Keyword: Home Depot

It’s annual report season again, and with it comes the flood of plastic wrapped envelopes to our mailbox that carry the once-a-year bounty of glossy, over-polished, and saccharin manifestos from publicly traded firms.  This is “the art of the annual report”.

I look forward to this flood, it offers insights that are hard to get any other way.  Inside these envelopes, you get an unmodified view of the company.  Certainly it is not an objective view, yet that is what makes it such a clear view.

You can tell volumes about companies and their culture by what they choose to portray in their annual report.  Once a year, companies get a chance to tell the world who they are, what they stand for, and what they are trying to accomplish.  And they can do it in a forum that is completely unadulterated by outside forces like the media or their critics.

Yes, of course, the government and tradition mandate that some information be included.  And since most companies include their proxy information in the same mailing, included are some required documents to support their voting process.  But if you take the time to look carefully at the whole package, the insights are many.

First and foremost, the report itself is a gold mine of company culture information.  Because most companies try so hard to make the report a show piece, it is quite telling to see how they present it.  There are some very interesting things to look at:

• Is it a very polished, glossy document (over-polished)?  Or a businesslike and direct report (not professional enough)?
• Does it feature pictures of just the CEO (are they an egotist)?  Or the executive staff (diverse)?  Or the products (hiding the leadership team)?  Or the employees (trying too hard to appear egalitarian)?
• Does it overflow with flowery language about “the world today” and “XYZ Corp.’s place in it” (taking themselves a little too seriously)?  Does it have a sense of humor (or even too much) Or is it just a dry recounting of economics (oh, lighten up)?
• Is it written in the form of a letter from the leader(s) or with the polish of a marketing piece?
• Who is that target audience?  Shareholders?  Employees?  Competitors?
• How much did it cost to produce?  Those are your shareholder dollars you’re holding…
• Most importantly, what does it say about the vision for the company?  What are they trying to accomplish?  Is it clear, obvious, obtainable and yet still a stretch?

These are all interesting questions, and they tell you a great deal about the culture.  I like to read it wearing several hats.  What would this mean to me if I worked there?  Is this company just a vehicle to express the ego of the CEO?  What would I think if I were their competition?

And then there are the wonderful proxy materials.  Here’s where you get a lot of interesting stuff.  In here are all the gory details of executive compensation, perks, and other dark secrets they try to bury in pages of dense text on toilet-paper-thin paper.  It’s a gold mine of information about the company and its leadership.

The proxy materials are where I (and most of the world) found out about Robert Nardelli (formerly CEO of Home Depot) and his truly absurd contract and pay package.  I wrote about it here, and since they were required to quote essentially the whole contract, it was great fun to read.  This info proved to be a key part of Nardelli’s downfall.  But you had to read the annual report to see it.

So I encourage you to welcome this bounty of “annual report art”.  Next, I’ll talk about my favorite one of them, but in the meantime, don’t just toss them in the recycle bin.  Plumb each and every one for the hidden gems that lay within.

I have written more than a little about Home Depot and its CEO Bob Nardelli.  From their top-heavy “Culture Change Offensive” (which I found offensive here), and the silly army mentality Nardelli tried to force down everyone’s throat (and got stuck in my craw here), to Bob’s stunning pay package (which rubbed me raw here), and even his autocratic shareholders meeting (which I recounted here) Nardelli has provided plenty of fodder for these pages.  Well, it seems that the company and the board have finally come to their senses.

ATLANTA, Jan 03, 2007 — The Board of Directors of The Home Depot and Bob Nardelli announced today that they have mutually agreed that Nardelli would leave his position as The Home Depot’s chairman, president & CEO and as a Director effective January 2, 2007.

In other words: “get out…  like yesterday”.  Clearly the company simply tired of all the bluster and noise that went along with Bob’s “Army Mentality”, and the corporate results have been lackluster since he arrived.  And as I said in this piece, the mood in the stores is rancid.  It is a wonderful sign that the company saw the insidious effect Nardelli had, and chose to put an end to it.

