Home Depot: Activists Keep Attacking

When the Home Depot board announced that Chief Executive Officer Robert Nardelli was leaving the company, most observers believed that the activist forces arrayed against the company might have been appeased. But not so. Instead, they seized upon his $210 million exit package as a reason to continue to press for major changes in board composition—even though the board was legally locked into the contract it signed with the General Electric star in 2000. For boards of directors, this new activism has sparked a relentless political debate between the forces claiming to speak for shareholders on one hand and the CEOs on the other, with boards sandwiched in the middle.

“They made a mistake, signing a contract six years ago with Nardelli that entitled him to walk away with this much,” Richard Ferlauto, director of pension and benefit policy at the American Federation of State, County and Municipal Employees (AFSCME), told Directorship. “Their first mistake, and the most critical, was in guaranteeing huge payouts that were not tied to performance.” Ferlauto (see “The Voice of a Powerful Union,” November 2006) was the AFSCME representative who stood up at Home Depot’s 2006 annual shareholder meeting and pointedly asked Nardelli where his directors were. Nardelli’s performance at the meeting, during which he ran a tightly controlled Q&A session, turned him into a favorite target of the activist community.

As news of Nardelli’s departure emerged, AFSCME was in the process of gearing up for the 2007 proxy season. But rather than appeasing AFSCME, the union says the board has inflamed the situation. “It adds fuel to the fire,” Ferlauto said. “It sends a message of board arrogance.” AFSCME says it wants to see the retirements of John C. Clendenin, a member of the compensation committee that okayed Nardelli’s original pay package, and of Milledge A. Hart III and Claudio X. Gonzalez. They had been on track to retire at age 72, but the company shifted course and allowed them to remain.

AFSCME itself owns only 23,000 Home Depot shares, but its members participate in various pension plans that account for 3 percent ownership.

Ralph V. Whitworth, head of San Diego-based Relational Investors, also signaled that the Nardelli departure would not diminish his efforts to push for the addition of new board members. His firm has built a position of almost 1 percent of Home Depot, and Whitworth wrote to the company suggesting a special board committee to review the company’s strategic options, implying a battle for control. Backing Whitworth is the California Public Employees’ Retirement System (CalPERS), which has invested $1 billion with Relational. And now that the Democrats have seized control of the House of Representatives, Barney Frank, the new chairman of the House Financial Services Committee, was widely expected to call a public hearing on the Nardelli exit package and to summon Home Depot representatives.

The Nardelli departure foreshadows what is likely to be a brutal proxy season. Boards have been surprised by combined effects of option leverage—a popular shareholder compensation technique just a few years ago—and the bull market in equities. So they are relearning the law of unintended consequences. It seems that finding the right compensation formula for both retaining top management talent and appeasing shareholder activists remains elusive.