Why Did HP Pay a $6 Million Fine for Unethical Sales Practices?

By Bruce Harpham | Friday, 02 October 2020 | Business, Finance

Hewlett-Packard (HP), one of the world's largest technology firms, has to pay a $6 million fine for unethical sales practices. Announced by the US Securities and Exchange Commission (SEC) on September 30, the decision has had a small impact on the stock price — down from $19.30 on September 30 to around $19 on October 1. However, the company is likely to face long-term problems from investors and other stakeholders in the future.

The Two Unethical Sales and Financial Practices

In brief, HP managers played games with sales figures and sales timing to artificially increase quarterly earnings. The Securities and Exchange Commission (SEC) press release identified the problem as follows: "Regional managers at HP used a variety of incentives to accelerate, or "pull-in" to the current quarter, sales of printing supplies that they otherwise expected to materialize in later quarters."

Playing aggressive games with sales numbers wasn't the only problem that caught SEC's attention. According to the Commission, HP also released misleading information. The Commission stated that “HP failed to disclose that its internal channel inventory ranges, which it described in quarterly earnings calls, included only channel inventory held by channel partners to which HP sold directly and not by channel partners further down the distribution chain, thereby disclosing only a partial and incomplete picture of HP's channel health."

The Fine Wouldn't Put a Scratch on the Company’s Bottom Line

While retail investors might be impressed by the headline figure of a $6 million fine, it isn't that much for HP. In 2019, the company reported $58 billion in net revenue. That means it will take the company less than one hour of the calendar year to recover from the fine's direct financial impact.

Put the fine in more personal terms by considering a comparable fine for an individual. According to US Census data, the average personal income in the United States was $35,000 in 2019. A comparable fine for an individual would be $3.62, about the same cost of a typical latte from a cafe. Paying a fine of less than $5 wouldn't hurt much directly. However, an individual might suffer discomfort from having such a fine on their record.

The Fine’s Real Damage to HP’s Brand

In the short term, investor confidence in the form of stock price movement has been minimal. However, HP executives may face a backlash from investors at their next annual meeting. Shareholder activism, traditionally focused on improving financial results, has recently expanded to take on ethical matters. Further, HP leadership may have to work harder to secure loans and bonds in the future.

Aside from investor impacts, HP may suffer other costs and losses. Take the Wells Fargo sales scandal. First announced in 2016, the scandal consumed headlines for months. However, investigations continued into 2020 when the company came to a $3 billion settlement with the US Justice Department. When company executives have to focus on damage control and addressing angry customers, they will have less capacity for innovation and growing the business.

HP's golden reputation may ultimately suffer the most from this scandal. Books like “The HP Way: How Bill Hewlett and I Built Our Company'' by company co-founder David Packard have emphasized its commitment to ethical business and innovation. As a result, the company may fall behind in the talent war as engineers and technologists reconsider collaborating with HP.

What This Ruling Means for Other Publicly Traded Companies

Other public companies will need to review the SEC announcement in detail. As a result, we may see executives review how much pressure they apply to their staff to meet quarterly targets. However, it is unrealistic to expect significant change unless shareholders and Boards change the senior leadership team's incentives.

This ruling may also signal that the SEC's appetite for enforcement actions are increasing. Further, the SEC does not have to rely on its resources to find problems. In 2020, the Commission "made a record 39 individual awards of approximately $175 million, more than in any prior fiscal year." These awards are paid to both company employees and company outsiders that suspect wrongdoing. With some individuals receiving six-figure awards for "providing a tip and giving continuing assistance during the course of the investigation," the SEC's whistleblower program may reveal many more examples of misconduct in the future, especially as companies do what they can to manage earnings and impress investors despite 2020's economic woes.

The Competitive Opportunity for Other Technology Companies

HP's recent failings in sales practices and disclosures may create opportunities for its large corporate competitors. For example, Apple may be able to lure talent away from HP based on its innovation and relatively stronger year from an ethics point of view. In the past, Apple has grappled with ethical questions related to manufacturing and privacy. However, the company's recent report is relatively stronger than HP's record.

About the Author

Bruce Harpham

Bruce Harpham is an author and marketing consultant based in Canada. His first book "Project Managers At Work" shared real-world success lessons from NASA, Google, and other organizations. His articles have been published in CIO.com, InfoWorld, Canadian Business, and other organizations. Visit BruceHarpham.com for articles, interviews with tech leaders, and updates on future books.