KPC&B's branch in San Francisco.
It was there, high atop an Embarcadero Center tower, that I first met Tom Perkins, one bright afternoon in May 2009. What might well be the country's most spectacular urban vista practically screamed for attention through the floor-to-ceiling glass walls of his office: San Francisco Bay laid out in its full cerulean glory. Perkins allowed me only a fleeting glimpse before directing my attention elsewhere. All seven of the other offices in KPC&B's thirty-sixth-floor suite were unoccupied. Perkins seemed less than enthralled to have the place to himself, rattling around its empty spaces like a deposed monarch exiled to a lonely outpost of the kingdom. "It's the high-rent district," he harrumphed as he showed me around. "When the lease runs out I'm not going to renew it."10
Perkins was polite, not at all unfriendly but clearly restless. He had even grown tired of The Maltese Falcon, having just put his nautical pride and joy up for sale a mere two years after its maiden voyage. "When I'm on it by myself I'm rattling around, and if I invite friends, which I do, I'm working all the time entertaining," he said. "I've been there, done that for years and years—all kinds of boats, all kinds of places. There are no places I particularly want to visit anymore and no friends I haven't already entertained. It's just time for something else."11
I'd come to see Perkins with a long list of questions about his involvement with Hewlett-Packard Co., which for him is a company of unique personal significance. He first went to work for HP in 1957, fresh from Harvard Business School and the Massachusetts Institute of Technology, when it was still a smallish company very much under the sway of its founders. Young Perkins grabbed hold of Dave Packard like a human lifeline. "Dave Packard was my mentor, an inspiration, and, I am sure, the father I so desperately needed," Perkins wrote in his autobiography, "the most important influence in my life."12 In the fourteen tumultuous years that Perkins spent in HP's employ he contributed greatly to its evolution, even though he never smoothly fit into a company that was far more cautious and buttoned-down than he was.
Even after Perkins left HP to start Kleiner & Perkins, the fledgling venture capitalist took pains to maintain a relationship with Packard for years. Perkins's happiness would have been complete if only his mentor had seen fit to reciprocate by making a place for him on HP's board. That happened only in 2002, long after Packard had died, as Perkins's career came agreeably full circle thanks to a circuitous twist of fate.
If Perkins's life had followed a Hollywood trajectory, he would have served his board term with dignity and distinction. Perkins being Perkins, though, the story of his tenure as an HP director turned into the boardroom equivalent of King Lear. Perkins could not have held HP any dearer if it had been his own kingdom, yet he abandoned HP on four different occasions—resigning twice as an executive and twice as a director. When he quit for the final time in May 1, 2006, he was, by his own description, "incandescent with anger." And so, curtain up.

