How a bad board of directors could kill HPE

Meg Whitman - CEO, Hewlett Packard Enterprise

Hewlett Packard Enterprise (HPE) just released its financials and the picture is anything but pretty.

Not only are almost all of their major businesses in decline, but it reduced its outlook, suggesting things aren’t going to be getting better soon.

While some of this may have been an effort to push revenues into the prior quarter to make Meg Whitman, HPE’s CEO, look better when she was placed into Hillary Clinton’s cabinet (a strategy that likely showcases that Whitman is incredibly unlucky when it comes to politics), the real problems are bigger than Whitman.

What I found particularly scary was Whitman’s comments that HPE was on the right track when cash flow from operations dropped from a painful negative $75 million from last year to a whopping negative $1.5 billion. That is like being on the Titanic, seeing the iceberg, and having the captain say “no problem, full steam ahead!”

Let me explain.

You need critical skills at the top

HP, now HPE, has been in turnaround mode since the late 1990s when Carly Fiorina was brought in to “shake the company up” and you can look at the string of CEOs to get a feel for what worked and what didn’t.

In terms of sustained company performance, the best CEO they had during that time was Mark Hurd who since went over to Oracle and pretty much turned what was a failed hardware business, sourced from failed Sun Micro Systems, into a marginal success.

Sun was effectively dead when Oracle was finally able to acquire that company and its hardware was a bad joke. Locking the door and selling off the physical assets would have the best move at that point, yet in just a tad over the time Whitman has been at HPE, Hurd turned things around creating a viable business once again.

Of all the CEOs that preceded, and including Whitman, what made Hurd stand out was he was the only one who had a technical background in the business that HP was in. Fiorina came from telecommunications, which seems similar, but is actually very different.

Apotheker came from enterprise software (and to be fair never really even got a chance to try to execute), and Whitman came from what was then an early web company. Only Hurd entered the job with substantial enterprise hardware experience and, only with him, did HP show sustained growth.

There is a completely unfounded idea that any executive can run any company, or any department, and that is just BS. You can’t step into a firm from the top, with no experience in what that firm does, and have any hope of being effective when running it. At the very least people just don’t think you are credible.

The telecom mistake

I spent a lot of time analyzing the IBM acquisition of ROLM Systems and the old AT&T acquisition of NCR. At the heart of those failures was that while both markets were technical in nature and used similar names, how they actually worked was very different.

This was actually worse than someone coming in from outside of tech because they assumed they already knew what they needed to know and then screwed up a ton more.

I’ve worked for both kinds of firms so I’ll give you an example: in computing centralized performance is important so processor speed is critical; in Telecom you use distributed processing so interconnect speed is far more important than processor speed.

But that little difference had computing executives in telecom jobs and telecom executives in computing jobs screwing up priorities and creating products that couldn’t compete. Bottom line, there actually are situations where people with the wrong background are worse than people with no background.

The Louis Gerstner exception

Often, when I argue this, someone points to Louis Gerstner who successfully turned around IBM. I have spoken to both Gerstner’s board and several of his aids.

What made that situation different is IBM had been a career for life company up until Gerstner took over making those underneath him all experts in IBM and the technologies surrounding the company.

The IBM process surrounded the CEO with folks who were considered the sharpest of their age and also experts, and before Gerstner took the job IBM’s board hired Jerry York as CFO and Jerry was the strongest executive turnaround expert in the market at that time, having just turned around Chrysler.

So, while Gerstner was light, he was surrounded by IBM lifers who were anything but (granted that did initially create a bigger culture problem), and he was given a CFO who had wicked good skills at fixing big companies. Gerstner then handed the reigns of the firm to Sam Palmisano who was again a subject matter expert.

Look at Apple. When it initially went into decline it was because it put ex-Pepsi CEO John Scully in as CEO and got rid of Steve Jobs. Jobs came back the company recovered.

And man, did it ever. This doesn’t mean that technical skills alone will make the difference, you need good business chops as well, something that is currently missing and killing Uber.

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It is hard to look at Uber and not ask yourself WTF, but yet another case where it is very clear core skills, in this case core business skills just don’t exist at the top.

Look at Uber’s board, how many nonemployees have a background in apps, services, or personal public transportation? (The guy from Google (Alphabet) is an attorney). Though I think the big problem there is a lack of multi-national skills, image management and marketing at the top.

HPE’s board

If you look at HP’s board you can see the problem. They have Dan Ammann, CEO of General Motors with virtually no background in HP’s business, Marc Andreesen who both created and helped kill Netscape in an ill-advised pivot to the enterprise with no hardware background (partially credited with both the Apotheker screw up, and Whitman’s selection); Mike Angelakis an investment expert in media and telecom with no hardware or software expertise; Pam Carter out of Cummins with a background in energy and transport but nothing in any HPE related business; and Klaus Kleinfeld out of Alcoa and Siemens AG (which is as close as we get to an HPE related background, and it isn’t that close).

Then you add Whitman who was out of PayPal and you see that the only consistent skills are in general business and investment, which is why they have so much executive churn below Whitman and their strategy is based on cutting costs not growing business.

This is a long way of saying replacing Whitman likely wouldn’t fix anything because the board lacks the skills needed to understand what skills are needed in the replacement.

It starts with the board

If you see a company in trouble, look to its board members to see if they have the skills needed before you blame the CEO. Just replacing a CEO, if the board lacks core skills, just changes the problem it doesn’t fix it.

Look at Yahoo, another firm that recently failed a turn around. It is in the online mixed media business now, but I challenge you to find one person on their board who has a background in this including their now departing CEO who came from Google.

They had Ross Levinsohn who had the needed background and the idiots, sorry, poorly founded board, forced him out in favor of Marissa Mayer and now Verizon is buying the company for pennies on the dollar.

So, why do you care? You are likely investing millions into tech companies’ products and you have no idea whether the company is truly being, or will continue to be, well run.

I suggest you take a hard look at the board. If the board lacks any knowledge of the industry or business the firm is in, and particularly if it is heavy in financial types they will undoubtedly screw the company up and you’ll be left with a problem you don’t want or need.

So I’d recommend looking for three things in the enterprise company you choose:

1. Related experience on the board
2. Stability in the executive staff
3. Sustained performance in the segment you are depending on them to execute in

Bet you don’t do that now, but I bet you will eventually regret it later.