Hewlett-Packard Chairwoman Patricia Dunn to Step Down in January

Hewlett-Packard Chairwoman Patricia Dunn took the fall Tuesday after admitting she authorized an investigation that relied on "inappropriate techniques" to uncover who was leaking boardroom secrets to the media.

CEO Mark Hurd, who has the respect of Wall Street and is untainted by the investigation at the Palo Alto-based computer and printer maker, will take over, vowing that the probe's methods "have no place in HP." HP's stock rose to a 52-week high.

It was the culmination of a scandal that has rocked Silicon Valley's biggest and oldest technology company, led to investigations by state and federal authorities, and raised questions about one of the most powerful women in corporate America.

Having already concluded that HP's probe broke some California laws, state Attorney General Bill Lockyer indicated for the first time that company insiders are likely to face some criminal charges.

"We currently have sufficient evidence to indict people both within Hewlett-Packard as well as contractors on the outside," Lockyer said in an interview aired late Tuesday on PBS' "NewsHour with Jim Lehrer."

Dunn, who initiated the probe in which private investigators impersonated HP directors and journalists to access their personal phone logs, will remain on the board after giving up the top job on Jan. 18. Hurd will add chairman to his existing positions of chief executive and president, the company announced early Tuesday.

Director George "Jay" Keyworth II, who acknowledged sharing company information with reporters, resigned from the board Tuesday after refusing to do so in May.

Some analysts said Dunn's demotion sent a message to investors that HP was ready to move on, while others said she should have been removed completely.

"She needed to go — she had become a liability to the company whether she liked it or not," said Morningstar analyst Mark Lanyon. "But just removing her from the chairperson role and keeping her on the board is a half-measure at best and probably not appropriate.

"There are still legal matters that could come down on the company," he said, "and the issue is still festering with her there."

Roger Kay, who follows HP as president of the market research firm Endpoint Technologies Associates, had a different take.

"I think the fact that they made the statement that she's going to leave solves most of the problem," he said. "I don't think it's that material precisely when she leaves."

The pressure on Dunn to step down rose sharply when Congress and federal investigators joined the probe of the scandal involving HP's Board of Directors

On Monday, the FBI, the U.S. Attorney for Northern California and the House Energy and Commerce Committee all requested information on HP's investigation, which was already the subject of inquiries by the state attorney general, the Securities and Exchange Commission and the Federal Communications Commission.

HP's stock, meanwhile, remained immune to the spying scandal. It continued a steady climb that began not long after the company revealed the questionable tactics of its leak investigation in a regulatory filing last week.

Shares of Hewlett-Packard Co. rose 56 cents, or 1.54 percent, to close at $36.92 on the New York Stock Exchange. Before Tuesday, they had traded in a 52-week range of $25.53 to $36.73.

Frank Gillett, vice president and principal analyst at Forrester Research, said the market seems unfazed by the problems on HP's board.

"I'm not hearing anything or seeing anything that makes me concerned about the success of the products," he said.

Hurd has won praise from Wall Street for a cost-cutting campaign that will have cut some 15,000 jobs by the end of this quarter.

"It makes perfect sense to give (Hurd) the chairmanship," Kay said. "He has the character, personality and chops to do it. I can't think of anyone else you would want to run the company at this point."

Hurd said in a statement he was "taking action to ensure that inappropriate investigative techniques will not be employed again. They have no place in HP," he said. The company declined to provide details about the future safeguards.

Dunn was angry about media leaks of confidential board discussions and commissioned an unnamed outside firm to identify their source. The investigators used Social Security numbers and other personal information to get phone companies to turn over detailed logs of home phone calls of reporters and company directors.

At a board meeting in May, Dunn identified Keyworth as the source of a January article on CNET Networks Inc.'s News.com. The board asked Keyworth, 66, to resign, but he refused. HP then barred him from seeking re-election.

Keyworth said Tuesday that he was often asked to be HP's liaison to the press, and that he believed he was acting in the company's best interest when he spoke to News.com.

"The invasion of my privacy and that of others was ill-conceived and inconsistent with HP's values," Keyworth said in a statement.

The attempt to oust him last spring riled another board member, longtime Silicon Valley venture capitalist Tom Perkins, 74, who resigned and stormed out of the May 18 meeting.

His attorney later revealed that Perkins' home phone calls had also been compromised. At least nine journalists, including reporters for The Wall Street Journal, BusinessWeek, The New York Times and News.com, also had their personal calls monitored.

Dunn defended the need to investigate the leaks, saying Tuesday that they had the potential to hurt HP's stock. But she apologized for the techniques of the probe, which included "pretexting" in which one poses as someone else to access their personal information. While commonly used by private investigators, it's barred by state law and is the subject of a Congressional inquiry.

"Unfortunately, the investigation, which was conducted with third parties, included certain inappropriate techniques," Dunn said in a statement. "These went beyond what we understood them to be, and I apologize that they were employed."

Perkins, Keyworth and Dunn were all in a conciliatory mood Tuesday, saying HP's focus should now be on moving forward with Hurd at the helm.

"I believe in HP. I believe in Mark Hurd," said Perkins, adding through a spokesman that he would not return to the HP board if asked. "This too shall pass."

As nonexecutive chairwoman, Dunn was a relative rarity in the corporate world, where CEOs often also serve as the leaders of their boards. Corporate governance watchdogs have long argued that separating the two positions is a necessary balance of power.

Though her independence helped her deal with thorny management conflicts, experts say the HP board was left with little choice but to replace Dunn with a stabilizing force like Hurd.

"This is one situation where it didn't work," said Patrick McGurn, executive vice president at Institutional Shareholder Services, an advisory firm. "This is a cautionary tale that directors should set well-defined ground rules and rules of engagement in the boardroom."