Home Sweet Home Depot

Just about no one has anything good to say about superstar CEO Bob Nardelli and his extravagant Home Depot severance. But can we cut the guy some slack already? After all, he was just playing by the rules.

January 8, 2007

By Sam Pizzigati

Executive excess has a new poster child. Last week, three days into the new year, Robert Nardelli resigned as CEO of Home Depot, the second-largest retailer in the United States, and walked off into the sunset with a severance package worth $210 million.

Nardelli’s windfall, after six stormy years at Home Depot’s summit, once again reminds us that something deeply wrong is ailing Corporate America.

Unfortunately, most pundits, reformers, and political leaders can’t seem to get right just what that something is.

Last week’s mainstream commentary on Nardelli’s windfall offered a simple, straightforward  — and sadly shallow — critique. Home Depot, mainstream analysts opined, brought in Nardelli six years ago to do a job. Nardelli performed poorly in that job, but Home Depot rewarded him lavishly anyway.

Corporate boards, this mainstream critique continues, need to get serious about linking pay to performance, and shareholders need to hold their feet to the fire until they do. End of story.

Left unchallenged in this mainstream critique: the basic assumption that led Home Depot’s corporate board to guarantee Nardelli a mega severance in the first place, the notion that a single executive, if that executive has the smarts and the guts to perform well enough, can turn a company around.

Six years ago, corporate board members at Home Depot thought they were getting one of those executive top performers, a true superstar, when they hired Bob Nardelli. That’s why they lavished upon Nardelli a pay deal that ensured him a fortune even before he stepped foot in Home Depot’s executive suites. You want a CEO miracle worker, you pay the CEO miracle worker going rate.

But CEOs, as both Home Depot board members and their now plentiful critics both don’t seem to understand, can’t work miracles. The chief executives of major corporations need to be recognized for what they actually are: administrators of huge enterprises whose success hinges on the performance of not one individual but thousands.

And if an enterprise, to be effective, must depend on contributions from many thousands of people, as sober thinkers about successful organizations have been preaching ever since Peter Drucker founded modern management science over a half-century ago, you don’t make an enterprise more effective by heaping rewards on a single individual.

You make enterprises more effective, more efficient, more productive by valuing employees, by investing in their training, by ensuring them the tools and information they need, by tapping the wisdom they’ve gained from their daily workplace experiences.

All of this, of course, can take considerable time. In fact, a responsible executive who sets out to create a truly effective enterprise may be long-retired by the time that organization is kicking on all cylinders.

Today’s top executives don’t have the patience to wait that long, not when windfall earnings await those executives who can somehow demonstrate that they’ve “performed.” So these executives don’t set about the serious work of building effective enterprises. They take shortcuts.

These executives don’t involve their workers. They squeeze them. They don’t make internal investments that can enhance enterprise productivity. They invest instead in mergers and acquisitions, quick-and-easy maneuvers that can pump up bottom lines in nothing flat. And if all else fails, they cook the books.

Robert Nardelli learned these all these trick shortcuts at the feet of Corporate America’s ultimate CEO all-star, Jack Welch, the legendary top executive at General Electric, the “manager of the century,” as Fortune magazine aw fit to dub him in 1999.

Nardelli’s G.E. connection made him irresistibly attractive to Home Depot’s board. Welch had “performed” brilliantly at General Electric, upping earnings, upping share price. Surely Nardelli, one of Welch’s most-prized executive lieutenants, would perform brilliantly, too, if Home Deport proffered upon him an appropriately superstar-sized CEO contract, complete with a nine-digit severance package.

And here’s the amazing part of the Nardelli story at Home Depot. He did “perform.” Home Depot sales doubled during his tenure, and company profits nearly doubled as well.

Home Deport’s share price, to be sure, did drop 6 percent on Nardelli’s watch. But even this decline, Nardelli’s defenders argued last week, ought not be considered damning. Most of that share price fall-off took place in Nardelli’s first two years. Since then, Home Depot shares have actually jumped at a faster rate than the shares of major U.S. companies tracked in the S & P 500 index.

How did Nardelli engineer this sterling “performance”? For starters, he cut corners. Home Depot had built customer confidence, over the years, by filling store aisles with expert employees who knew their fixer-upper stuff. Nardelli, as Business Week notes, replaced “thousands of full-time store workers with legions of part-timers.”

Overall, under Nardelli, store staffing levels fell, part of a massive Nardelli cost-cutting offensive that helped boost Home Depot profit margins by over 10 percent.

The cost-cutting, somewhat predictably, started creating as many problems as extra profit dollars. Consumers began complaining “there weren't enough workers in Home Depot's cavernous stores to help do-it-yourself customers.” By 2005, Business Week observes, Home Depot had “slipped to last among major U.S. retailers in the University of Michigan's annual American Consumer Satisfaction Index.”

Nardelli might have avoided all this angst in Home Depot’s aisles if he had bothered to tap some employee wisdom. But Nardelli went the opposite way. Early on in his tenure, he snatched away decision-making authority from local store managers who deal with customers every day, a move that would eventually have veteran execs exiting Home Depot in droves. Nardelli filled their slots with ex-G.E. executives with no retailing experience.

Despite this enterprise-wide bedlam, Home Depot sales totals did increase with Nardelli holding the Home Depot CEO reins. How did Novelli work this magic? He went on a corporate buy-up binge. Nardelli spent $7 billion acquiring nearly 40 companies. Their sales became his sales.

At General Electric, tricks like these worked share-price wonders for Bob Nardelli’s mentor, Jack Welch. But Nardelli, no matter what he did, couldn’t seem to get his Home Depot shares sizzling.

At one point, to jazz up interest in Home Depot shares, Nardelli even announced a $20.3 billion plan to buy back Home Depot shares off the open market and issue new dividends to shareholders. Still no share price sizzle.

Shareholders would soon be calling for Nardelli’s head. They couldn’t understand how someone who had “performed” so poorly with the compmay's share price could continue to be pulling in such ample rewards, $38.1 million in 2005 alone.

A CEO superstar who can’t deliver higher share prices, shareholders figured, cannot be a true superstar. And if Nardelli wasn’t turning out to be a superstar, Home Depot needed to find somebody who could fill that superstar role.

By late 2006, Nardelli’s buddies on the Home Depot board realized they desperately needed to appease their growing ranks of angry shareholders. Directors asked Nardelli to take a symbolic cut in salary. He refused. At that point, board members had no choice. They showed Nardelli the door.

All this, to Nardelli, must have seemed terribly unfair. He had played by America’s CEO rules, just like his mentor Jack, and still lost his job.  

Unfortunately, as working Americans know all too well, sometimes you play by the rules and lose anyway.

Maybe we need to change the rules.

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Sam Pizzigati edits Too Much, an online newsletter on excess and inequality.