Warning Shot by Investors to Boards and Chiefs
By Gretchen Morgenson
New York Times
Thursday, January 4, 2007
Arrogance has never been attractive in a leader. Now, in
corporate chief executives anyhow, it may be a career ender.
The surprising defenestration yesterday of Robert L.
Nardelli, head of Home Depot and one of the nation’s most
imperious and highly paid chief executives, was a victory
for shareholders hoping to force corporate directors to be
more accountable on the increasingly incendiary issue of
Even though the board gave him $20 million that was not a
part of his employment contract, perhaps smoothing his way
out the door, the departure seemed to be a watershed. No
longer can executives demand — and directors happily grant —
contracts worth hundreds of millions of dollars without at
least some shareholders uttering a peep.
Indeed, Mr. Nardelli’s resignation seems to indicate a
rising fear among Home Depot’s directors that they would be
subject to even more investor ire and personal embarrassment
during the 2007 proxy season than they encountered in 2006,
when Mr. Nardelli ran the annual shareholder meeting like a
lord over his fief.
“The departure of Nardelli is good news for shareholders,”
said Frederick E. Rowe Jr., a money manager in Dallas and
president of Investors for Director Accountability. “To
borrow from Winston Churchill, this is the end of the
beginning in the war to make directors accountable to the
shareholder owners they represent.” Mr. Nardelli’s fall
from the executive firmament was fairly stunning. In just
six years, he went from being one of the most sought-after
chief executives, forged in the management crucible that is
General Electric, to a top target of investors outraged by
his $245 million in total pay over the last five years.
That amount was seen as completely at odds with the dismal
performance of Home Depot stock on his watch. Yesterday,
the shares closed at $41.07, almost 6 percent lower than
they were the day Mr. Nardelli arrived at Home Depot in
“C.E.O.’s now will understand that they’ve got to put their
conscience and shareholder wealth well above their personal
gain,” said Jeffrey M. Cunningham, chairman and chief
executive of Directorship, an online information service for
board members. “Boards create termination packages when no
one even contemplates there is going to be a termination and
they are extraordinarily rich. You are going to see all
those plans rethought and rationalized for the new
Shareholders of Home Depot have been smoldering for several
years about the company’s executive pay practices. Back
when Mr. Nardelli arrived, for example, shareholders raised
eyebrows after the company granted him a $10 million loan
that it subsequently forgave. He has earned $20 million to
$37 million each year since he joined the company.
In 2004, the company quietly changed the measurement it used
to calculate long-term incentive pay for executives,
upsetting investors when they learned of it later.
Previously, the performance measure was based on a
peer-group comparison, but the new measure involved only the
company’s growth in earnings per share. It was more easily
reached because it was based solely on Home Depot’s
performance not that of other companies.
To some shareholders, changing the performance target in the
middle of a year seemed an attempt to ensure a payout
despite a dismal performance.
“We had a problem with that change,” said Bess Joffe,
manager for the Americas at Hermes Investment Management, a
money management firm owned by the British Telecom Pension
Scheme, the largest pension plan in Britain. “After all,
shareholders don’t get to change the terms under which they
bought their shares midstream.”
But it was not until last year that Home Depot’s
shareholders began to express serious disenchantment with
the company’s directors over Mr. Nardelli’s pay. Last
March, about two months before Home Depot’s annual
shareholder meeting, the board was named one of the 11 worst
executive pay offenders by the Corporate Library, a
corporate governance research firm. In the weeks leading up
to the meeting, shareholder advisory firms recommended
withholding votes from Home Depot directors to voice their
dismay over the disconnect between performance and pay at
But Mr. Nardelli’s biggest error, and the act that may have
set his demise in motion, was his shocking decision to run
the annual meeting last May alone, insisting that his
directors stay away and limiting questions from the
“I’ve never heard of anything like that happening before,
where directors don’t show up,” Ms. Joffe said. “It’s the
one time of year that shareholders have a right to be
present and stand up and speak their mind and directors have
Stockholders were outraged. At least 30 percent of
shareholders voting at the meeting withheld support from 10
of the company’s directors. Some 32 percent withheld
support from Mr. Nardelli. Almost 36 percent of those
voting withheld support from Claudio X. Gonzalez, chairman
and chief executive of Kimberly-Clark's Mexico operations
and the director who had headed the compensation committee
when the company changed its performance goals midstream.
Many shareholders also favored a proposal urging the Home
Depot board to allow its investors to vote on an advisory
basis to approve the company’s compensation; 40 percent
voted for the measure.
Shareholders also supported a measure that would have
required the board to accept resignations from directors who
failed to receive support from a majority of votes cast.
After the meeting, Home Depot said it would require such a
vote from shareholders for the election of its directors.
Even so, the company continued to tinker last year with its
pay practices in a way that may have been intended to
generate pay for Mr. Nardelli in periods of poor performance
at the company. Last November, a Home Depot spokesman
disclosed that the company’s huge stock buybacks, which have
the effect of increasing earnings when measured per share,
would be included in the calculation of long-term incentive
targets. In previous years, the effects of the buybacks
were excluded from the calculations.
John A. Hill, the chairman of Putnam Funds, was one investor
whose organization voted against Home Depot management at
last year’s meeting. He said he was optimistic that Mr.
Nardelli’s resignation signaled a new responsiveness among
corporate directors. But he is uncertain.
“I think if a lot more shareholders withhold their votes for
this board in the upcoming proxy season over their agreement
with Nardelli, then it will really start to have an impact,”
Mr. Hill said. “But as long as it is a minority, it won’t.”
Mr. Hill personally experienced Mr. Nardelli’s disdain
toward his shareholders. As chairman of Putnam Funds, he
wrote a letter after the annual meeting to Mr. Nardelli
explaining why he had not earned the funds’ support at the
election. He did not get a reply until August, when a
reporter asked Home Depot why the chief executive had not
responded to one of its large shareholders.
“He had become a lightning rod with the stock down,” Mr.
Hill said. “But his not replying to our letter showed an
arrogance there that came in on him.”
It seems that “my way or the highway” — Mr. Nardelli’s
message to Home Depot’s beleaguered shareholders in recent
years — does not play that well anymore.