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Blame Home Depot's Board, Not Nardelli

January 04, 2007 | About:
Vitaliy Katsenelson

Vitaliy Katsenelson

73 followers

The ousting of Bob Nardelli sent a wrong message to American CEOs: it taught them an incorrect lesson – manage the stock, not the company.

As Herb Greenberg mentioned in his column, if Home Depot's (HD) stock went up while he was in charge he would still have a job, though he’d be $210 million poorer.

Bob Nardelli was a terrible stock promoter (not his job), but he did a terrific job managing the company (his job). As I mentioned in the past, from the time Nardelli took over Home Depot in 2000, Home Depot’s earnings have grown at an amazing clip of 20% a year, revenues over 15%, net margins have increased and return on capital went up every single year. The stock has not gone anywhere during his leadership because it was grossly overpriced in 2000.

Did he do a job worthy of $210 million? He came to manage an already successful company, an industry leader, a well oiled, money making machine, not a startup that lost its way.

Despite the stock prices not moving since he came on board, he created a lot of shareholder value (when measured in operating performance). But in many ways his main job was not to screw up (not to destroy corporate culture, or make dumb acquisitions, or over leverage the company etc…).

His $210 million compensation package is a disgrace – sorry Bob, but you were not worth that much. But the blame for overpaying Bob should not go to Bob, but should instead land on Home Depot's board of directors. Bob is as greedy as any human being, and if I were him I’d ask for a billion dollars (why not?), but it is the board’s responsibility to decide how much to pay a CEO.

If you invite a plumber to your house to fix a sink and he asks for $10,000 – that is his right! His first responsibility is to feed his family, not to you. Your right is to find another plumber who’ll do the same job for $100. And if you decided to pay the plumber $10,000 for a job that somebody else would do for $100 – don’t blame the plumber, point the finger at yourself.

Unfortunately, the same board that just paid a “failed CEO” (he was fired after all) the equivalent of a GDP of several Caribbean islands, will do the same thing all over again. If you are unhappy with Bob’s going away present, blame Home Depot’s board, not Bob. There is a free market at work when it comes to 99.999% of the jobs out there, the free market-Messrs. Supply and demand decide how much to pay a computer programmer, an accountant, a store clerk. But when it comes to top executive jobs, Mr. Supply takes a vacation and Mr. Demand (the soon to be hired CEO) decides with the board’s rubber stamp his/her own compensation.

P.S.

Since I (unintentionally) became a member of Defend Bob Nardelli Club, I've received many emails telling me that Bob Nardelli didn't do a great job managing Home Depot (HD). Most criticism is centered around Nardelli switching to using more part time labor which led to less knowledgeable employees, the less than sparkling store appearance and the view that the inventory management system being used is inferior to Lowes (LOW).

Let's say all these points are accurate and there is a dichotomy between the on-the-surface and under-the-surface operational performances.  But suppose Nardelli lost his job not because he didn't manage the company well, but simply because the stock didn't go anywhere during his tenure.  One can argue that if the company was run by a better CEO, HD would command a higher P/E multiple.  But take a look at Lowe's, it is supposedly a much better run company, but it trades at similar P/E.

Milton Friedman said, "the stock market and economy are two different things."  I say the stock and an underlying company are two different things too.

About the author:

Vitaliy Katsenelson
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 2.3/5 (3 votes)

Comments

vooch
Vooch - 7 years ago
I think the verbal attacks against the HD Board of Directors is going to intensify over the next few months and crescendoing at their annual meeting.

However, this time, the Board of Directors will have to make an appearance.

It'll be interesting to see how it all turns out.

- Vooch

kfh227
Kfh227 premium member - 7 years ago
guru,

I read your whole post. And agree 100%.

As soon as I hear people complain about HDs share performance and then blame the CEO (not themselves), I jsut want to smack them. Your plumber analogy was dead on!
kfh227
Kfh227 premium member - 7 years ago
OK, this total irks me. I can't believe I failed at adding more colorful language in that sentence even though I want to.

[biz.yahoo.com]

QUOTE:

"Nardelli's severance package is a final, indefensible step by the board of directors in wrongly over-compensating an unsuccessful chief executive," plaintiffs said in papers filed in Fulton County Superior Court.

How in the world do these share holders think they can win this argument? Unsuccessful? he did his job, he grew the companies shareholder value. Just because some bought when the PE was 25+ isn't his fault. I really wish I could create my own lawsuit to sue these "shareholders" for causing their own company to spend money on such unneeded garbage. I'm referring to defending their actions and the cost of their lawyers.

Sorry, a bit ranty ... and I am not double checking my typing.

Good day.

EDIT: AND .... sometimes I really feel like pulling the hair out of my head. Proud HD shareholder that WILL NOT be joinging suit. And looking at the PE today, I won't be crying 5 years from now. I'll be laughing. I've waited 3 years to buy HD at a reasonable level and I finally got my good entry point of $38.25. Discalaimer: I bought in July via put assignment ($30-$1.75 premium = $38.25 cost basis)
Evan
Evan - 7 years ago
My god,

Your article is dead on, and sadly also a minority view it seems. I agree with Kfh227's subtle contempt for shareholders who self-inflict monetary-pain on themselves; there was a lot of smacking that should have been done.

While I don't know too much about the inner workings of the company, and am not up to speed on their I/S systems, I do think that Bob got the big stuff right (ROI, Margins, ETC) but I was unhappy about how service suffered. Eventually service scores would have bit us in the ass with regards to sales.

Good job Vitaliy... Har, Har!

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