Note To William H. Gray III Of Dell’s Board: Save The Women And Children

Dell board member William H. Gray III, who runs the company’s Governance and Nominating committee, has a problem. He needs to replace CEO Michael Dell, but replacing a company’s founder is hard. He has the background to understand the problem which makes it harder to understand why he does not address it. Gray is a director of JPMorgan Chase & Co., Prudential Financial Inc., Visteon Corporation and Pfizer Inc.

Dell (NASDAQ: DELL) has had an extraordinary number of problems since founder Michael Dell returned as CEO in January of 2007. Dell handed the CEO’s job over the Kevin Rollins in March of 2004. The troubles at Dell all have their roots in a culture of unethical behavior that extends back nearly a decade. It is an issue that neither Dell, nor Rollins, nor the board of directors ever addressed. Gray has been a director since 2000, so each of the major legal and accounting problems at the company happened while he was there.In August of 2007, Dell CFO Donald Carty admitted that a number of company employees were fired. Several accounting executives at Dell has manipulated accrued revenue and expenses. The affected period was 2006 to 2007. The computer company took a $150 million charge to cover restatements. The actions caused the SEC to review several years of the company’s accounting. This in turn caused the company to delay the filing of its 10-K for the year ending February 2, 2007.

In November 2009, New York State Attorney General Andrew Cuomo filed charges against Intel (NASDAQ: INTC) and Michael Dell which said that Intel had paid huge bribes to Dell for using its chips over those of competitor AMD (NYSE: AMD). The European Commission started a similar investigation earlier in the year. Cuomo said that “Dell was allegedly paid about $6 billion between February 2002 and January 2007 and in one quarter Intel’s payments were 116 per cent of Dell’s reported net income.”

Last month, Dell said it was on its way to settling the Intel matter which had also been taken up by the SEC. The settlement would include negligence-based fraud charges, as well as other non-fraud based charges, on the company’s disclosures and alleged omissions prior to Fiscal 2008 regarding certain aspects of its commercial relationship with Intel Corp, the company said. Dell added that “the company recorded a $100 million liability in its first quarter of Fiscal 2011 to establish a reserve for the potential settlement by the company of the previously reported SEC investigation.”

Michael Dell, the company said, had entered into talks with the SEC to settle his issues with the commission. “Any such settlement by Mr. Dell would involve alleged violations of negligence-based fraud provisions of the federal securities laws, as well as other non-fraud based provisions, and would not include any bar against Mr. Dell’s service as an officer and director of a public company,” Dell reported.

In a lawsuit filed by Advanced Internet Technologies three years ago, it alleged that Dell sold it computers that the PC company knew had design and manufacturing flaws. Documents for the case which is being heard in the Federal District Court in North Carolina, showed that Dell shipped about 11.8 million PCs during the May 2003 to July 2005 period.  The documents also show that Dell workers actively covered up the problems.

Some of the troubling behavior at Dell, which added up is an extraordinary amount for any large company, occurred when Michael Dell was CEO. All of it happened when he was the firm’s chairman. Dell can argue that his is a huge company. He cannot know what all 94,000 of his workers are doing at any one time. That is almost certainly true. But a company’s values are established at the top and that behavior is s a by-product of corporate culture.

Gray’s own reputation is at stake now, and it is married to the future of the company.

Douglas A. McIntyre