January 8, 2007

Disarming Nardelli’s Defenders: Part 1

Alan Murray of the Wall Street Journal is the first of three somewhat-defenders of Home Depot’s recently-departed CEO Bob “$210 millon” Nardelli.

Murray missed the boat (requires subscription) on what Nardelli did and didn’t do while he was in charge:

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.

STOP, right there. It’s HOW Nardelli doubled HD’s earnings that kept the stock from going up. The market isn’t stupid, and has given the back of its hand to many of Nardelli’s actions, including but not limited to these:

  • His consolidation of purchasing and many other functions to Atlanta from several regions caused buyers to lose touch with their vendors.
  • The company’s insistence on using non-union facilities and holding “the China price” over every US vendor’s head (never mind that the Chinese heavily subsidize prices and “somehow” manage to ship goods over here for almost nothing) kept costs down, but also hurt quality and availability, which is really starting to show now that residential construction has slowed.
  • Firing knowledgeable and experienced people in favor of uninformed newbies and part-timers greatly reduced payroll and benefits costs, but has eventually driven customers away, and given the company a richly-deserved reputation for mediocre service.

The fact of the matter is that HD may still be the biggest, but almost everybody in America knows they’re not the best — not, even, close. Stock market valuations are based on the estimated present value of future earnings, and the market came to see that as long as Nardelli stuck around, those earnings were not going to continue to go up just because of more muscle-cutting.

But Murray isn’t alone. Two other writers got the inexplicable urge to defend Nardelli. Part 2, which follows immediately below if you are on the home page, will cover what the Wall Street Journal’s Editorial Board said.
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Previous Posts:
- Jan. 3, 2007 — Bleep You, Bob Nardelli. Bleeeeeeeeep You.
- July 11, 2006 — Home Depot wants to own a bank (1st item at link)
- June 14 — Three Months from Hero to Goat? (first item at link)
- June 12 — Home Depot’s Arrogant Annual Meeting (fourth item at link)

Disarming Nardelli’s Defenders: Part 2

Part 1 went into what the Wall Street Journal’s Alan Murray had to say in partial defense of recently-departed Bob “Mr. $210 Million” Nardelli of the Home Depot, noting several of Nardelli’s more important business mistakes.

Meanwhile, the Journal’s editorialists (requires subscription) attempted on Friday to defend Nardelli’s compensation:

….. someone needs to rebut the claim, which is almost as rampant as the Schadenfreude at his fall, that Mr. Nardelli is getting a $210 million “severance” package as a reward for having failed.

The truth is that nearly all of that $210 million isn’t severance at all but was part of Mr. Nardelli’s original employment contract. In other words, it was part of the package that the Home Depot board offered to lure him in the first place. Keep in mind that when he was hired in 2000 Mr. Nardelli had been a star at General Electric, one of the three executives competing to succeed Jack Welch as that company’s CEO. When he lost out to Jeff Immelt, Mr. Nardelli was a hot executive property in a world that isn’t exactly full of them.

….. This may be unpleasant for reporters and other egalitarians to hear, but it’s a fact of the marketplace. Public-company CEOs face the harshest scrutiny because their pay packages are disclosed, but some of the largest compensation deals these days are being offered by private-equity recruiters. We doubt Henry Kravis or the Carlyle Group are parting with big chunks of their equity because they don’t think their CEO hires are worth it.

Oh, spare me. The point isn’t that people like Nardelli don’t deserve to be paid grandly if they succeed. I for one don’t have much of a problem with ExxonMobil’s Lee Raymond walking away with $400 million at retirement, because ExxonMobil’s financial performance has been world-class — AND, as I understand it, if the company hadn’t done well during his tenure, his walkaway would have been relatively small.

The point is that HD, and every company hiring a CEO with guaranteed money, is betraying their public-company shareholders, who have every right to expect and demand pay-for-performance (PFP) ONLY. But for some reason, the institutional investors who control the boards and the shareholder voting aren’t insisting on this. They are flat-out wrong not to. Since the Journal brought up the private-equity people, how much do you want to bet that their CEO pay packages have a lot less guarantee, and a lot more PFP? Even if I’m wrong, at least there’s usually not the misalignment between the board and the shareholders in the private-equity situations that you see at public companies, because at private companies they’re essentially one and the same.

Any CEO with the right stuff wouldn’t hesitate to take on a generous offer if it’s contingent on performance. If they insist on anything but that beyond a few mil a year “to live on,” it should be a red flag that something is wrong with the potential CEO. Bob Nardelli is just the latest proof that company boards and the major institutional investors have not learned the hard lessons of Jill Barad, Carly Fiorina, Jac Nasser, and myriad other failures who walked away with unconscionable exit packages after taking their respective companies down.

