Shareholders get directors' attention

Analysis

January 05, 2007|By Gretchen Morgenson | Gretchen Morgenson,New York Times News Service

Arrogance has never been attractive in a leader. Now, in corporate chief executives anyhow, it may be a career ender.

The surprising defenestration Wednesday of Robert L. Nardelli, head of Home Depot Inc. and one of America'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 executive pay.

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, 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 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," Rowe said.

Nardelli's fall from the executive firmament was 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 Co., to a top target of investors outraged by his $245 million in total pay over the past five years.

That amount was seen as completely at odds with the dismal performance of Home Depot stock on his watch. On Wednesday, the shares closed at $41.07, almost 6 percent lower than they were the day Nardelli arrived at Home Depot in December 2000. The slide continued yesterday with the shares losing 50 cents to close at $40.57.

"CEOs 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 environment."

Shareholders of Home Depot have been smoldering for several years about the company's executive pay practices. Back when 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.. "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 Nardelli's pay. In 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.

But Nardelli's biggest error, and the act that may have set his demise in motion, was his shocking decision to run the annual meeting in May alone, insisting that his directors stay away and limiting questions from the shareholders.

"I've never heard of anything like that happening before, where directors don't show up," 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 to respond."

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