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By Carl Howe

Today, Hewlett-Packard (NYSE:HPQ) announced (WSJ piece - sub. req.) that Patricia Dunn is stepping down as the Chairman of the board in January and that current CEO Mark Hurd will take her place. HP is taking these actions in response to the recent disclosure that Dunn asked for phone records of board members to find out who was leaking company information to the press. Those phone records were obtained through a third-party agency that used "pretexting" (falsifying their identities) to obtain those records.

With CEO Mark Hurd taking over the Chairman position, the story's over, right? Certainly the majority of analysts cited in the Wall Street Journal (sub. req.) think so. They are so wrong. This is a public relations and business disaster that's just getting started.

Think about this from the point of view of a possible HP customer, say, a large multinational bank that is interested in having HP provide them with hardware and services for their data centers for the next three to five years. But now they hear that the chairman of the board can't really distinguish the bright line between staunching a leak and breaking the law? And not only that, the FBI AND Congress are now investigating the firm for criminal violations? And the person who did this isn't even fired, but kept on as a member of the board?!

This type of publicity generates a clear response on the part of prospects and customers: An immediate reflex to look up the number of the nearest IBM or Sun salesperson. And despite all the good will that Mark Hurd has generated on Wall Street, losing customers is the surest way to put the stock back onto life support.

Earlier today, Mark Hurd said, "I am taking action to ensure that inappropriate investigative techniques will not be employed again. They have no place in HP." And that's right. The founders of HP, Bill Hewlett and David Packard, never would have stood for this. The surprising thing is that even today, someone at HP thinks that a person who used those techniques should stay in a governing and fiduciary role at the company. Though people at HP will try to forget about this crisis, I doubt Congress, the FBI, or serious customers will forget about it for a long time to come.

HPQ 1-yr chart:

HPQ 1-yr chart

Full disclosure: I have no positions in HP stocks or derivatives.

Source: House Cleaning Failure: H-P Should Have Completely Rid Itself of Dunn