A third somewhat-defender of Nardelli, or at least a publication that gave him more of a break than he deserved, is Business Week (or Biz Weak, as it’s referred to around here). Their coverage will be critiqued in Part 3, which starts immediately below if you’re on the home page.

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Previous Posts:
- Jan. 3, 2007 — Bleep You, Bob Nardelli. Bleeeeeeeeep You.
- July 11, 2006 — Home Depot wants to own a bank (1st item at link)
- June 14 — Three Months from Hero to Goat? (first item at link)
- June 12 — Home Depot’s Arrogant Annual Meeting (fourth item at link)

Disarming Nardelli’s Defenders: Part 3

Part 1 looked at Alan Murray’s specious partial defense of Bob (“Mr. $210 Million”) Nardelli on business grounds. Part 2 reviewed a Wall Street Journal editorial that ridiculously tried to defend his compensation.

This third part will look at the wayyyy too sympathetic treatment Business Week (Biz Weak as it’s called around here) gave Nardelli in its Jan. 15 issue cover story (free for now; HT NixGuy via e-mail) –

In the end it came down to the headstrong CEO’s refusal to accept even a symbolic reduction in his stock package. ….. Nardelli agreed to give up a guarantee that he would continue to receive a minimum $3 million bonus each year. But that’s as far as he would go. When board members asked him to more closely tie his future stock awards to shareholder gains, he refused, according to people familiar with the matter. Nardelli has complained for years that share price is the one measure of company performance that he can’t control.

“The board loved him and hates the way this ended up,” says a person familiar with the matter. But in a season of growing antipathy toward extravagantly paid executives, the directors felt they had no choice.

Substitute “control” in the first para of the excerpt with “manipulate.” Nardelli and his minions played every accounting, acquisition, and quick-fix angle they could to keep the numbers looking good, while letting the business deteriorate. The market is not stupid; HD’s poor share-price performance shows that investors have known for quite a while that the HD-Nardelli “success” story has not been genuine. The manipulation can make the numbers look good, and it takes some time for the chickens to come home to roost. In a company that is expanding like Home Depot has been, sometimes it can take quite a while. But the roosting is taking place now, with a vengeance:

During the current housing slowdown, however, the financials have eroded. In the third quarter of 2006, same-store sales at Home Depot’s 2,127 retail stores declined 5.1%. (vs. +5% a year earlier — Ed.) And with the stock price recently stuck at just over 40, roughly the same as when Nardelli arrived six years ago, he could no longer rely on other sterile metrics to assuage the quivering anger his arrogance provoked within every one of his key constituencies: employees, customers, and shareholders.

Here’s one thing I didn’t know about the infamous May 28, 2006 annual meeting (fourth item at link) that made so many shareholders’ blood boil:

Nardelli (handled) the meeting on his own. He did that in an abrupt 30 minutes. Shareholders were limited to just one question each. A digital clock timed them: One minute, then the microphone cut off.

And here’s a final point that Biz Weak almost got to, but in the end missed (or deliberately omitted):

Managers who weren’t hitting their numbers — “making plan” in Home Depot parlance — were routinely culled, their posts often filled with former executives from GE. That led some bitter insiders to dub the company “Home GEpot.” In fact, since 2001, 98% of Home Depot’s top 170 executives are new to their positions; 56% of the changes involved bringing new managers in from outside the company.

The fact of the matter, as I have been told, and as Biz Weak could easily have learned (and may have, but chose not to tell us — I don’t suppose having overrated GE ex-CEO Jack Welch on with his apparat-chick wife as weekly columnists had anything to do with it?), is that the incumbent senior managers could have walked on water and cured cancer, and it wouldn’t have mattered — Nardelli was going to get his people installed, no matter what. He should have made that clear from the very beginning and gotten on with the position changes instead of playing charades. Instead, his and his imported cronies’ dismissive and often humiliating treatment of hugely successful people set the stage for what he was going to do to the rest of the workforce, and ultimately to the chain’s customers. Good, bleeping, riddance.

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UPDATE: AP’s Harry Weber has a pretty even-handed look at the post-Nardelli challenges HD faces.

UDPATE 2: Here’s part of a sidebar story from Biz Weak:

Nardelli arrived at Home Depot full of bombast, standing up at one meeting to say “you guys don’t know how to run a f—ing business,” according to a former senior executive at Home Depot.

Yeah, they’d only built the Home Depot from nothing to $40 billion (1/2 of the current $80 billion) in 22 years. What has Bob Nardelli ever built from scratch? (crickets chirping) A sane board would have fired his a** on the spot.

