Why Carly’s Out

The last place Carly Fiorina expected to be last Wednesday was home. A hard-driving, jet-setting business titan, the CEO of Hewlett-Packard had a packed calendar that week, including a meeting with President Bush. She had recently returned from the World Economic Forum in Switzerland, where she always loomed large, even at an event stuffed with corporate Pooh-Bahs and heads of state. Now, holed up in her Los Altos Hills, Calif., home and protected by three security guards, she fielded e-mails from well-wishers and contemplated her next career move–just like so many other cashiered Silicon Valley denizens in recent years. Only none of them had made as big a thud.

She was the consummate celebrity CEO–right up until her final moment. Just a few weeks ago, the Hewlett-Packard board rapped her on the wrist for the company’s dismal performance and ordered her to give some control of HP’s four key divisions to line executives. Outwardly, her ever-confident manner gave no hint of the humiliating demotion, even after the reorganization leaked to the press. But charisma and confidence can go only so far. On Feb. 6, board members held an emergency meeting at an O’Hare Airport hotel. The next day they asked her to step down. And so the most powerful woman in American business, the poster girl for high-powered celebrity CEOS, was out.

The board of directors at Hewlett-Packard had admired many things about their star CEO. Asked to bring change to the doddering Silicon Valley giant, she pursued the task fearlessly, her efforts culminating in a controversial merger with Compaq. Asked to inject pizazz into HP’s pedestrian marketing, she overhauled it right down to the corporate logo. Asked to create a strategic vision for a company that had none, she came up with dazzling insights into “transformational trends” and a hyperdigital future in which HP would serve consumers and corporations at every stage. But the board ultimately concluded that Fiorina had one significant weakness as a chief executive: she just wasn’t very good at running the business. That’s a problem when you head an $80 billion behemoth with lackluster earnings that is beset on all sides by competitors like IBM, EMC and Dell. “Looking forward, we think the job is very reliant on hands-on execution, and we thought a new set of capabilities was called for,” said Patricia Dunn, an HP director who became nonexecutive chairwoman.

That Fiorina, 50, lost a power struggle to her board is emblematic of a dramatic shift taking place in corporate America. With board members of companies from Disney to Enron getting hauled into court to answer for their stewardship, directors are becoming ever more emboldened to give poor- performing CEOs the boot. In fact, 92 CEOs departed in January, the highest number since February 2001, according to Challenger, Gray & Christmas, an outplacement firm. “Boards are trying to demonstrate that they are doing their duty,” says Warren Batts of the University of Chicago, former CEO and director of several FORTUNE 500 companies.

So how did Fiorina incur her board’s ire? In part, it was simple hubris. HP’s directors had been voicing unhappiness with her performance for months, particularly after some dismal earnings numbers were posted last summer. Increasingly disillusioned with her inability to deliver the profits she promised, the board was stung by her refusal to make changes or relinquish operating responsibility in HP’s floundering computer business. “She played a brinkmanship game and didn’t realize the other side wouldn’t budge,” says Rob Enderle, a tech analyst in San Jose, Calif. “It’s a game she’s used to playing. She bet wrong.”

Her resignation came a week before HP was due to report earnings–a report that the company acknowledges will meet Wall Street’s estimates. But the guillotine blade began its descent in December, when IBM decided to sell its money-losing personal-computer business to Lenovo, a Chinese company. IBM had concluded that a PC was a commodity, little more than a toaster that also does long division, and its decision to get out of the business spotlighted Fiorina’s opposite bet. Under her command, HP in 2002 spent $19 billion buying Compaq, largely to expand its position in PCs and fight off Dell, the market’s low-cost leader. Though the merger had produced cost savings–and wrenching layoffs–profits remained hard to come by. In 2003, despite Fiorina’s promises that operating margins would reach 3%, the company’s PC division earned a meager 0.1% on $21.2 billion in sales. And last August, the company’s Enterprise Servers and Storage Group, which sells to corporate customers, reported a $208 million loss for the quarter.

