HP Pretexting Scandal

Contemporary Management Issues

August 2011, Malaysia

Faraz Davani

Author:

The general purpose of this article is to provide a discussion on corporate governance issues and ethics involved in HP pretexting scandal story. The focus will be on ethical decision making and contemporary business issues at individual, organizational, and societal levels.

Abstract
This report attempts to discuss different ethical issues in HP scandal based on assumptions made in the appendix by the means of normative and descriptive stakeholder theories at the individual, organizational, and societal levels. The report begins by determining the nature of the ethical issue by given supporting sentences in the appendix. At the organizational level it is discussed that HPs corporate governance failed when facing a law dilemma within a global context in which HP chose the weaker Federal law rather the stronger California law. At the individual level, HPs attorneys violated their professional codes of conducts and human and employees right of privacy. Finally it is identified that HP, at the societal level, also failed in its supply chain corporate responsibilities. Then the report introduces an ethical dilemma for HP Chief Ethical Officer at the individual level and then evaluates performance of his decision making ethically by defining proper ethical standards and recognizing the area of conflicts. At the end, the analysis concludes that he gave emphasis to his duties rather than cultivating a virtue character. Furthermore, the analysis comes to assessing Chairwomans ethical reasoning. It is recognized that her ethical behaviors were highly affected by HPs Anglo-American framework of corporate governance. Then the result of the analysis subscribes her decision making approach to Consequentialism coupled with Capitalism. Also, her participation in privacy intrusion is justified by Egoism but is condemned through a pluralism perspective. At the end Utilitarianism model is suggested for her ethical issue. The reports continues with giving recommendations in three different areas in which the ethical issues regarding the HP scandal appeared such as Policies, Communication Processes, and Supervisory Processes. In addition, a discussion on the current corporate internal decision structure shows that the new structure is integrated with legal and ethical considerations, and sort of social test; but unlike the European approach, sustainability is not fully designed in that decision making process. The next part of this report explains how HP evolved its social responsiveness strategies compared to Enron as a bad practice. It shows that HP, in the first place, defended its position against admitting its social responsibilities but then accommodated its behaviors to be more consistent with the globalization standards besides; in spite of the fact, HP requires proactive actions to retain the leadership position. At last, the report shows how HP should learn the Intels good practices of building sustainability culture among its employees and taking its supply chain corporate responsibilities. In conclusion, the Anglo-American approach cannot survive in a global context where sustainability development and multiple stakeholders approach are of vital importance. HP Pretexting Scandal by Faraz Davani (2011) Malaysia

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Preface
HP was traditionally leading in the area of business ethics for its excellent ethical practices, and outstanding value and belief system called The HP Way (6.1.1). As a result of this, HP puts trust and respect for individuals at the center of its shared values: We work together to create a culture of inclusion built on trust, respect and dignity for all. The HP Way started diminishing in 1999, when Carly Fiorina appointed as HPs CEO and chairwoman. In fact, her controversial initiatives in HP were not congruent with the spirit of The HP Way; thus the HPs excellent culture of trust and respect changed; instead, significant conflict and mistrust appeared among the members of the Board of Directors (6.1.2.). Eventually, Fiorina ousted for her poor performance in 2005; thus gave over her position as chairwoman to Patricia Dunn. Following the ethical issues, that Frioria had already cultivated, insider information of the boardroom started leaking to public in early 2005 in conjunction with Dunn appointment; and accordingly took Dunns urgent focus to plug the leaks. For this, Dunn initiated an investigation on the boardrooms leak, and along with several HPs executives planned and controlled many steps of it (6.1.3-5). Finally Dunn introduced a long-term director as the source of leaks after HPs long-term strategic plan of January 2006 meeting appeared on public for the second time (6.1.18). By the way, although she revealed the source of leaks to the board, it cost Dunn her chairmans post as well as other chief executives involved in the investigation (6.1.8). HP, with regard to the leak probe, was prosecuted by state and federal authorities for use of pretexting through data brokers to obtain telephone records of the members of its Board of Directors, employees, and journalists without their knowledge and consent, namely The HP Scandal.

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Learning Outcome
Demonstrate a systematic understanding of modern developments within business management. To appreciate and apply the essential ethical principles relevant to business settings; these include descriptive (i.e., behavioral) and normative (i.e., philosophical) models of ethical decision making. Justify the recommendation of alternative approaches to management. To appreciate the dynamics associated with the making of ethical and unethical decisions in the workplace. This includes the development of ethical frameworks to be used in decision-making settings. This focus on ethical reasoning is a skill-based objective. Demonstrate knowledge and application of international standards relating to sustainability, values and norms and business ethics within a global context. To demonstrate these general principles and decision-making dynamics to understanding and analyzing real ethical dilemmas confronting individuals and organizations today

Marking Scheme
Evaluate the nature of the ethical issue 10% Explain using published models and frameworks why it occurredthat is, what specific conditions enabled or encouraged it 30% Recommend steps that could have been taken to prevent; if any the scandal or any issue from occurring 40% Evaluate and compare how large multinational companies show leadership in developing sustainable business practices 20%

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Contents
1. 2. Nature of the Ethical Issue....................................................................................................... 7 Why it Occurred ...................................................................................................................... 8 2.1. 2.2. 2.3. 3. Hunsaker Ethical Dilemma .............................................................................................. 8 Dunns Ethical Reasoning ................................................................................................ 9 Corporate Governance Issues ......................................................................................... 11

Recommendation ................................................................................................................... 12 3.1. 3.2. 3.3. 3.4. Policies ........................................................................................................................... 12 Communication Processes.............................................................................................. 12 Supervisory Processes .................................................................................................... 13 Corporate Social Responsiveness................................................................................... 14

4. 5. 6. 7. 7.1.

Sustainability Development................................................................................................... 15 Conclusion ............................................................................................................................. 16 References ............................................................................................................................. 17 Appendix ............................................................................................................................... 21 Appendix Assumptions ................................................................................................... 21 The HP Way ............................................................................................................... 21 The HP Way Diminished............................................................................................ 21 Board Leaks to the Media ........................................................................................... 21 KONA 1 ...................................................................................................................... 21 KONA 2 ...................................................................................................................... 22 Supervision on Leak Probe ......................................................................................... 22 Disputation on Handling the Board Leak ................................................................... 24 May 2006 Board Meeting ........................................................................................... 24 Internal Investigation on Leak Probe.......................................................................... 24 Investigation Supply Chain ..................................................................................... 25 HP Scandal Went Public ......................................................................................... 25 Law Dilemma.......................................................................................................... 26 Ethics Considerations.............................................................................................. 27 Government Investigation into HP Scandal............................................................ 28 Settles with California............................................................................................. 29 Page 5

7.1.1. 7.1.2. 7.1.3. 7.1.4. 7.1.5. 7.1.6. 7.1.7. 7.1.8. 7.1.9. 7.1.10. 7.1.11. 7.1.12. 7.1.13. 7.1.14. 7.1.15.

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7.1.16. 7.1.17. 7.1.18. 7.1.19. 7.1.20. 7.1.21. 7.1.22. 7.1.23. 7.2.

