Berkshire Ruminations

Friday, March 09, 2007

Thoughts On the Home Depot Situation

It was one year ago that Business Week suggestively declared, in its cover story no less, that Home Depot was “thriving under CEO Bob Nardelli’s military-style rule.” Under Nardelli, the story explains, HD began recruiting military veterans and focused on “conquering customers” just as the military works to conquer the enemy. Nevermind that such a strategy seemed somewhat dangerous even at the time (the story documents a “culture of fear” as described by anonymous former executives), with the benefit of hindsight we now know that it was simply the wrong choice.

We should have known better. We knew that Nardelli, who took over the firm as the first non-founder CEO in December 2000, oversaw a HD share price that went precisely nowhere, from $42/share in 2000 to $42/share 2006. But we also knew from the 2006 proxy statement that Nardelli earned a total of $12 million in cash compensation from the company – that is, excluding option and restricted stock grants, which were sizable. But $7 million of this compensation was in the form of a bonus. A bonus for what, you may ask. Well, admittedly, earnings and revenues did grow nicely over this time but come on, what is the CEO’s job really?

The proxy gets yet more suspect the further you read. The company even admits that Nardelli’s “annual bonus shall be not less than $3,000,000.” So is it a bonus or is it salary? You tell me. Regardless, it later came to light that Nardelli’s total compensation in 2005 was worth somewhere around $38 million, and nearly $250 million over his five-year tenure through December 2005. To me, notwithstanding that I am merely an outsider with no management experience of my own, this just looks categorically egregious.

If the pay of the CEO wasn’t enough to make one question the direction of the company, then surely the CEO’s outright contempt towards shareholders should have been. At the shareholders meeting last May, which lasted all of 30 minutes and which the entire board of directors (save for Nardelli, the Chairman) boycotted, Nardelli refused to take shareholder questions. I am not even a Home Depot shareholder, and this made me livid. But it also caused me to avoid HD stock like the plague.

I am glad I did avoid it, because $250 million in severance for someone who effectively failed at his job is just a slap in the face.

The Business Week story concluded by citing a survey that suggested the anti-touchy-feely, threatening demeanor that Nardelli uses to manage may surface in the interaction store employees have with customers. Today I read articles like the one on MSN from earlier this week that seem to echo my own personal feelings about the company – that by mistreating employees the customer experience has suffered, and Home Depot is no longer a pleasant place to visit. With an alternative like Lowes, I feel, there is really no reason to shop at or to invest in Home Depot.

Hopefully, after Nardelli’s January ouster, things may be able to change. But how quickly a new CEO can change the culture of a 350,000-person firm remains to be seen. I hope, for the sake of the corporate financial system, that the Bob Nardelli type of behavior continues to outrage investors.

FD: I have no position in any firm mentioned in this post.

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