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Previous Posts:
- Jan. 3, 2007 — Bleep You, Bob Nardelli. Bleeeeeeeeep You.
- July 11, 2006 — Home Depot wants to own a bank (1st item at link)
- June 14 — Three Months from Hero to Goat? (first item at link)
- June 12 — Home Depot’s Arrogant Annual Meeting (fourth item at link)

Quote of the Day: On Vista v. Mac OSX

Filed under: Business Moves,Quotes, Etc. of the Day — Tom @ 11:56 am

In advance of Apple’s apparent announcement that it will release Leopard (OSX 10.5) and maybe even give us a specific spring ship date, I don’t see how anyone can disagree with the following, regardless of which platform you prefer (or are forced to prefer, as the case may be):

In a nutshell, Vista vs. Mac OS X is Revolution vs. Evolution. It’s about a massive, long-delayed upgrade that has to account for almost 6 years of progress by its competitors, versus a well-executed strategy of regular updates. While updating an operating system is never something that can be called easy, Apple’s strategy has been the better one for keeping their OS on top of things, something Microsoft has admitted to in a roundabout way.

FTC Cracks Down on Major Underwriters of Talk Radio

Here’s what some might think of as an “unusual” question coming from BizzyBlog (that’s because they don’t know, or don’t remember, that not taking advantage of a person’s ignorance to get them into a bad deal is a fundamental BizzyBlog tenet) — Did you ever notice how much talk radio shows (this goes for conservative, liberal, sports, advice, you name it) is underwritten by advertisers of really marginal stuff?

What made me think of this is the fact that many providers of dubious vitamins and diet pills (e.g., CortiSlim, TrimSpa, and others) were on the receiving end of signficant FTC fines last week.

I think it’s legitimate to ask at what point the talkers have a responsibility (moral, not legal, unless the product itself is illegal) to screen the people who are willing to pay them for the priceless visibility and, to an extent, credibility that these shows provide the advertisers. Even if it’s not a direct endorsement, an association with a given show removes much of the resistance on the part of a lot of people who might ordinarily be on guard against getting taken.

Kelo-Property Rights Update: An Awful Case May Get Heard by the Supremes

Filed under: Economy,Taxes & Government — Tom @ 7:39 am

This second item (HT Russell’s Rhetoric) is difficult for me to present without violating the site’s PG-13 standard, but here it is:

Bart Didden wanted to put a CVS pharmacy on his property in Port Chester, N.Y. He even obtained approvals from the local planning board.

But because a portion of the CVS site was in a blighted redevelopment zone, Mr. Didden was told that planning board approval wasn’t enough. He’d have to reach an understanding with a private company that had been selected by Port Chester officials to control all construction inside the renewal zone.

The developer, Gregg Wasser of G&S Port Chester, told Didden he’d have to pay $800,000 or give G&S a 50 percent stake in the CVS business. If Didden refused, Mr. Wasser said, he would have Port Chester condemn and seize his property and instead of a CVS he’d put a Walgreens drugstore on the site.

Didden refused. The next day, the Village of Port Chester began legal proceedings to seize Didden’s land by eminent domain.

Lawyers for Didden took the matter to federal court. They even went to the FBI – all to no avail. Now they are asking the US Supreme Court to examine whether a private company can demand payment in exchange for refraining to seize private property in an urban renewal zone.

Property rights activists are hoping that a majority of the justices view Didden’s case as an opportunity to clarify a portion of the high court’s controversial decision in its last big eminent domain case, Kelo v. New London. In that June 2005 opinion, the court ruled 5-to-4 that local governments could seize private property and turn it over to a private developer when the action was part of an economic development project of benefit to the public.

So the bad news is that this is the kind of overarching tyranny those who opposed the Kelo ruling feared. The good news is that it could be reviewed by the Supreme Court, which, with the arrival of two new justices since the infamous June 2005 ruling, might decide to rule in a sweeping fashion, perhaps overturning Kelo. Another piece of good news is that the Institute for Justice is involved.

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UPDATE: Ross Kaminsky’s reax — “It simply can not be that a man’s home is his castle unless a government can make more money by giving it to someone else.”

Couldn’t Help But Notice (010807)

I’m STILL trying to talk myself out of having a daily “Bleep You” award. The idea would be that a person or group has done something so outrageous and offensive that you just want to go up and say “Bleep you” to them in the loudest, shrillest voice possible. The whole concept is so negative that I’m sure I’ll avoid doing it.

But stories like these definitely test my resolve:

A survey by researchers at Villanova University has found that 85 percent of Roman Catholic dioceses that responded had discovered embezzlement of church money in the last five years, with 11 percent reporting that more than $500,000 had been stolen.

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They probably think it’s a “swell” development — “Report: Specialized Skill Shortages to Swell IT Salaries.”