Felony Charges ....................................................................................................... 29 Pretexting against HP Employee ............................................................................ 30 Leak Investigation Went Too Far ........................................................................... 30 Assessing HP Investigation Processes .................................................................... 30 Director Independence ............................................................................................ 31 Insider Trading ........................................................................................................ 32 Internal and External Legal Authorities .................................................................. 32 Corporate Social Responsiveness ........................................................................... 33

Appendix Key Actors ..................................................................................................... 34

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1. Nature of the Ethical Issue

HP, in a probe to find the source of boardrooms leak to public media, was prosecuted by state and federal authorities for use of pretexting through data brokers to obtain telephone records of the members of its Board of Directors, employees, and journalists without their knowledge and consent, namely The HP Scandal (7.1). According to Schwartz (2006, p.6), pretexting is getting private information about an individual under false pretenses. To put it in the context of a typical crime, a pretexter might then sell that information to people who might want to do bad things to that individual. In HP scandal, the following ethical issues are recognized: Violation of law and moral principles (7.1.12, 7.1.13) Unclear information-gathering policy Inadequate supervision in autonomy of ethics over the supply chain (7.1.10) Failure of principles to comply with professional code of conducts Misconduct in corporate governance Unfair treatment towards insiders as well as other individuals in society (7.1.17) Insider trading (7.1.21) Count: 171 words

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2. Why it Occurred
2.1. Hunsaker Ethical Dilemma
Kevin Hunsaker, when he was HPs Chief Ethics Officer, knowingly engaged with an immoral, unethical, and legally questionable practice (7.1.6.3). It is highly thought that Hunsaker encountered an ethical dilemma towards his involvement to investigation. For exploring this ethical dilemma and other ethical issues in this assignment, Kitcheners (1984) five moral principles of autonomy, Non-maleficence, Beneficence, Justice, and Fidelity are used as the ethical guideline. According to Forester-Miller and Davis (1996): Non-maleficence is the concept of not causing harm to others. This principle reflects both the idea of not inflicting intentional harm, and not engaging in actions that risk harming others. Fidelity involves the notions of loyalty, faithfulness, and honoring commitments by which subordinate must be able to trust his higher ordinate; instead ordinate must take care not to threaten his subordinate nor leave obligations unfulfilled.

Regarding Hunsakers ethical dilemma, non-maleficence and fidelity comprise the area of moral conflict in which, he was not obligated to violate the employees rights of informational privacy (Crane and Patten, 2010, p.304) in one side, and he shall trust Dunn as the chairwoman and other chief executives in the other side. In addition to this, the main tasks of a manager is to manage the property of shareholders in their interests (Crane and Matten, 2010, p.238). The story of scandal shows that he, in struggle between them, gave priority to his duty and loyalty to Dunn and the executive team not The HP Way (7.1.1). In conclusion, adoption of the old fashion ethical framework of Kitcheners (1984) Five Moral Principles was the main reason for Hunsakers failure in his ethical dilemma. Furthermore, his ethical behavior violates the second maxim of categorical imperative which stresses act so that you treat humanity, whether in your own person or in that of another, always as an end and never as a means only (Crane and Matten, 2010, p.105). However, giving emphasis to utilitarianism and rights and justice ethics were more in line with HPs shared values such as welfare of employees and society, and respect and dignity for all. Crane and Matten (2010) defines natural rights as certain basic, important, unalienable entitlements that should be respected and protected in every single action (p.108); and defines justice as the simultaneously fair treatment of individuals in a given situation with the result that everybody gets what they deserve (p.111). As they define utilitarianism, an action is morally right if it results in the greatest amount of good for the greatest amount of people affected by the action (p.101). Page 8

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2.2.

Dunns Ethical Reasoning

Dunn is criticized for not involving its outside legal firm, as well as legislative government committees in its leaks prove. Perhaps, in Dunns perspective of view (but is not believed), conducting private investigation, hidden from the supervision of legal firms and government authorities, was the best ensuring way to deal with very influential board members; because any exposure could alert the leaker, and consequently decrease the chance of success. After all, inadequate consideration for stake of regulations, and information-gathering policies and processes in investigation, set Dunn in the position of autonomy (Forester-Miller and Davis, 1996) in ethical reasoning process. Dunn, in handling the leak issue, acted according to Anglo-American model of corporate governance in which the focus is on financial objectives and stock market (Crane and Matten, 2010, p.241). Above all, Dunn, fully considered the interest of shareholders as well as her selfinterest of spying on the board (7.1.18); while she did not consider the stake and rights of employees, government and regulations, and civil society (like reporters and news agencies as pressure groups). Dunn, in her ethical decision-making, put emphasis to consequences rather than moral principles like beneficence which requires ordinates to act for good of subordinates, be proactive in benefit them, and prevent harm when possible (Forester-Miller and Davis, 1996). Instead, Dunn misused her autonomous position to sacrifice moral principles of nonmaleficence, fidelity, and beneficence as well as human rights of privacy (Crane and Matten, 2010, p.293) for retaining the stock market stable. Accordingly, she must be subscribed to Capitalism coupled with Consequentialism. Dunn knew that the practice was not illegal, or no generally illegal, but she also knew it was not moral and ethical (7.1.6.4 & 7.1.13). Her ethical reasoning was that she could hide behind the fact that human was limited to knowledge (see 7.1.12) an Egoism reasoning (Crane and Matten 2010, p.98), thus she could justify the unethical behavior of its third-party towards her good goals by saying that she was not aware of the wrongdoing. Furthermore, Dunn, as an advocate for shareholders interest, acted selfishly against others interests (focus of Egoism). In addition to this, she along with the investigation team, reignited the leak probe to keep spying on the board for their own interest (7.1.18). It comes to conclusion that Dunns approach of ethical reasoning lies on Egoism within the framework of Anglo-American concept. Nevertheless, as Crane and Matten (2010) suggest using different ethical standards for further explorations, Dunns justifications are also refused through the lens of Rights and Justice theories of ethics. Ethics of Rights ABSOLUTELY refuses privacy intrusion without the knowledge and consent; furthermore, investigation of other innocent members of the Board of Directors is refused by Justice. HP Pretexting Scandal by Faraz Davani (2011) Malaysia

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The story of HP scandal reveals that Dunns Egoism reasoning and shareholder-oriented AngloAmerican model could not address accountability and legal concerns for global companies. Thus, it is suggested that Dunn should have taken the ethical theory of utilitarianism within a modified version of Anglo-American model of corporate governance by adopting some excellent practices of European approach like Stakeholder Theory of the Firm. Here is an analysis of Dunns ethical issue at her hand by the means of Utilitarianism reasoning.

The framework of this analysis adopted from Crane and Matten (2010, p.103)

Outcomes of this analysis: Approach (a), with higher transparency, relatively produces more satisfaction than approach (b) with less transparency Minority of shareholders enjoy of the highest pleasure from approach (b), while a significant amount of pleasure (3.5 above the mean 2.5) is distributed among Government, Independent Shareholders, Employees, and Civil Society which comprise the majority of the stakeholders.

As a result, involving outside legal firm & government legislative committees, promising a higher level of transparency, results in producing the greatest satisfaction for the majority of stakeholders which is the main goal of Utilitarianism. After all, Utilitarianism, in HP ethical issue, suggests an ethical decision making model in which social considerations, stake of regulations and rights of employees are designed.

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2.3.