EXTREME AMBITION IS not always fueled by deprivation, but in Tom Perkins's case it definitely was. Born in 1932, he was an only child reared amid the Great Depression. His parents, Harry and Elizabeth Perkins, often struggled to make ends meet and had to move in with better-off relatives for a time. As Perkins tells it, though, his youthful suffering was more emotional than economic. "I arrived late in my parents' lives and they let me know that, all things considered, it would have been better if I hadn't been born," he wrote in Valley Boy, a memoir in which he never mentions either his mother or father by name.1 Harry, a strapping ex-jock, was indifferent to young Tom's academic successes and mocked his nerdish son's futile attempts at athletic endeavor. Mom was much gentler, but alarmingly erratic. "I'll always picture her standing in our little kitchen with a butcher's knife pressed against her wrist," Perkins recalled. "As a kid, I found these scenes absolutely terrifying."2
Only in the last few years has it dawned on Perkins that he styled his bold, risk-intensive career in complete opposition to the ultra-cautious approach of his father, who endured a long, scarring stretch of unemployment during the 1930s. A first-rate golfer, Harry could well have had the talent to play professionally but never dared give it a try. He also was an intellectually curious autodidact who read widely, built an enormous vocabulary, and yet spent his entire work life as a fire-risk assessor drone for a big insurance company that saw fit to move him around the country without ever promoting him. "He hated his work, basically," Perkins said, acknowledging sympathetically that his father was a man of "unfulfilled capabilities."3
Perkins, who grew up mainly in the New York City suburb of White Plains, won a scholarship to MIT, where he majored in electrical engineering after realizing that he was incapable of excelling at "his first and truest love": theoretical physics.4 At Harvard Business School, he studied under the legendary George Doriot, who moonlighted as the chairman of the country's first full-time venture capital company. Perkins first met Dave Packard and Bill Hewlett at an electronics trade show in New York City a few months before he was awarded his master's in business administration. Hewlett-Packard was a thriving but still obscure company, unknown on the East Coast except to the scientists and engineers to whom it catered as customers. Perkins's HP job interview took the form of chatting up its co-founders while helping them set up their booth at the trade show. In 1957, Perkins climbed into his beat-up Jaguar XK120 coupe and drove cross-country all the way from Boston to Silicon Valley, which still consisted mostly of apricot orchards, to go to work full-time for Bill and Dave.
Perkins, who had just celebrated his twenty-fourth birthday, descended on Palo Alto with all the subtlety of a boulder dropped into a pond from 20,000 feet. "I expected to be running the place in no time," he recalled.5 Was Perkins's swagger his way of compensating for the damage inflicted by a miserable upbringing? Undoubtedly, but he radiated arrogance so convincingly that Packard decided to start out his new apprentice with a lesson in humility, assigning Perkins to HP's machine shop, where the Harvard-educated hotshot MBA spent three months running a lathe. Perkins then moved into sales, becoming sales manager for California, HP's largest market. As an MBA-worthy side project, he reorganized order processing for the entire company, which, in his view, "had become almost impossibly cumbersome."6
Perkins lasted just three years in his first go-round at HP. Frustrated by what he considered the slow pace of his advancement, he quit in 1960 to take a job in the San Francisco office of a prestigious management consulting firm at twice the pay. Just twelve months later, a contrite Perkins called Packard and asked to return to HP.
Packard wasn't quite ready to welcome back his wayward protégé and steered him instead to Optics Technology Inc. (OTI), a fledgling laser company in which both Bill and Dave had invested personally. For the first time, OTI put Perkins in what would become a familiar position for him as a venture capitalist: on the ground floor of an emerging technology of potentially great but undefined commercial promise. Perkins would make his first million in the laser business while exacting a measure of hard-earned revenge against a hated rival.
OTI's mastermind was Narinder Kapany, a young Indian-born scientist with boundless charisma and ambition to match. Perkins, who joined OTI as director of marketing, emerged enthralled from his job interview with the Sikh scientist but soon came to despise Kapany with a fervor that still burned half a century later. "Dr. Narinder Kapany and I developed what is fortunately a rare thing in life: a mutual hatred of near biblical proportions," Perkins wrote in Valley Boy. "Years afterward I told anyone who would listen that I wanted engraved on my tombstone: 'I still hate him.' Perhaps it's time to cancel that request. I'll start to think about it, one of these days."7
Kapany, who, like Perkins, still lives in the Bay Area, admits to owing a copy of Perkins's autobiography but hastens to add that it gathers dust on a shelf, its denunciations of him unread. "My children saw it and they were quite upset," Kapany told me. "My son actually bought one. He wrapped it up nicely and handed it to me. I never opened it. Look, I'm eighty-one years old. At this age, you understand that in this life, you can't live with everybody in love with you. He may have some animosity toward me. Who cares?"8
Kapany was born and raised in the Punjab, the scion of affluent, upper-class parents who sparked his interest in optics as a teenager by giving him a box camera. Narinder earned top marks at a fine Indian university, worked briefly for a military contractor in his native land, and then flew to London to study optics at the Imperial College of Science and Technology. In time, he no doubt would have returned home to start an optical business of some sort had not the renowned British physicist Harold Hopkins hired him in 1952 to assist with what proved to be landmark experiments in fiber optics. PhD in hand, Kapany headed to the United States in 1955 in pursuit of grander opportunity than either England or his native land offered.


On Sale
May 25, 2010
Page Count
368 pages

Anthony Bianco

About the Author

Anthony Bianco wrote for BusinessWeek for twenty-seven years, authoring more than fifty BusinessWeek cover stories. He is the author of four books, most recently Ghosts of 42nd Street: A History of America’s Most Infamous Block, and Wal-Mart: The Bully of Bentonville. He lives in Brooklyn, NY.

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