As a furious Fiorino reacted by publicly firing the server unit’s boss and two others, the board began to take a harder look at her performance. By early January, outside directors, led by Dunn, ex–White House science adviser George Keyworth, and Richard Hackborn, a former HP chairman who once turned down the CEO job, read her a four-page critique. At a board planning session later that month, the directors, growing bolder, presented Fiorina with her effective demotion. The approach of a damning cover story in FORTUNE reportedly hastened her departure. The piece, headlined “Why Carly’s Big Bet Is Failing,” included on-the-record quotes by HP insiders criticizing Fiorina and laid out in wincing detail the merger’s failure to produce the financial results she had long promised.

In certain respects, Fiorina did exactly what she had been asked to do. Hewlett Packard is Silicon Valley’s alpha company, founded in a garage by Bill Hewlett and Dave Packard in 1938, when the area had far more peach trees than programmers. HP first produced oscilloscopes, then expanded to other testing and measuring instruments. It was a pocket-protector paradise, its culture defined by the HP way: paternal, collaborative, entrepreneurial, community minded and inconspicuous.

Fiorina was brought in to drive a stake through that squishy culture’s heart. HP expanded into computers in the 1970s, but by the 1990s, its sundial pace had run up against Internet time. The company needed to reposition itself in a new, networked environment. Fiorina grew up within AT&T and its equipment-making spin-off Lucent Technologies, so she was well versed in the dangers of cultural inertia. At Lucent, she had emphasized speed and aggressive sales targets. “Have I taken risks through my whole life? Yes,” she told TIME in a 2002 interview. “The risk that is not worth taking is to do the easy thing and do nothing.”

HP had more than 80 separate operating units when Fiorina arrived in 1999. She slashed them into four key groups. She not only rationalized operations but also reoriented them to focus on customers instead of HP’s engineers. “The board was looking to revitalize HP, and they saw Carly as a change agent,” says Richard Hagberg, a California industrial psychologist who gave Fiorina the personality test credited with helping her win the HP job. “They saw her as a visionary evangelist who could oversee the creation of a new vision, [who] was willing to challenge some sacred cows. And they got that.”

They also got a rock star. While most HP executives practiced invisibility, Fiorina led from the front. She came from sales, not engineering, and she looked the part, from the tailored clothing to the new Gulfstream jet she was soon using. “I told her that rock stars were probably not going to be accepted by a culture that’s understated, a bunch of engineers,” says Hagberg. “She’s a salesperson, and she liked the limelight.” But Fiorina kept her distance. Unlike her predecessors, she rarely ate lunch in the cafeteria or mingled with HP staffers. “She rubbed a lot of people the wrong way,” says a former HP executive. “HP was data driven. Carly was idea driven. That can be an inspiring kind of leadership, but you had a leader at odds with the organization.”

Those odds got a lot sharper during her burnt-earth campaign to acquire Compaq in 2002. To Fiorina, combining the two plodding PC businesses was the only way to improve profitability and take on the low-cost, direct-sales monster called Dell. To critics, merging two lousy operations had limited appeal. Director Walter Hewlett, a Stanford music professor and son of the co-founder, led a public proxy fight against the deal. Although Fiorina prevailed, the cost was high. Within months, Compaq CEO Michael Capellas, who was supposed to run the computer division, was out the door. Others followed.

Though the merger did produce significant cost savings, it did not improve HP’s strategic position. In consumer PCs, HP is still getting punished by Dell, which just reported record numbers. On the computer- services side, HP is mostly stuck in the maintenance business, where margins are shrinking. Even HP’s best performer–the $24.2 billion printer and imaging-products business, which yielded 73% of profits last year–is under pressure. Dell has entered the printer market and already has a 13% share of the U.S. inkjet-printer market.

To be fair, HP’s board–including those, like new chairwoman Dunn, who forced Fiorina out–strongly supported the Compaq acquisition and still say publicly that, strategically, it was the right move. Even without that deal, HP’s business would face significant challenges. The first job of Fiorina’s successor may be to decide whether the firm will sell or spin off the printer division, as some Wall Street analysts have recommended. In any case, HP’s now activist board is sure to pick someone focused on operations rather than another glamour boy or girl. “Bringing in the celebrity is out of favor,” says Charles Elson, a lawyer and director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. And while Fiorina is being pilloried for things board members once found so attractive, the blame isn’t hers alone. They stood by as her visionary plans fizzled. “That’s the big question,” says Elson. “Where were they three years ago?” –With reporting by Chris Taylor/Palo Alto, Laura A. Locke/San Francisco, Daren Fonda and Jyoti Thottam/New York