Corporate Governance Issues

The main reason for HP scandal can be found in its corporate governances ethical issues. Here there are some incentives which encouraged them. Adoption to an old-fashion version of Anglo-American model, where Stakeholder Theory of Firm was not in place HP did not have adequate policies, processes, and supervision in place for investigation on its BOD, employees, and even outsiders. Lack of transparency (7.1.7, 7.1.11) Corporate culture issues such as mistrust and conflict among some board members (7.1.7). Acting globally but no accommodation in codes of corporate governance for accountability, and legal issues (7.1.12) Lack of internal and outside audit committees in investigation practices Violation of Professional Codes of Conducts by HP counsels and lawyers (7.1.6.3) Conflict of responsibilities among chief executives (7.1.6.2) Higher degree of reliance between chief executives and outside investigators (7.1.6.1) Lack of proper structure and guidelines for ethical decision-making processes Insider Trading (7.1.21)

Count: 1,257 words

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3. Recommendation
Corporate governance is the processes of goal definition, supervision, control, and sanctioning through which they ensure that management is running their corporation according to their interest and intention (Crane and Matten, 2010; P.238). The HP scandal mostly was a result of inadequate policies, communication and supervisory processes in place (Schwartz, 2006, p.6).

3.1.

Policies

With regard to employees rights of privacy, Standards of Business Conducts (SBC) must determine how, when, and to what extent private data about them are released to others (Crane and Matten, 2010; p.293 & p.304). Crane and Matten (2010, p.238) suggest the framework of protect, respect, and remedy as a guideline to corporate responsibilities towards its employees in which HP has responsibility to respect human rights even when law is not enforced, and should respect the relevant international principle of human rights even if national law is absent. With this regard, HP has the obligation to identify and manage the areas where there are potential threats to human rights by the means of impact assessment. In HP scandal, general and senior counsels Baskins and Hunsaker as HPs attorneys violated the Rule 5.3(b) of their Professional Codes of Conducts which requires lawyers with supervisory authority over non-lawyers "to make reasonable efforts to ensure that the person's conduct is compatible with the professional obligations of the lawyer" (Arenz, 2007). This rule should be updated to HPs employees and directors codes of conducts for HPs attorneys. Parkinson (1993), identifies duty of diligence for managers by which they are expected to actively engage in the company affairs. The duty of diligence also can be applied for in-house attorneys and should be updated to their codes of conducts and responsibilities. This enables HP to establish pressure on its attorneys to put every possible effort to provide sufficient legitimate guidelines and code of ethics in place for future investigations (Arenz, 2007; Crane and Matten, 2010, p.238).

3.2.

Communication Processes

Communication Processes require providing adequate information for government, shareholders, and society by improvement of external reporting mechanism and social accountability through the production of full social and sustainability reports. HP should explain to its employees and to the public exactly what steps have been taken to prevent a recurrence. Disclosing the HP scandal by Perkins to public is appreciated after HP refused to apologize (7.1.11). In fact, Perkins told the story of HPs scandal to public to force HP accept its unethical conduct an action which called business-story telling (mindtools.com). In line with transparency objectives, this is a great leadership tool to communicate and reinforce HP Pretexting Scandal by Faraz Davani (2011) Malaysia

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HPs values and belief, and to inspire and influence corporate governance to act ethically in future practices. Furthermore, HP should communicate exact consequences of ethical conducts by creating and introducing a reward and punishment system. HP, in an article (2010, 'Human Rights'), explains that When potential violations of law, company policy, or the SBC (Standards of Business Conducts) do occur, we provide formal, confidential communication channels through which employees and third parties can report. The importance of this, is well shown in Hunsakers dilemma. It is believed that Hunsaker would comply with the principle of non-maleficence without damaging the relationship of fidelity with chainman and other chief executives if he could report the ethical issue into a Case Management System in which management had access to incident details with protection of personal identification.

3.3.

Supervisory Processes

HP, to improve the processes of supervision and control, adopted a corporate governance reforms program suggested by California Attorney General (7.1.15) According to notion of shareholder democracy, shareholders, by dint of their property rights, have a legally protected claim on the corporation and are entitled to have a say in corporate decisions (Crane and Matten, 2010; p.262). Thus, in HP case, shareholders could prevent the scandal from happening if they would ask transparent and frequent reports on the leak probe progress. In HPs corporate governance, with its Anglo-American model, employees had no say at all in the control of the firm, but like European model of corporate governance, there should be one or more seats in the corporations supervisory board for directors which are appointed by employees. Thus, the main role of these supervisory directors will be overseeing the management of the firm to protect the rights of its employees (Crane and Matten, 2010, p.243). For improvement of internal control, the notion of principle-agent relationship can be applied to the HPs BOD. By this, as Crane and Matten (2010) suggest, like European approach of corporate governance, the Board of Directors should be split into two different responsibilities as non-executives and executives directors in which non-executive directors are appointed by legitimate stakeholders known as principles to supervise and control the executive directors who are responsible for day-to-day operation of the firm; something that HP lacked of. Instead of a two-tier board, HP found sufficient to only design an independent director into its single-tier board who would be solely auditing HP investigations. To establish an effective supervisory board, non-executives directors should appointed independently and for a limited period to prevent them from getting too close to the firm as well as a limited number of them should be former executives who are mostly competent to judge the firms performance. It is suggested that HP set higher director independence standards (7.1.20). HP Pretexting Scandal by Faraz Davani (2011) Malaysia

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According to corporate governance experts, the boardroom-leak issue is a matter of BOD and so it should be handled by the board itself rather than Chairman (Olsen, September 2006). For resolving this conflict, HP, besides retaining an investigation expert, retained and engaged with an external legal firm to assess current investigation practices, and devise proper investigation processes and best future practices consistent with the law and HPs SBC (7.1.19). Concerning the notion of having split body of supervision and execution, it is suggested to separate the role of Chainman and CEO, since Hurd accumulated power as president, CEO and chairman. HP, with regard to its responsibility of overseeing the investigation supply chain, must fully inform and update the contractors and third parties with possible ethical issues undergoing investigation projects.

HPs corporate internal decision structure, after the scandal, reformed but still the key issue in the process of decision-making is legality and morality recently along with sort of social test; unlike the European approach which designs sustainability goals at root of the business ethics. Unlike what happened in the HP scandal, this new structure discourages testing the law; instead, in dubious situations, encourages questioning and negotiation with legal authorities for approved guidelines.

Source HP Code of Corporate Governance

After all, it is suggested that HP take preserving side in this ethical decision making particularly regarding privacy rights.

3.4.

Corporate Social Responsiveness

Carroll (1979) identifies for strategies for social responsiveness such as reaction, defence, accommodation, proaction. According to Lewis et al (2007, pp.66) explanation of those strategies it is understood that HP, firstly, adopted a defence strategy but later changed its strategy to accommodation. Now, HP, as a leader in the area of social responsibility, requires proactive activities rather just meeting social expectations (7.1.23). Count: 1,162 words Page 14