But, the company didn’t completely come to their senses.  They continued to give Nardelli completely ridiculous payouts even as he exits in disgrace:

Nardelli and the Company have agreed in principle to the terms of a separation agreement which would provide for payment of the amounts he is entitled to receive under his pre-existing employment contract entered into in 2000.  Under this agreement, Nardelli will receive consideration currently valued at approximately $210 million (including amounts which have previously been earned or vested).

Holy Cow!  Even in the face of amazingly generous pay packages to CEOs, this one is a stunner.  This means that Nardelli has received, since becoming CEO of Home Depot, a whopping $400+ million in compensation!  During the same time, HD (the stock) has gone from a high of around $70 to the mid-30s.

And worse, much of this is clearly a golden handshake, or simply “go away” money.  It is optional, the board didn’t have to agree to it, but just wanted him out so badly they were willing to pay almost anything to have him go away:

This consideration will include a cash severance payment of $20 million, the acceleration of unvested deferred stock awards currently valued at approximately $77 million and unvested options with an intrinsic value of approximately $7 million, the payment of earned bonuses and long-term incentive awards of approximately $9 million, the payment of account balances under the Company’s 401(k) plan and other benefit programs currently valued at approximately $2 million, the payment of previously earned and vested deferred shares with an approximate value of $44 million, the payment of the present value of retirement benefits currently valued at approximately $32 million and the payment of $18 million for other entitlements under his contract which will be paid over a four year period and will be forfeited if he does not honor his contractual obligations.

The bulk of this is sickening…  I’m sure there were clauses in his contract that would have allowed the company to fight most of this.  I haven’t seen it, but I’d be shocked if it was all carved in stone.  I’m betting they didn’t have to accelerate his unvested and/or deferred options, they didn’t have to buy out his retirement plans, they just did it to get rid of him.

While I applaud Home Depot for ridding themselves of this jerk, I wish they had the backbone not only to fire him, but to not pay his blackmail too.  But I’m sure the company is better off without him.  The markets surely agree, the stock is up over 3% today alone on the news.

As if all the other things about HD weren’t enough, Bob Nardelli of Home Depot ruled with an iron fist over their annual meeting the other day. Reports are that he controlled all the discussion, allowed no dissent, and brushed off concerns over his massive pay package.

Perhaps most shocking however is that not a single member of the board (or at least the compensation committee) showed up.  That’s right, one of the most over-paid CEO’s in America holds an annual meeting and no member of the paymasters decides it’s worth their time to see what the owners think.  Sad.

Apparently it went so poorly that HD’s PR team issued a release saying that the company “apologizes if the absence of the board offended anyone” (or something like that).  I guess even the most strident generals realize when they get caught with their junta down.

Well Bob, it worked.  This great PR offensive (see these posts about it here and here) worked wonders, the board bought all this stuff, and they rewarded you handsomely.  In the last five years, you’ve received some $200 million in salary, bonus, stock, stock options, and other perks.  In 2005 alone, you got a stunning $38.1 million in total compensation.  Nicely done.

But in case you missed it, the Home Depot board has guaranteed Bob Nardelli a “bonus” of $3million.  Read about it in BusinessWeek online.

one lucrative element of the package is not as well-known: Nardelli’s guaranteed minimum annual bonus.  Of course, many CEOs are eligible for a bonus each year, usually if they hit certain financial and operating targets.  Others have more limited guarantees, such as an assured payout in the first year of service.  But Nardelli’s employment contract shows that $3 million of his annual bonus, defined as the “target amount,” is a sure thing. “For each year during the period of employment,” says the agreement, “the executive will receive an annual bonus of no less than the full target amount.”  Last year, Nardelli earned a total bonus of $7 million.

Guaranteed bonus?  Isn’t that an oxymoron?  Aren’t bonuses supposed to be a reward for good work you did, not compensation for work you are going to do?

And as writer Brian Grow notes in that article, it’s not like he’s returned anything to shareholders.

