Dear Home Depot Board of Directors,

Elizabeth Nowicki —  4 January 2007

I write regarding the soon-to-be-vacant position of CEO of Home Depot.  As I understand it, the position pays well, little is demanded in terms of results, and the exit package is great.  I would like to be hired to fill the CEO position.  I realize Frank Blake has been tapped as the new CEO, but I would like to think of myself as someone who could fill Nardelli’s shoes for less money than Blake requires.

Alternatively, I would like to be nominated to serve on the Board of Directors of Home Depot.  Where else can I find a job where I actually do not need to show up?

Thank you for your attention to these matters.  I look forward to working with you (minimally), and I really look forward to collecting a large paycheck from you.

Best regards,

Elizabeth Nowicki, Radical Shareholder Primacist Qua Budding Potential (and cheap) CEO

[This is the second time I have reached out to the Home Depot BOD.  I am not optimistic that they will be blogging back.  Some day I would like to ask Lucien Bebchuk if he really believes the executive pay problem will resolve itself.]

4 responses to Dear Home Depot Board of Directors,

  1. 

    MH:

    HD stock was trading at more than 50 times earnings when Nardelli was hired. My point was not that HD’s current stock price doesn’t reflect the above-average financial performance the company has turned in during Nardelli’s tenure. Rather, it was that the stock price when Nardelli took over assumed earnings growth rates in the future that proved unsustainable.

    Were such earnings growth rates unsustainable because they were unrealistic under any circumstances or because Nardelli managed the company more poorly than another CEO would have? This is a question that reasonable people can debate. But it’s not reasonable to conclude, ipso facto, that Nardelli managed the company poorly because the stock price suffered under his watch.

    The lesson for aspiring CEOs: it’s easier to follow failure than to follow success. Just ask Mark Hurd.

  2. 

    I wonder how long it’ll be until Kate Litvak will post a snarky response. I’m looking forward to it.

  3. 

    SG,

    A lot of Nardelli supporters are trotting out the higher returns under his tenure, but the market isn’t buying it.

    I would give your argument more credence if we were looking at just a few year’s worth of performance, where divergence between accounting and share price results can occur for any number of reasons. But over five years, the odds of stock price results failing to accurately reflect underlying weaknesses not yet visible in accounting results starts to get small. This is especially true when looking at relative results, such as HD vs. Lowes, which underlying differences are visible to any shopper.

    It’s possible that, after five years, the market is still wrong about Nardelli. I wouldn’t have bet on that. (Actually, I didn’t. See http://papers.ssrn.com/sol3/papers.cfm?abstract_id=816825).

    Unfortunately, none of this argues in favor of Elizabeth’s feelings about shareholder supremacy or, even more lamentably, her candidacy.

  4. 
    Securities Guy 8 January 2007 at 7:58 am

    “As I understand it, the position pays well, little is demanded in terms of results, and the exit package is great.”

    A lot of smart people have been talking about how horrible Home Depot’s performance has been under Nardelli, but nobody ever seems to provide concrete specifics–apart from noting that the performance of HD’s stock price under Nardelli has been creamed by that of Lowes’.

    But CEOs don’t manage the stock price. They manage the business. In the long run, of course, the stock price should perform well if the business is run well, but it doesn’t necessarily follow that poor short-term stock price performance reflects poor management (or, for that matter, that great short-term stock price performance reflects superior management). This observation, of course, may have implications with respect to the efficacy of stock options as compensatory tools, but let’s put that issue aside for another day.

    The operative question is, how bad was Nardelli’s performance at running the business? This is obviously a complex question that can’t be answered in this space, but it’s worthwhile to point out a few facts regarding Home Depot’s financial performance from fiscal year 2004 to fiscal year 2006 (I selected this time period only because the f/s statements were readily available on Yahoo). During that time period, revenue increased from $64.8 billion to $81.5 billion, which represents a 12.1% compound annual growth rate. But did that growth come at the expense of margins? In a word: no. During the same time period, gross margins improved from 31.8% to 33.5%, operating margins improved from 10.6% to 11.5% and net margins improved from 6.6% to 7.1%.

    So, for the period from fiscal year 2004 to fiscal year 2006, Nardelli grew the top line at a rate more than double the rate of GDP growth and improved margins across the board in the process.

    Do these facts mean Nardelli was a great, or even good, CEO? Of course not. But they do suggest that those who would deride his performance as poor beg the question to the extent they don’t address address them.