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4. Sustainability Development
Corporate Sustainability is a business approach that creates long-term shareholder value by embracing opportunities and managing risks deriving from economic, environmental and social developments. (Dow Jones Indexes, 2010) Unlike the way MNCs exploit human resources of developing countries with low salaries, according to 3M Sustainability Report 2011 (p.46), 3M as a leading global social responsible company, is highly committing to its employees welfare by offering them competitive compensations higher than the legal minimum salary standards. Microsoft Corporation, according to its Corporate Citizenship 2010 Report (pp.41-42), in achieving environmental values proactively reduces the impacts of its operations rather just seeking for sustainable products, and complying with the international and regional environmental regulations. For example, Microsoft to reduce its carbon emissions has cut the employees commutes by cultivating remote communication as an alternative for corporate travel. Furthermore, Microsoft is managing transportation facilities to reduce millions of miles traveling to corporation. Also, with respect to energy, new Microsoft buildings are 20% more effective than the traditional ones. Microsoft has recently joined an initiative computer recycling program in an effort to recycle used personal electronics worth at 27% of worldwide sales volume. A key determinant of our success will be our ability to innovate and advance our leadership in corporate responsibility. Intel President and Chief Executive Officer From Intel 2010 Corporate Sustainability Report (executive summary), it is understood that: Intel is aligning its social investments with the long-term business strategy; something that HP should learn and develop. For example, Intel, to build the foundation for Innovation, decides financial commitment to advance math and science education in society; thus, by fueling the next generation of society with the requirements of the business strategy, helps realizing its business objectives in a long run. In fact, Intel, towards developing a sustainable society, is seeking a long-term beneficial mutual relationship with the society (p.3). Furthermore, Intel, not only at the strategic level, but extends social responsibility boundaries to its employees at individual level. For this, Intel, by investing in its employees and building a culture of responsibility, encourages its workforce to think and act ethically; for example, in 2010, close to half of Intels workforce donated more than one million hours of service in schools and nonprofit organizations globally, (p.2). Intel highly prioritized the supply chain corporate responsibility. Intel, towards building a sustainable supply chain, in one side, provides its suppliers with clear expectations, directions, and tools to help them improve their social performance; in other side, monitors them by HP Pretexting Scandal by Faraz Davani (2011) Malaysia

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continuously conducting risk assessment and audit; something that HP lacked of in its investigation supply chain (p.5). Count: 429 words

5. Conclusion
In the era of globalization, corporate social responsibility is no longer optional business leaders while they are encouraged increasing transparency on their social supply chain and promoting collaborations with their stakeholders. In this era, the old-fashion Ango-American framework of corporate governance cannot survive; otherwise they reform and adopt consistent triple bottom line (three strategic principles around sustainability such as economic, social and environmental factors) thinking at the strategic level of their business management. Count: 73 Words

Total Count: 2,805 Words

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6. References
Crane, A., and Matten, D., 2010, business ethics, 3rd ed., New York, Oxford University Press Inc. Lewis, P., and Goodman, S., and Fandt, P., and Michlitsch, J., 2007, Management Challenges for Tomorrow's Leaders, 5th ed., USA, Thomson Higher Education Intel Corporation, 2011, 2010 Corporate Responsibility Report [pdf], Intel Corporation, Available at http://www.intel.com/about/corporateresponsibility/report/index.htm, [Accessed May 20, 2011] 3M Company - 2011 Sustainability Report [pdf], June 2011, 3M Corporation, Available from http://www.google.com.my/url?sa=t&source=web&cd=1&ved=0CBYQFjAA&url=http%3A%2 F%2Fmultimedia.3m.com%2Fmws%2Fmediawebserver%3FmwsId%3DSSSSSu7zK1fslxtUO8 _ZP8mvev7qe17zHvTSevTSeSSSSSS-&ei=XckTTsrFNonprAezp7SIBA&usg=AFQjCNHRCX5VvDBQVqTepGCgGnMJ5gonHA, [Accessed July 1, 2011] Microsoft 2010 Citizenship Report [pdf], 2010, Microsoft Corporation, Available from http://download.microsoft.com/download/4/D/B/4DB34782-BEAE-4A56-93F636DC8D251054/Microsoft_2010_Citizenship_Report.pdf, [Accessed July 1, 2011] Dow Jones Indexes, 2010, Dow Jones Sustainability Indexes [online], SAM Indexes GmbH, Available at http://www.sustainabilityindex.com/07_htmle/sustainability/corpsustainability.html, [Accessed May 20, 2011] Heritage Institute, 2007, Hewlett Packard's Corporate Governance Woes - 1 [online], Heritage Institute, Available from http://www.heritageinstitute.com/governance/hp/woes1.htm, [Accessed May 20, 2011] Hanson, K., 2006, What HP Should Have Done [online], BusinessWeek, Available from http://www.businessweek.com/technology/content/sep2006/tc20060918_715052.htm, [Accessed May 20, 2011] Darlin, D., 2006, HP focused on legality, not ethics, adviser finds - Business - International Herald Tribune [online], The New York Times, Available from http://www.nytimes.com/2006/10/04/business/worldbusiness/04iht-spy.3026128.html, [Accessed May 20, 2011] msnbc.com news, September 2006, HP ethics officer questioned spying tactics [online], SAN FRANCISCO, msnbc.com news, Available from http://www.msnbc.msn.com/id/14919183/ns/business-us_business/t/hp-ethics-officerquestioned-spying-tactics/, [Accessed May 20, 2011] HP Pretexting Scandal by Faraz Davani (2011) Malaysia

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HP News Press, 12 October 2006, HP Appoints Chief Ethics and Compliance Officer [online], HP News Press, Available from http://www.hp.com/hpinfo/newsroom/press/2006/061012a.html, [Accessed May 20, 2011] MindTools.com, Business Story-telling [online], Mind Tools Ltd, Available from http://www.mindtools.com/pages/article/BusinessStoryTelling.htm, [Accessed May 20, 2011] Forester-Miller, H., and Davis, T., 1996, A Practitioner's Guide to Ethical Decision Making [online], American Counseling Association, Available from http://www.counseling.org/Counselors/PractitionersGuide.aspx, [Accessed May 20, 2011] 2010, 'Human Rights' [online], Hewlett-Packard Development Company, Available at http://www.hp.com/hpinfo/globalcitizenship/09gcreport/society/humanrights.html, [Accessed May 20, 2011] Arenz, P., 2007, The Truth Behind Pretexting: In-house Investigations and Professional Responsibility Concerns [online], Robins, Kaplan, Miller & Ciresi L.L.P, Available from http://www.rkmc.com/The-Truth-Behind-Pretexting-In-house-Investigations-and-ProfessionalResponsibility-Concerns.htm, [Accessed May 20, 2011] Donahue Gallagher Woods, 2007, Use Of Private Investigators In The Wake Of The HP "PRETEXTING" Scandal [online], Donahue Gallagher Woods LLP, Available from http://www.donahue.com/BC-pretexting.htm, [Accessed May 20, 2011] Shankland, S., 8 September 2006, HP chairman: Use of pretexting 'embarrassing' [online], CNET News, Available from http://news.cnet.com/HP-chairman-Use-of-pretexting-embarrassing/21001014_3-6113715.html, [Accessed May 20, 2011] Krazit, T., 6 September 2006, FAQ: The HP 'pretexting' scandal [online], CNET News, Available from http://news.cnet.com/FAQ-The-HP-pretexting-scandal/2100-1014_36113011.html, [Accessed May 20, 2011] Krazit, T., 6 September 2006, Calif. top cop on HP, privacy and 'pretexting' [online], CNET News, Available from http://news.cnet.com/Calif.-top-cop-on-HP%2C-privacy-andpretexting/2008-1014_3-6113039.html, [Accessed May 20, 2011] Fried, I., 7 September 2006, HP settles with California in spy scandal [online], CNET News, Available from http://news.cnet.com/HP-settles-with-California-in-spy-scandal/2100-1014_36141814.html, [Accessed May 20, 2011] Fried, I., 25 September 2006, Five questions for HP [online], CNET News, Available from http://news.cnet.com/Five-questions-for-HP/2100-1014_3-6119344.html, [Accessed May 20, 2011] Page 18