To the ire of many investors, however, Home Depot’s total return to shareholders, a key benchmark of corporate performance, is down 13%, according to Institutional Shareholder Services (ISS).

Gee, Bob, hope you share some of it with the PR team.

Not long after Home Depot’s Bob Nardelli unleashed his silly PR offensive designed to get him more money (see the post here), he managed to get someone to whip up an article designed to show he reads management articles too.

The Harvard Business Review’s Ram Charan wrote a puff piece on “Home Depot’s Blueprint for Culture Change” in the April 2006 issue.  I’d love to give you a link to the article, but the HBR is subscription only content (you can, however buy this article for $6 here).

This article is PR work at it’s finest.  Sure the HBR requires there to be some real content, and even perhaps some kind of learning about how to do thou likewise.  But the miracle here is the stench of spin.  You can smell it in the lead in:

Deep, lasting culture change requires an integrated approach that remodels a company’s social systems.  The leadership team of Home Depot employed a remarkable set of tools to do that.

The remarkable set of tools was “boot camp”.  See my blog entry on that here.

But, to be fair there are some really interesting ideas in the article about how to catalog change, and monitor what is happening.  The problem is, it didn’t work at HD.  And I know why.

This culture change didn’t “take” because it didn’t go deep enough.  It was decided by the top 17 executives at an offsite meeting.  It was rolled out in a “huge event” to another 1,800 more.  But Home Depot has over 345,000 employees in over 2,000 stores.  That means fewer than one-half of 1% of the employees even got briefed on this big change.  And 0.005% of the employees had input.  No wonder they hate the required Monday morning “BobCasts”.

Bob, sir, forgive me, but even in the military you have to explain things to people, get their buy-in, heck even consider that private’s opinion.  This fancy “culture change” ain’t working, and no amount of force-feeding’s going to make it work.  But you don’t care, you’re off to the bank.

PS - The author, Ram is to be forgiven — he was the consultant working on the project for HD.  He’s just trying to get a little PR for himself.  You can be sure he didn’t get anything like Bob’s pay package…

Back in March Home Depot unleashed what could only be called a PR offensive [ed: pun intended].  There was this great BusinessWeek cover story, a couple of other minor articles and mentions, and then a Harvard Business Review piece, all about how Bob Nardelli was wonderful.  Heck, the BusinessWeek article was even titled:

Renovating Home Depot
Skip the touchy-feely stuff.  The big-box store is thriving under CEP Bob Nardelli’s military-style rule.

But the problem is, it’s a PR crock.  By any measure Home Depot is not thriving, the people there hate it, and it shows — all the way through to the check-out line.

Sure the article(s) talk all big about ex-marines, and “tough under fire”, and all that junk.  But the point of fact is the retailer is not the military, people don’t like being treated like that, and the stuff doesn’t work.

Walked into a Home Depot lately?  Tried to find help?  Tried to find someone who cared?  Tried to find something you went in wanting to buy?  It’s a nightmare.

Just for fun, pull an orange apron aside and ask them what they think of the place.  But only if you have an hour to spare.  They will rant all over you, and endlessly — like they have nothing better to do.  Ouch.  And the BW article even alludes to this: “Some describe a demoralized staff and say a “culture of fear” is causing customer service to wane.”  Executive turnover is rampant.  And Bob’s pay package can’t help (see this entry).

Customers see it too:

The University of Michigan’s annual American Customer Satisfaction Index, released on Feb. 21, shows Home Depot slipped to dead last among major U.S. retailers.  With a score of 67, down from 73 in 2004, Home Depot scored 11 points behind Lowe’s and three points lower than much-maligned Kmart.

And perhaps just as importantly, it doesn’t work in the market, either.  HD’s results are pitiful: Since the day before Nardelli’s arrival on Dec. 14, 2000, Lowe’s split-adjusted share price has soared 210%.  Home Depot’s is down 7%

So, tell me again how great this military stuff is, Bob?