BUSINESS: Behind Nardelli's Abrupt Exit --- Executive's Fatal Flaw:
Failing to Understand New Demands on CEOs
By Alan Murray
1486 words
4 January 2007
The Wall Street Journal
A1
English
(Copyright (c) 2007, Dow Jones & Company, Inc.)
Robert Nardelli's demise as chief executive of Home Depot resulted, in
part, from his failure to understand how profoundly the job of CEO has
changed in recent years.
Mr. Nardelli was old school. In an interview last fall, as his
public-relations problems were compounding, he acknowledged he had gotten
"too focused on the idea that you do your job, you take care of your numbers,
and the rest will take care of itself." Some of Mr. Nardelli's numbers
were hard to argue with. In six years on the job, he doubled Home Depot's
sales and more than doubled its earnings.
What Mr. Nardelli missed, however, is that in the post-Enron world, CEOs
have been forced to respond to a widening array of shareholder advocates,
hedge funds, private-equity deal makers, legislators, regulators,
attorneys general, nongovernmental organizations and countless others
who want a say in how public companies manage their affairs. Today's CEO,
in effect, has to play the role of a politician, answering to varied
constituents. And it's in that role that Mr. Nardelli failed most
spectacularly.
There were plenty of other reasons a board might want to dump him. He
provided no return to shareholders. He pursued a controversial strategy
of expanding into the low-margin wholesale business. And he accepted an
exorbitant pay package.
But other CEOs have survived similar criticisms. Mr. Nardelli's failure
to do so reflects, at least in part, his inability to adapt to a new era
of greater scrutiny.
"I used to play football," he said when asked about the challenges of being
a public company CEO today. "In football, you always know the score. Now,
it's like we are ice-skating, and you've got a bunch of judges on the
sideline shouting out the scores."
As failures go, Mr. Nardelli's isn't half bad. He walked away with an exit
package of $210 million -- and that figure was calculated before
announcement of his resignation boosted the potential value of his stock
options yesterday.
Much of the package is due to the rich employment contract he negotiated
with the Home Depot board before leaving General Electric Co., where he
was one of three finalists to succeed Jack Welch. Mr. Welch convinced his
board to give all three finalists large batches of stock options, telling
board members they would have to make good on only one man's options, one
director says. Upon leaving GE, the board was told, the two runners-up
likely would use those awards to negotiate pay at their next jobs -- which
is exactly what Mr. Nardelli and James McNerney, who is now CEO of Boeing,
did.
Yet Mr. Nardelli's extravagant pay became his biggest problem. It prompted
an attack from shareholder advocates like Richard Ferlauto, who runs
investment policy for the American Federation of State, County and
Municipal Employees, one of the nation's largest labor unions.
Mr. Ferlauto helped organize protests at Home Depot's annual meeting last
year, prompting Mr. Nardelli to commit his gravest political error: Aware
of the protests to come, he convinced other board members to stay away
from the meeting, and restricted shareholder questions to one minute. That
sealed his public image as a callous and entrenched corporate leader, and
even prompted a call from his former boss, Mr. Welch.
In response, Mr. Nardelli belatedly tried to become a politician. He went
on a "listening" tour to visit 25 of the company's largest shareholders,
and he granted interviews to a number of television and newspaper
reporters. He apologized for his ham-handed handling of the annual
meeting.
But he didn't apologize for his pay package. And he didn't reduce it.
That left him vulnerable last month when an investment firm, Relational
Investors LLC, announced it was mounting a proxy battle to put new
directors on the Home Depot board. Ralph Whitworth, who heads Relational,
said his complaint had less to do with Mr. Nardelli's pay than his strategy.
Mr. Whitworth believes Home Depot erred in expanding into the
contractor-supply business. But Mr. Nardelli's weakened standing greatly
increased the odds that Mr. Whitworth might win his proxy battle. So Home
Depot's directors acted first.
Raised in a blue-collar family and educated in public schools, Mr.
Nardelli was upset when informed by Mr. Welch that he had lost out to Ivy
Leaguer Jeffrey Immelt for the top job at GE. He believed he had been a
better performer, building revenue at the company's power-turbine
business from $770 million in 1995 to $2.8 billion in 2000.
But subsequent events have confirmed the wisdom of Mr. Welch's choice.
Like Mr. Nardelli, Mr. Immelt has struggled with a languishing stock price.
But in addition to generating good operating results, Mr. Immelt has
played the CEO's political role with great skill. He has tied his own pay
closely to performance. He has eschewed the kind of employment contract
that is now rewarding Mr. Nardelli. He has reached out to a wide range
of constituent groups. And he has adopted a number of popular initiatives,
such as his "eco-imagination" program which, among other things, includes
an effort to reduce GE's emissions of greenhouse gases.
As a result, Mr. Immelt wins awards, graces magazine covers, and is widely
praised as one of America's best CEOs.
Procter & Gamble Co.'s A.G. Lafley is another CEO who has learned the
lessons of the post-Enron era. Instead of catering just to shareholders,
he makes a broad appeal to "stakeholders" -- a group that, by his
definition, includes shareholders, employees, customers, consumers and
the communities in which all these people live. When I asked him last year
whether that makes his job sound like that of a global politician, he
responded: "Like it or not, we are in a global political world. I've
concluded I'm in it anyway, and I might as well deal with it anyway."
No one exemplifies the new CEO more than Wal-Mart Chief Executive Lee Scott.
When Mr. Scott found his company under attack by a well-organized
political campaign, he responded in kind. He reached out to his opponents,
took polls of opinion leaders and hired political consultants. He also
embraced environmentally friendly policies, improved employee
health-care coverage and began advocating policies like an increase in
the minimum wage.
Mr. Scott insists the environmental positions he's taken and the other
policies he's adopted are all good for the company's bottom line. In an
interview in his office in Bentonville, Ark., last year, Mr. Scott said:
"The generation of people I work with -- like A.G. Lafley, who has been
here in this office in the last two months, or Jeff Immelt, who has been
in this office in the last three weeks -- feel there is a business reason
to do this."
Taking the political route may be necessary to success in the post-Enron
world, but it, alone, is not sufficient. Citigroup CEO Charles Prince has
tried to appease his critics by making ethics a hallmark of his time at
the top, but that hasn't helped the bank's lagging performance or silenced
its critics.
In any event, it's clear Mr. Nardelli never bought into the approach
favored by his colleagues like Mr. Immelt, Mr. Lafley, and Mr. Scott.
Instead, he fretted that the corporate system is under attack.
"I am very concerned with the future of business and the capitalistic
system in this country," he said last fall, expressing his concern about
the repeated attacks on public companies. "Somebody has yelled fire in
the auditorium. If you stand back, you've got to say that we as a country
should share a growing concern as it relates to the capitalist system.
The things that got us to where we are are under attack."
One consequence of the increased pressures on public companies and their
CEOs, Mr. Nardelli noted, is a rush of both money and talent into private
equity, which is shielded from many pressures that affect public companies.
"Not everyone can go private," he said.
Not everyone, but how about Mr. Nardelli? He wasn't giving interviews or
any hint of his plans yesterday. But his strong background in operational
management, his distaste for the public spotlight and his hefty severance
check in need of investing may make him the perfect candidate for a
private-equity firm.
(See related article: "Moving Out: Amid a Pay Dispute, Home Depot's Chief
Faced Board Tensions" -- WSJ January 4, 2007).
(See related letters: "Letters to the Editor: Money Depot: The Huge
Rewards of Failure for Some CEOs" -- WSJ Jan. 9, 2007)
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