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Fried, I., 27 September 2006, HP's Dunn says others supervised probe [online], CNET News, Available from http://news.cnet.com/HPs-Dunn-says-others-supervised-probe/2100-1014_36120365.html, [Accessed May 20, 2011] Fried, I., 16 November 2006, HP discloses formal SEC inquiry into spy tactics [online], CNET News, Available from http://news.cnet.com/HP-discloses-formal-SEC-inquiry-into-spytactics/2100-1014_3-6136363.html, [Accessed May 20, 2011] Fried, I., and Kerstetter, J., September 2006, HP targeted reporters before they published [online], CNET News, Available from http://news.cnet.com/HP-targeted-reporters-before-theypublished---page-2/2100-1014_3-6117497-2.html?tag=mncol, [Accessed May 20, 2011] Olsen, S., September 2006, Has HP done enough in corporate governance? [online], CNET News, Available from http://news.cnet.com/Has-HP-done-enough-in-corporategovernance/2100-1014_3-6118799.html, [Accessed May 20, 2011] Sandoval, G., October 2006, Dunn gave phone numbers to PIs [online], CNET News, Available from http://news.cnet.com/Dunn-gave-phone-numbers-to-PIs/2100-1014_3-6122254.html, [Accessed May 20, 2011] Ard, S., and Fried, I., 12 September 2006, Leak scandal costs HP's Dunn her chairman's job [online], CNET News, Available from http://news.cnet.com/Leak-scandal-costs-HPs-Dunn-herchairmans-job/2100-1014_3-6114655.html, [Accessed May 20, 2011] Kawamoto, D., 6 September 2006, SEC filing acknowledges 'pretexting' in HP board probe [online], CNET News, Available from http://news.cnet.com/SEC-filing-acknowledgespretexting-in-HP-board-probe/2100-1014_3-6112710.html, [Accessed May 20, 2011] Perkins, T., To the Directors of the Hewlett-Pachard Company [pdf], WSG online, Available from online.wsj.com/public/resources/documents/WSJ_Perkins-to-HP.pdf, [Accessed May 20, 2011] Sandoval, G., 15 February 2007, FTC to court: Put an end to pretexting operations [online], CNET News, Available from http://news.cnet.com/FTC-to-court-Put-an-end-to-pretextingoperations/2100-7348_3-6159871.html, [Accessed May 20, 2011] Fried, I., 28 February 2007, HP denies pretexting former employee [online], CNET News, Available from http://news.cnet.com/HP-denies-pretexting-former-employee/2100-1014_36163190.html, [Accessed May 20, 2011] Fried, I., 26 September 2006, Two HP employees depart amid leak probe [online], CNET News, Available from http://news.cnet.com/Two-HP-employees-depart-amid-leak-probe/2100-1014_36119811.html, [Accessed May 20, 2011] Page 19

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Fried, I., 13 September 2006, HP leak probe extended to employee [online], CNET News, Available from http://news.cnet.com/HP-leak-probe-extended-to-employees/2100-1014_36115509.html, [Accessed May 20, 2011] Fried, I., 7 December 2006, CNET reporters sue HP for invasion of privacy [online], CNET News, Available from http://news.cnet.com/HP-settles-with-California-in-spy-scandal/21001014_3-6141814.html, [Accessed May 20, 2011] Darlin, D., 1 October 2006, HP, red-faced but still selling [online], CNET News, Available from http://news.cnet.com/HP%2C-red-faced-but-still-selling/2100-1014_3-6121624.html, [Accessed May 20, 2011] Broache, A., 1 March 2007, HP execs: Spy scandal was ethical wake-up call [online], CNET News, Available from http://news.cnet.com/HP-execs-Spy-scandal-was-ethical-wake-upcall/2100-1014_3-6163563.html, [Accessed May 20, 2011] Schwartz, E., 2006, Lessons Learned from HP, Info World [online], (Issue 41), Available at http://books.google.com.my/books?id=bzYEAAAAMBAJ&pg=PA6&lpg=PA6&dq=%22chief+ compliance+officer+or+the+board,+must%22&source=bl&ots=JQJhv15KlL&sig=YGOYQXjn DBNhex2K9Ue0Sn5a6UA&hl=en&ei=lLv0TdKABofRrQfN8MXCBg&sa=X&oi=book_result &ct=result&resnum=1&ved=0CBoQ6AEwAA#v=onepage&q=%22chief%20compliance%20off icer%20or%20the%20board%2C%20must%22&f=false, [Accessed May 20, 2011]

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7. Appendix 7.1. Appendix Assumptions

7.1.1. The HP Way
HP, a Silicon Valley icon, has been traditionally honored for its outstanding value system and standards of ethical behavior which owes to HPs founders, William Hewlett and David Packard, for devising a management approach called the HP way. In fact, while The HP Way promises profitability as its primary objectives, also pursues values such as morality, respect to employees, and obligation of human rights in a high prioritized order (Heritage Institute, 2007).

7.1.2. The HP Way Diminished

The legacy of the HP way was continuing living in HP till Carly Fiorina was assigned as HPs chairwoman and CEO in July 1999. It was only when the spirit of The HP Way dramatically diminished through her controversial management which led the board of directors to fire her for her poor performance in February 2005. One of her controversial initiatives was to use her bargaining power on the board to go through negotiation for acquisition of Compaq that violated many the HP Way good practices and opened way to considerable conflict among directors and recent HPs corporate governance issues (Heritage Institute, 2007).

7.1.3. Board Leaks to the Media

Patricia Dunn who was an HPs director since 1998, replaced as chairwoman in early 2005 and "respected the board's decision to split the roles of chairman and CEO". Despite of the board conflicts, Dunn began her job with arising distrust among directors and a leak of internal information of the board at the front page of the Wall Street Journal on January 24, 2005. As the chair of the board, the focus of her tenure required her to urgently find the source of the leak. To address these leaks, HP asked it outside legal firm, Wilson Sonsini Goodrich & Rosati, to conduct interviews of directors to find the source of the leaks and to assure that they were committing to their obligations of confidentiality. At the end, HPs outside legal counsel Larry Sonsini, from the HPs outside legal firm, failed to determine the source of the leak through interviewing processes and could not put an end to further board leaks (Heritage Institute, 2007).

7.1.4. KONA 1
As a result, Dunn initiated a private internal investigation project namely KONA on the board-leak issue as early as summer 2005 and along with HP General Counsel Ann Baskins planned and executed the leak probe (Fried & Kerstetter, September 2006). Without an explicit note to the board about the investigation, they hired Security Outsourcing Solutions, a private investigation firm, to conduct a hunt for board leaks. HP has been using Security Outsourcing Solutions firm for more than eight years and had strong dependency on its HP Pretexting Scandal by Faraz Davani (2011) Malaysia

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vendor as Dunn called it as a captive subsidiary for HP. Thus, HP outsourced much of the activities in investigation of boardroom leaks to this private investigation firm (Darlin, 2006). They also hired former prosecutor Ronald Delia who was an operator of Security Outsourcing Solutions to increase their influence over the investigation. Dunn intimately engaged with Delia to obtain phone records of the board members, HP former vice president of business development and strategy Karl Kamb, and suspicious reporters. In an e-mail from Dunn to DeLia dated May 16, 2005, she wrote, "Here are their numbers." (Sandoval, October 2006).

7.1.5. KONA 2
After KONA 1 failed to identify the source of the board leaks, the minutes of January board meeting including HPs long-term strategic plans appeared on the public media and led Dunn and Baskins at the center of leak probe to begin a new phase of investigation on boardroom leaks, namely KONA 2 (Fried & Kerstetter, September 2006). As HP describes, KONA 2 is ordered by Dunn in January 2006, through the supervision of senior counsel Kevin Hunsaker as HPs chief ethics officer. Besides close involvement of the HPs ethics officer in the leak probe, according to Dunns testimony, HPs CEO Mark Hurd was also aware of KONA 1, and even he had more participation in KONA 2 than it had in KONA 1. As for KONA 2, Hurd attended "perhaps two or three meetings." (Fried, 27 September 2006).