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William Jefferson (D-LA) needs money. Apparently the freezer is empty, and he either doesn’t know or doesn’t care (HT Hot Air) that you don’t ask for campaign money using official Congressional stationery.

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The always brilliant George Reisman contrasts obit headlines at the New York Times on the deaths of Pinochet, Mao, Stalin, and Lenin? Guess who looks worst?

A previous Reisman post punctures one of the most dangerous fables in existence:

It is the fable that those who are responsible for the attempt to socialize a country’s economic system, such as Chile’s, are well-intentioned and therefore deserve to be immune from bodily harm and certainly do not deserve ever to be killed.

….. all the writing, speaking, and peaceful protest in the world have no prospect of ever achieving socialism, because they will never persuade very many people to voluntarily donate their property to a socialist state. So at bottom, it must all be futile, unless at some point it erupts into violent action.

Such Marxists, such socialists, i.e., the serious, dedicated ones, are not at all saints or martyrs, but dangerous people with a criminal mentality.

Read the whole thing. “Inconvenient truths” indeed.

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“You Don’t Say” Dept. — “Falling Oil Prices Should Help Drivers

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Electronics Store Strength — Best Buy’s December sales were up a whopping 15%, and Circuit City’s 5.9%.

The Weather Channel Enters Advocacy Journalism

Zheesh — from Melanie Morgan:

Media Village reported that the move by The Weather Channel “is intended to establish a broader perspective on the weather category and, says Lucas, to move the brand from functional to emotional.”

Emotional weather forecasting?

The Weather Channel is launching a new website and broadband channel dedicated solely to global warming called “One Degree” and has a weekly program called “The Climate Code,” devoted almost entirely to liberal advocacy on climate matters.

I have always liked the channel that just drones on with repeats of the forecast much better anyway, because I know the wait for what I want to know will be minimal. Now the choice is even easier.

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Related: From ShopFloor.org — “The Union of Concerned Scientists is None of These…”

E-Voting: Can You Top This?

Filed under: Business Moves,Taxes & Government — Tom @ 6:06 am

From Techdirt, no comment necessary, printable comment impossible:

If you ever wondered how pathetic e-voting technology gets approved for use despite having fatal design flaws, wonder no longer. It appears that the laboratory tasked with testing most of the nation’s electronic voting systems has, shockingly, done a miserable job at it — resulting in Uncle Sam barring them from further machine approval until they clean up their act. Not only was Ciber Inc. not following proper quality-control procedures, the company couldn’t actually document that it was conducting all the required tests. Worse, the company was banned from further testing last summer, but we’re only finding out about their incompetence after the elections.

Freddie Mac …..

Filed under: Business Moves,Taxes & Government — Tom @ 6:01 am

….. is reporting big losses:

Home-mortgage financier Freddie Mac said Friday it expects to report losses for the third and fourth quarters of 2006, citing interest rates declines.

The government-sponsored company, emerging from a multibillion-dollar accounting scandal, forecast a loss of about $550 million for the third quarter, compared with a profit of $880 million in the third quarter of 2005. During the most recent July-September period, long-term interest rates declined by about half a percentage point.

One more GOP Congressional failure: not stripping away the “government-sponsored” characteristic of the company. Who do you think is on the hook if Fred continues to hemorrhage?

Positivity: Woman Rescued after Her Car Plunges into Swollen Creek

Filed under: Positivity — Tom @ 5:56 am

From Dayton:

Firefighters saved a woman whose car plunged into Wolf Creek on Monday morning, using a ladder to pluck her from the car’s roof after swift current floated her 75 feet downstream.

The accident occurred at 9:30 a.m. when a vehicle driven by Sharon Derricks, 53, of Dayton was westbound on Cornell Drive near Gettysburg Avenue.

Police Sgt. Bill Keller said the car was going too fast when it rounded a curve on the rain-slick road, flew off the side of the road, went over an embankment and jumped a culvert into the creek.

The water rose to the vehicle’s windows, and it floated away in the swollen waters, Keller said. The car, a Mercury Mystique, snagged and stopped, allowing Derricks to climb onto the roof.

Firefighters extended a ladder from the shoreline to the roof and walked Derricks to safety. A Dayton 5th District police officer photographed the rescue.

Derricks was not injured, although the car appears to be a loss.

“She lost the car, but she’s lucky to be alive,” Keller said. “It could have been a real disaster with how fast the river is going.”

Derricks said it was hard for her to believe her routine trip to buy cigarettes became a rescue.

“When I was coming around that bend, it happened so fast, I ended up in the water,” she said.

Fear hit her when the car plunged into the creek. “I was scared,” she said. “I can’t swim.”

As the current carried her along, she struggled to open the door enough to climb to the roof, she said.

“I’m blessed,” she said.