BOB NARDELLI OF HOME DEPOT sparked an outcry in the media and among governance professionals by conducting his company's annual meeting in less than one hour and not having any of his directors present. Here are excerpts from a conversation:
Directorship: Why did you conduct such a short, tightly scheduled annual meeting?
Bob Nardelli I tried a new format this past year. It did not work. Within seven days, I committed that next year we would return to a traditional format where the board would be in attendance, that we would do a business overview, we would handle the legal part of the meeting relative to (shareholder) proposals and that we would have ample time for question and answer. So I accept full responsibility for the change in format and acknowledge, based on the feedback, that we're going to return (to the other format.) I'm looking forward to a productive shareholder meeting in '07.
Were you trying to shield your directors from the spectacle that the unions were trying to create?
That wasn't part of the logic behind the decision. The board reviewed in detail the shareholder proposals and our company's response. Each year, this one included, they are provided with detailed minutes of the shareholder meeting. So there's no proposal made or opinion voiced at the meeting itself that they're not keenly attuned to.
What was going on in your mind? There were newspaper articles and it seemed clear that the unions were coming to the meeting to embarrass you over your compensation, right?
We tried something. It didn't work. It was my call. Not the board's. It's unfortunate that this one event has cascaded itself down to become such a distraction for my associates, for my leadership team, for my board. It's a shame because it tends to mask the real solid financial performance of this company over the past five years. My goal right now is to be lot more forward-looking in terms of what we'll do in '07 and to continue to stay on strategy. We've had record performance in sales, earnings and operating margins.
You pride yourself that your directors are very independent. Why did they...
I would go beyond that. We have the most independent set of directors in corporate America by any measurement. First of all, there's only one member of management on the board, myself. Of the remaining directors, everyone but one meets the most stringent criteria, whether it be the SEC's or the New York Stock Exchange's, for total independence. Maybe the average for independent directors is somewhere around 50 or 60 percent. We're well above 90 percent.
They're also the most engaged board of any board in America. They are required to do store visits. They have volunteered to spend a minimum of another full day, in some cases two or three days, where we have functional reviews. Or they'll go out to the field to spend time with a division president. That's a one on one, a director with one of my direct reports. They put the agenda together. The director has total transparency into the company and the leadership team. We've got a great board. They couldn't have been more supportive. They're unwavering in the strategy that's been instrumental in transforming this company over the past five years.
Since they're so independent, my question was, did any of them say to you, "Bob, you might be making a mistake by not having us going to that meeting?"
Let me say again, I take full responsibility for this. It was not the right call, and we're moving forward.
The underlying issue, of course, was your compensation. The way it's been portrayed is that you have made $245 million at a time when the stock price has not performed as well as you might like. Is that a fair analogy to make?
Let me say, first of all again, back to transparency and corporate governance. The wonderful thing about our company is that my compensation is fully disclosed in the proxy statement. Take the $240 million or $250 million that's referenced and totally transparent. Let me say that 80 percent of that number is in the form of equity that is still retained by the company. There has not been a dollar payout. Sixty percent of that 80 percent is in the form of stock options. So no one is more interested or aligned with shareholders because if the price doesn't go up, there will not be a dollar payout to me.
Is it fair to say that your compensation ought to be measured against share price performance?
If you look at the $240 million, based on the Black-Scholes evaluation that's reported in the proxy table, over $140 million of that is in options. That's directly tied to the stock price. Given where the stock price is today, there will not be a dollar payout to me. That's totally fair. That's the way it works. I'm merely explaining and pointing out what sometimes is misconceived or is the subject of the wrong conception. The board is totally aligned with the performance of this company. I would expect that if we don't continue to deliver—and over the past five years we've delivered a 78 percent in revenue and 147 percent increase in earnings per share--I'm fully confident that the board will react in the other fashion relative to my salary and compensation. We've taken the operating margin up 230 basis points. Return on invested capital is up 280 basis points from 19.6 to 22.4. I'm obviously very grateful for the compensation they have awarded me. I'd expect that if performance goes the other way, they'll act appropriately.