7.1.6. Supervision on Leak Probe

7.1.6.1. Dunn who initiated both phases of investigation, as for KONA 2 asked Hurd to assemble an investigation team and provide personnel to conduct the leak probe. The investigation team was consisted of former HPs ethics officer Kevin Hunsaker, former HPs global investigation officer Anthony Gentilucci, former HPs general counsel Ann Baskins, and HPs outside investigator Ronald Delia in which both Dunn and Hurd had high reliance on particularly Hunsaker and Delia (Heritage Institute, 2007). As for KONA 2, Dunn suggested Baskins to switch to a different investigation firm, Kroll Associates, with higher reputation, instead she recommended turning the investigation over to Hunsaker. It was only then that she relied on executives at the company particularly Hunsaker to advise her on the leak probe and did not consider herself the projects supervisor (Fried, 27 September 2006). When Hunsaker expressed his concerned about the legality of the investigation methodology in an email to HPs global investigation officer Anthony Gentilucci, realized that there could be a potential legal or ethical problem in the investigation process but he did not alert Dunn as a figure above the board. In the early steps of KONA 2, Hunsaker and Gentilucci were explicitly aware of doubtful wrongdoing in

7.1.6.2.

7.1.6.3.

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the investigation. Here is the correspondence between them (msnbc.com news, September 2006):
-

Hunsaker, in a January 30 email to Gentilucci, asked: Is it all above board? Gentilucci wrote back I think it is on the edge, but above board, adding the fact that Dunn was initiated the investigation and She was involved with Ronald Delia who had asked investigators call operators under some ruse. He continued in his email: We use pretext interviews on a number of investigations to extract information and/or make covert purchases of stolen property, in a sense, all undercover operations. Hunsaker replied: I shouldnt have asked...

Accordingly, this reveals that Hunsaker supposed the investigation together with the wrongdoing was ordered from above the board and he should obey and admit it although he knew the practice was immoral and even against the HPs business code of conducts. In fact, he considered his involvement in the project as his DUTY. 7.1.6.4. Both Dunn and Hurd, in response to U.S. House Energy and Commerce Committees Subcommittee on Investigation inquiry, testified that they did not suggest, approve, or even be aware of any illegal investigation method and tactics used into the leak probe; besides the fact that there is no evidence in investigation documents to prove they allowed a wrongdoing into the leak probe. Both Dunns and Hurds understanding about the investigation method was that private information obtained from suspicious individuals is accessible in public. "The clear impression I had from Mr. DeLia was that such records could be obtained from publicly available sources in a legal and appropriate manner." Dunn said to reporters (Fried, 27 September 2006). In addition to this, Hunsaker, through his report for HPs legal team and Dunn, in a footnote ensure that "It should be noted that, with respect to non-HP phone records, the Investigation Team utilized a lawful investigative methodology commonly utilized by entities such as law firms and licensed security firms in the United States to obtain such records." Above all, this suggests that both Dunn and Hurd were not knowingly involved in legal wrongdoing into the leak probe, but they must know that that was not illegal did not mean that was moral and fully ethical. Page 23

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7.1.7. Disputation on Handling the Board Leak

Dunn in her testimony for the US Senate Hearing, states Perkins strongly asked her to keep the result of the leak probe private between them. Instead, he suggested dealing with the leaker privately in order to get a confession and promise never to violate his obligations of confidentiality of the board if and when the leak probe revealed the actual leaker and not to expose this to the full board only when the whole board said that they had expected for the investigation result. By the way, Perkins approved that he and Dunn had an implicit agreement on how they should go through handling the board problem privately (Heritage Institute, 2007). Dunn added to her written testimony that she relied on advice and recommendations from HPs outside counsel Larry Sonsini to expose the investigations findings to the board and solicit proper course of actions. Nevertheless, what Dunn brought to the board was only the acknowledgement of the leak source and not detailed findings obtained through the whole investigation process (Heritage Institute, 2007). As a result, this is understood that the board was not clearly aware of the fact that they had being investigated. In addition to this, Dunn and particularly Perkins objected to transparent the investigation process and findings to the whole board.

7.1.8. May 2006 Board Meeting

According Securities and Exchange Committee (SEC), at May 18, 2006 board meeting, the investigation team revealed the result of the news leak probe to the whole board and introduced long-term director George Keyworth as the source of the board leaks to news media and he admitted (Kawamoto, 6 September 2006). According to HP's 8-K filing with the SEC, at the same meeting, the board asked Keyworth who was working for HP for 23 years to resign from the board. He refused to resign immediately so directors put their decisions together not to nominate him as a director for the next period. At that meeting, Perkins, a close friend of Keyworth, was bursting with the Dunns action for exposure of the leak source to the whole board thus immediately resigned from the board in a protest to the way of handling the matter with the board (Heritage Institute, 2006).

7.1.9. Internal Investigation on Leak Probe

According to SEC filing, one month later after Perkins resigned from HPs board of directors in a protest to the way Dunn dealt with the board, he asked HP to explain him the investigation method used into the leak probe (Kawamoto, 6 September 2006). HP, acting upon Perkins request, asked its Nominating and Governance Committee to engage HPs outside legal firm, Wilson Sonsini Goodrich & Rosati, to examine the KONA investigation processes conducted by its internal investigation team and outside private investigation firms. Perkins, who was a former member of HPs Nominating and Governance Committee before his resignation from the board, was urging HPs outside counsel Larry Sonsini to believe that HP Pretexting Scandal by Faraz Davani (2011) Malaysia

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KONA was fully designed and planned by Dunn (Heritage Institute, 2007). Thus, it is understood that the HPs outside legal firm was not involved in KONA project and there was no outside supervision on processes conducted into the HPs leak probe. As a result of the second investigation, HP in a response to Perkinss inquiry acknowledged the use of pretexting to obtain private information about the board members phone records by disguising their identity with an opportunity to find a connection between directors and reporters (Kawamoto, 6 September 2006).

7.1.10.

Investigation Supply Chain

Particularly in KONA 2, HP contracted most of its investigation works to outside private investigation firms such as Action Research Group and Security Outsourcing Solutions Inc which in turn hired or retained other companies to conduct the investigation. To be more specific, according to SEC filing, HP, to assist its internal investigation team to conduct the leak probe, retained its long-term partner Security Outsourcing Solution Inc; instead this company hired another company to obtain phone records of HPs board members, employees, and journalists by duping employees of AT&T Company through false pretence, a technique called pretexting (Kawamoto, 6 September 2006; Shankland, 8 September 2006). Therefore, this is understood that HP did not have processes in place to supervise undertaking investigation processes over its investigation supply chain.

7.1.11.

HP Scandal Went Public

As Heritage Institute (2007) explains Any time a director resigns, or otherwise leaves the position, from a U.S. public corporation, federal law requires the corporation to inform the United States Securities and Exchange Commission about the resignation or removal in an 8-K filing including the details of any disagreement about operations, policies or practices. Instead, HP briefly reported the resignation of Perkins to SEC without specifying his reasons for resignation. After HP refused to report the reasons of Perkins resignation to SEC upon several his requests, Perkins addressed the HP scandal to public as he wrote in a letter to HP directors when he was no longer an HP director: As the Company failed to make a full and accurate report (as required by feral law) and having given the Company several opportunities to correct the record, I am now legally obligated to disclose publicly the reasons for my resignation. As a result, it is assumed that HP at beginning was not willing to share its legally doubtful investigation practice with legislative committees and commissions.

