Deteriorating Morale and Stock Price at Hewlett-Packard

Margie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I recently discussed how Google (NASDAQ: GOOG) and Wynn Resorts (NASDAQ: WYNN) excel in employee satisfaction. Today, I wish to discuss a company that at one time was lauded for their treatment of employees, but where today employee morale has deteriorated badly, and along with it, its share price.

The HP way  

When the company's founders were at the helm, employees were treated very well, and morale was high. You can look through this link "The HP Way," to see a list of objectives that Hewlett Packard (NYSE: HPQ) set for their corporation.

When you read through you'll notice that the company placed employees behind profit on its list of priorities. However, the way they conducted business years ago had managers making decisions who were intimate with employee concerns and took them into account, rather than typical bureaucratic decision making that adheres primarily to bottom line. Here’s a quote from founder David Packard illustrating the change towards a more “shareholder-friendly” way boards generally work today.

"Somehow, we got into a discussion of the responsibility of management. Holden made the point that management's responsibility is to the shareholders – that's the end of it. And I objected. I said, 'I think you're absolutely wrong. Management has a responsibility to its employees, it has a responsibility to its customers, it has a responsibility to the community at large.' And they almost laughed me out of the room."

Both Wynn Resorts and Google have its founders still at the helm of the ship. David Packard was a founder of Hewlett-Packard. To a founder, a company is like a child, and they want every part of it healthy. They view/ viewed employees as the lifeblood of their baby.

HP layoffs

When the first recession hit in the 1980's, instead of laying people off, HP had everyone work 80% of the time for a while. Management realized that experience and corporate continuity was important, and that keeping your full staff makes it much easier to get back on your feet when a recession ends.

Compare this today, where management looks for the first opportunity to cut costs and bolster short-term profits. 

HP’s change in product mix

HP was in a high-profit margin business -- scientific and test equipment -- and its board was studded with technical experts, including Nobel laureate Luis Alvarez, who were able to steer the company wisely during the growth and development of semiconductor technology. This took concentrated scientific effort, had long development cycles, and was capital intensive. Contrast this with the current "technology" development that is on a much faster cycle, requires much smaller amounts of capital investment, and is much more geared towards the development of software. 

When Carly Fiorina took over, she pushed the company into a commodity, low profit margin business by merging with PC maker Compaq. The company subsequently spun off its high profit margin business in scientific equipment -- on which the company had built its reputation -- as Agilent. In terms of new business development, if there was no promise of a $1 billion return in a year or two, HP wasn't interested.

Compare this to Google and Wynn, both high margin businesses, and both willing to put their large amounts of capital to work (Google with massive amounts R&D and putting out fiber networks, and Wynn with multi-billion dollar casino expansions).

Proximity to management

The CEO used to be much closer to the rank and file employees. HP had a corporate fleet of jets that would run regular routes from PaloAlto to Colorado to Oregon and back. HP CEOs like John Young would take trips together with employees going for whatever reason to these locations, and had direct informal interactions with lower levels.

Steve Wynn interviewed every single employee he hired for the Wynn casino. It was his baby, he wanted everything perfect. Employees got to meet the boss.

At Google employees all over the world have access to founders Sergei and Larry on a regular basis via video conferences where questions to be asked them are voted up or down by other employees.

Obviously as a company grows, it’s harder to for upper management to really know their employees, but today’s HP culture is a far cry from the past.

Cost cutting

About the time Carly Fiorina took over HP, the company started to implement cost-cutting measures en masse. Benefits were cut, salaries stopped rising, employees were laid off.

But when Mark Hurd took over HP, things really started to deteriorate. Hurd cut costs to the bone. Whenever I would ask my friends how things were going, the answers were never positive. “Projects keep being cut that are deemed non-essential," they'd tell me. "Hurd doesn’t seem to understand that one of those might be the new laser-jet printer. He’s cutting costs just to cut them, it seems.”

HP went on a spree of acquiring technology instead of developing it internally, and gutting R&D. Decisions were (and still are) made on the basis of lowest cost without putting value on things like ease of use or user appeal.

HP has lost a lot of talent to other tech companies, as dissatisfied employees abandon ship.

A succession of CEOs have further hurt HP with a series of value-destroying acquisitions -- especially Leo Apotheker’s vast overpayment to acquire British software maker Autonomy. When I recently mentioned that Wall Street seems to have brightened around HP’s prospects, and questioned whether morale around the company had improved, my friend replied dryly, “Morale around the office is directly correlated with the stock price.”

Often times, when a CEO cuts costs dramatically, it is to bolster short-term results, and cash out his massive number of stock options. Sadly, when you become suspicious that such a phenomenon is taking place, you’ll likely do well to sell your shares as upper-level management does.

Bottom line

Google and Wynn are leaders in their industries and have very high morale amongst their associates. HP shares have dipped dramatically, and this is definitely in part a function of employee morale.

One of my criteria for my long-term investments is high morale among employees. 

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Margie Nemcick-Cruz owns shares of Google. The Motley Fool recommends Google. The Motley Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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