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7.1.12.

Law Dilemma

Was HP fully confident about the legality of techniques used by its contractors? In conducting the investigation of the board leaks to media, HPs Nominating and Governance Committee suggested HP to outsource much of its investigation works to outside investigation firms. According to SEC filing, this committee and its chairman Tom Perkins were advised by HPs outside counsel Larry Sonsini that the use of pretexting at the time of the investigation was not generally unlawful (except with respect to financial institutions), but such counsel could not confirm that the techniques employed by the outside consulting firm and the party retained by that firm complied in all respects with applicable law. (Heritage Institute, 2007). Therefore, it comes to conclusion that HP and particularly Perkins as the chainman of the committee was aware of undertaking the legally questionable investigation technique. What is covered under California law with regard to pretexting? CNET reporter Tom Krazit Asked. California Attorney General Bill Lockyer whose office was investigating HP use of pretexting in its leak probe, in response to this question, he mentioned that there was no a specific statute under California law to address in respect to pretexting but there are two statutes about identity theft and computer hackers (Krazit, 6 September 2006). Accordingly, it is concluded that there was no specific statute under California law prohibiting obtaining phone records of individuals through false pretence. He is also asked This practice is not illegal under federal law with respect to telephone records, correct? But from what I understand, that's not the case in California. Lockyer replied that California law was stronger than federal statute. As a result, according to Krazit (2006), although HP claims that pretexting was "not generally unlawful" at the time of investigation, it cannot be conclusively said that the HPs contractor was within the bounds of the law since, at the least, there was some general civil prohibitions in place. In response to this question that how does the liability work between people who actually commit pretexting and those who hire them to do these acts, he answered that it depended on expectations of the employer. Thus the employer can be criminally liable (Krazit, 6 September 2006). This is how the feds like to work," said David Cohen, a San Francisco-based criminal attorney. "They like to start at the bottom and get that guy to (testify against) the next guy and then they work up the ladder". It is believed that Dunn and his investigation team took a risk and allowed other parties to conduct unethical behavior and legally questionable investigation method while they believe that in case of crime they will be safe because others was doing the crime and they can hide themselves behind. Page 26

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conducted their unethical behavior and legally questionable investigation method through other people Documents that the company has provided to government investigators show that HP was concerned about the legality of the techniques used (Darlin, 2006). After all, it comes to conclusion that HP, with regard to using pretexting, was facing with a legal dilemma in which, strict law prohibiting pretexting varied from one state to another in the U.S. as well as to increase HPs confidence level, the practice was not illegal under federal law with respect to telephone records. In fact, in the dilemma between the choice of the stronger and the weaker law, HP took the risk of selecting the federal law under which the practice was not illegal instead turned a blind eye to stronger California Law. As a result, not only the practice of testing the legality of pretexting did not turn to HPs advantage, but on 4 October 2006, California Attorney General Bill Lockyer filled a criminal complaint associated with HP scandal of using pretexting. California Penal Code Sections Used In the HP Pretexting Complaint (Donahue Gallagher Woods, 2007) conspiracy to commit a crime, in violation of Penal Code section 182(a)(1); fraudulent use of wire, radio or television transmissions, in violation of Penal Code section 538.5; taking, copying, and using computer data, in violation of Penal Code section 502(c)(2); and using personal identifying information without authorization, in violation of Penal Code section 530.5(a).

7.1.13.

Ethics Considerations

HP began its leak probe for good reasons but used wrong means to find the leak source to media. For this, HP, to find possible connections between its employees, directors, and journalists, attempts to access their phone records by false pretence without obtaining their consent and knowledge - pretexting. When Dunn asked if she believed pretexting was illegal, she replied, I have no idea, but its wrong (Shankland, 8 September 2006). According Bart Schwartz, a former federal prosecutor and adviser hired by HP to perform an independent assessment of current investigative practices, The company's lawyers had concluded that pretexting was legal, but the documents and memorandums sent between the lawyers and detectives show that they had not given much consideration to whether it was ethical (Darlin, 2006) Page 27

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Indeed, HP focused on legality of the leak probe practices while the use of pretexting was conclusively wrong through moral considerations.

7.1.14.

Government Investigation into HP Scandal

Following Perkinss exposure of HPs scandal to public, federal and California state prosecutors launched investigations into HPs leak probe practices for possible criminal charges. As a result of that, from that point of time, HP had been under scrutiny from a variety of state and federal authorities such as:

Federal Trading Commission (FTC) filed pretexting complaints against HP and asked federal court to permanently prohibit pretexting of telephone records (Sandoval, 15 February 2007) Federal Communications Commission (FCC) following Senate hearings, asked AT&T to explain the way HP obtained customers telephone records as well as requested HP the investigation documents regarding illegally obtaining telephone records (Ard and Fried, 12 September 2006; Fried, 16 November 2006) Securities and Exchange Commission (SEC) issued a formal order of investigation in HP leak probe, and filed HP protexting complaints (Kawamoto, 6 September 2006; Fried, 16 November 2006) The California Attorney General's office conducted an investigation into HPs leak probe potential criminal violations and filed four felony charges against HP principles and data brokers (Arenz, 2007) U.S. Attorney's Office in Northern California launched investigation into HPs leak probe (Kawamoto, 6 September 2006) House Energy and Commerce Committee held hearings for HP scandal (Fried, 27 September 2006)

HP, besides it long-term partner Wilson Sonsini Goodrich & Rosati as its outside legal firm, retained another law firm Morgan, Lewis & Bockius to to represent the company in its dealings with federal prosecutors (Fried, 13 September 2006). According to a SEC filing, HP acknowledged that it investigated its own board of directors to discover who leaked information that led to a News.com story about HP's future strategic plans. HP also said that the outside firms used to obtain the identity of the source of the leak might have used a technique called pretexting to obtain telephone records of calls made by HP directors from their home phones and cell phones. (Krazit, 2006) Page 28

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7.1.15.

Settles with California

HP, in dealing with The California Attorney General's office, faced a civil complaint due to inflicting emotional distress for Californians and violating human rights of privacy, which also filed at the Santa Clara County Superior Court (Fried, 7 December 2006; Fried, 7 September 2006). HP, to settle this civil complaint, agreed $13.5 million to "finance a new law enforcement fund to fight violations of privacy and intellectual-property rights", and $350,000 to reimburse Attorney General's Office for its investigation, and $650,000 to pay for statutory damages (Fried, 7 December 2006). HP, in addition, committed to adopt corporate governance reforms to to protect confidential business information without violating corporate ethics or privacy rights." (Fried, 7 December 2006) HP, as part of its corporate governance reforms program, accepted to adopt below measures for five years (Fried, 7 September 2006): Maintain employment of a chief ethics and compliance officer Expand the role of HPs chief privacy officer to check HPs investigation practices Expand the companys employee and vendor codes to ensure that they address ethical standards regarding investigations Retain an investigation expert to assist HPs chief ethics and compliance officer through investigation practices

HP, cooperating with California Attorney General to settle the civil complaint and to adopt corporate governance reforms, retained its position as a global leader in business ethics practices and provided some guidelines for other companies dealing with privacy investigation. (Fried, 7 December 2006)

7.1.16.

Felony Charges

When Hunsaker expressed his concerned about the legality of the investigation methodology in an email to HPs global investigation officer Anthony Gentilucci, realized that there could be a potential legal or ethical problem in the investigation process but he did not alert Dunn as a figure above the board. In the early steps of KONA 2, Hunsaker and Gentilucci were explicitly aware of doubtful wrongdoing in the investigation (msnbc.com news, September 2006). But Kevin T. Hunsaker, HPs chief ethics officer, expressed his concerns about the legality of the investigators methods in a Jan. 30 e-mail to Anthony R. Gentilucci, who manages the companys global investigations unit in Boston, according to the Times. Page 29

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7.1.17.

Pretexting against HP Employee

Did HP also pretext its employee? In 2005, HP alleged its former vice president of business development and strategy Karl Kamp for illegally obtaining the companys secret internal information. In January, Kamb countersued HP alleging that he was pretexted by HP. Mike Holston from Morgan, Lewis & Bockius which hired by HP to assess its operations and investigation process, admitted that Gentilucci provided Kambs Social Security Number to outside investigators in order to obtain his telephone records (Fried, 26 September 2006). Later Hunsaker testified that HP did pretext against his employee Karl Kamb (Fried, 28 February 2007).

7.1.18.

Leak Investigation Went Too Far

There strong opinions that HPs investigation on source of the board leaks to news agencies, had been encouraged and intensified even after the KONA 1 failed to produce results. Investigation on HP leak probe suggested that HP investigation team did physical surveillance at a January board meeting which conducted several days before publication of HPs strategic plan on CNET News.com. Furthermore, telephone record of CNET journalists obtained some days after the January board meeting and before exposure of such information on public media. In fact, HP targeted CNET reporters before their publication while HP claimed that KONA 2 started in January for the purpose of finding the January board meeting leak (Fried, 27 September 2006; Fried, 25 September 2006; Fried and Kerstetter, September 2006). Therefore, it is highly thought that the investigation which started for good reasons reignited and continued for the interest of Dunn and other members of the investigation team perhaps to increase their influence over the board.

7.1.19.

Assessing HP Investigation Processes

Hurd, acting upon the recommendations of its reliable outside legal firm Wilson Sonsini Goodrich & Rosati, is engaging an external firm Morgan, Lewis & Bockius so that in the future, our investigative methods and processes are handled in a manner that not only complies with the law but also will be aligned to Hewlett-Packard's Standards of Business Conduct." (Fried, 13 September 2006) "Among Hoaks responsibilities will be working with Bart Schwartz, an outside counsel who was hired last month to perform an independent assessment of current investigative practices and develop future best practices. (HP News Press, 12 October 2006) Throughout this research conducted on HP scandal, has been not found any trace of HPs chief privacy officer involved in the HP leak probe. Thus, it is assumed that he was not a member of the investigation team nor engaged in the investigation processes. Page 30

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7.1.20.

Director Independence

Jonathan Hoak - according to HP News Press (2006), Jonathan Hoak appointed as HPs vice president and chief ethics and compliant officer, effective October 11, 2006. Prior to this, he was the senior vice president and general counsel for NCR from 1993 until May 2006 and previously served as an attorney for AT&T for three years. Mark Hurd According to HP website, Mark Hurd was CEO of HP from 2005 to 2010 and chairman of the board from 2006 to 2010. Prior to this, according to Heritage Institute (2007), Mark Hurd was CEO of NCR from March 2003 to March 2005. This information reveals that, between 2003 and 2005, when Hurd was the CEO of NCR, at the same time Hoak also served as vice president and general counsel for NCR.

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7.1.21.

Insider Trading

The executives of a corporation and other insiders know the company well, and so might easily know about events that are likely to have significant impact on the companys share price well in advance of other potential traders. Consequently, insiders are privileged over other players in the market in terms of knowledge, a privilege that they could take advantage of to reap a questionable profit. According to Heritage Institute (2007), on November 30, 2006, a lawsuit against HPs CEO Hurd, and other senior executives and directors was filed in San Jose state court in California on behalf of HPs shareholders alleging that they sold about $41.3 million of HP stock in a couple of weeks just before exposure of HP scandal to public in 2006 which potentially could affect stock market. The suit alleged that in addition to the sales of shares by insiders, Hewlett Packard's board approved stock buybacks of about $10 billion "to keep the company's stock price propped up while insiders were selling." According msnbc.com news (September 2006) and Darlin (October 2006), within one month since exposure of HP scandal to public, HPs stock price had been stable. As a result, it is thought that the boardroom leaks were planned in advance by Hurd and some members of BOD, something as part of an Insider Trading plan for the benefit of them.

7.1.22.

Internal and External Legal Authorities

The new HPs corporate internal decision structure is based on questioning. Person, to check an ethical issue, can solicit from internal human resources such as: Chief Ethics and Compliance Officer Chief Privacy Officer General Counsel Independent Director Global Investigations Officer Outside Legal Counsel Larry Sonsini Chief External Communications Officer Investigation Expert - Bart Schwartz And from outside available legal firms and committees:

Federal Trading Commission (FTC) Federal Communications Commission (FCC) Securities and Exchange Commission (SEC) The California Attorney General's office U.S. Attorney's Office in Northern California House Energy and Commerce Committee

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7.1.23.

Corporate Social Responsiveness

Lewis et al (2007, pp.66) explains Carrolls (1979) four strategies of corporate social responsiveness which are recommended here to explore and compare capacity of social responsiveness for two HP and Enron corporations. HP, which did not have a care in its social responsiveness for the sake of pretexting, responded to its social challenge only when the story of its scandal went public defence strategy. HP, after arguments over taking the responsibility of its supply chain for using pretexting, finally admit to accommodates its compliance programs and adopt corporate governance reforms in attempt to increase responsiveness to public expectations where Enron failed in the first place. Now, HP, as a leader in the area of social responsibility, requires proactive activities rather just meeting social expectations. One of its proactive actions was to support the Federal Trade Committees efforts to prohibit telephone record pretexting permanently and for all U.S. states (Sandoval, 15 February 2007).

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7.2. Appendix Key Actors

Bill Lockyer California Attorney General Carly Fiorina Former CEO and Chairwoman from July 1999 to February 2005 Bart Schwartz Adviser and an outside counsel (a former federal prosecutor) who was hired by HP to perform an independent assessment of current investigative practices and develop future best practices Tom Perkins The board member who resigned in protest to the way of handling the board Robert Sherbin - HP's vice president of external communications Patricia Dunn HP former chairwoman, Dunn had been a director at HP since 1998 Mark Hurd Current HP Chairman, CEO Karl Kamb Former vice president of business development and strategy, he as an employee was pretexted Ronald R. Delia A former prosecutor and the operator of Security Outsourcing Solutions, which was hired by HP to conduct a hunt for boardroom leaks Kevin Hunsaker HPs senior counsel and former HP ethics officer, was a central figure in a probe by the company to find the source of news leaks. Jonathan Hoak The company's chief ethics and compliance officer from 2006 Bryan Wagner & Matthew DePante Data brokers George Keyworth Former HP director and the source of leaks Ann Baskins HPs General Counsel Scott Taylor HP Chief Privacy Officer Larry Sonsini HP's outside legal counsel Anthony R. Gentilucci HPs global investigations officer Kennedy Thompson New board director as independent director Mike Holston Outside lawyer form Morgan, Lewis & Bockius lawyer Holston, hired for investigating HP internal operation and investigation practices

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