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Created: June 2, 2006
Latest Update: June 2, 2006

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Index of Topics on Site Backup of The Board Wore Chicken Suits
By Joe Nocera
SOURCE: New York TimesSource Copyright.
Included here under Fair Use Doctrine for teaching purposes.
This backup copy is to be used only if the original site on the Web is not accessible. It is meant to preserve the document for teaching purposes, when sometimes the URLS are changed when sites are updated, or sites are eliminated. Please be certain to give credit if you refer to this to the original URL: Original URL, consulted: June 2, 2006.

May 27, 2006
The Board Wore Chicken Suits

A SHOWDOWN could occur at the annual meeting tomorrow as firms that advise large shareholders and activist groups are urging shareholders to withhold votes from several directors." So wrote Julie Creswell on Wednesday, in her detailed front-page article in The New York Times about the compensation package of Robert L. Nardelli, the chief executive of Home Depot.

This was a showdown I didn't want to miss. Mr. Nardelli, you see, has become this year's version of Mr. Overpaid C.E.O. He's earned this status, in part, by the sheer sum of money his board has awarded him in the five years since he was recruited from General Electric to take over Home Depot: $245 million, including $37.1 million just this last year. At the same time, Home Depot's stock has fallen 12 percent, while shares of its chief competitor, Lowe's, have risen 173 percent. You've heard of pay for performance? This is the classic definition of pay for pulse.

But as Ms. Creswell's article made clear, these facts barely begin to get at the richer story that is the Home Depot scandale. There's the lead director, Kenneth G. Langone, who's never met a chief executive he doesn't want to overpay. The cozy board. The other overpaid chief executives who sit on the Home Depot compensation committee, who have every incentive to keep lining Mr. Nardelli's pockets because his good fortune will rebound to them as well. Mr. Nardelli's compensation illustrates precisely what is so offensive about C.E.O. pay: it's a rigged game. Heads I win, tails you lose.

So I hopped on a train Wednesday night, and headed to Wilmington, Del., where the Home Depot meeting was being held. In all honesty, I cannot characterize what I saw the next day as a showdown. But it certainly was a show.

9:15 A.M.: I see a man in a chicken suit holding a sign. He's part a small group protesting Mr. Nardelli's pay package on behalf of the American Federation of State, County and Municipal Workers. Unions like the A.F.L.-C.I.O., the United Brotherhood of Carpenters and government workers union have taken aim at executive pay in recent years, and have gotten shareholder proposals on the proxies at many companies. This year, the government workers' union has put forward a proposal calling for the Home Depot board to allow shareholders to hold an advisory vote on the compensation committee's report. The union is also among those urging shareholder to withhold votes from the directors as a way of protesting Mr. Nardelli's pay.

"Home Depot is a classic case of a board being nonresponsive to shareholders," says Richard Ferlauto, who is the union's director of pension investment policy. As I walk into the hotel where the meeting is taking place, I can hear the protesters chanting, "Hey Bob, why are you chicken/while the stock price takes a lickin'?"

9:45 A.M.: The ballroom doors finally open and a few shareholders and reporters trickle in. But where are all the Home Depot people? The corporate officers? The middle managers? Maybe a few local store managers who might be asked to stand up and take a bow? Nowhere to be seen. There are a few public relations people here and there, helpfully explaining why Mr. Nardelli really, really, really deserves all that money, but otherwise what I mainly see are big, strong men, some wearing Home Depot aprons, who look as if they could be bouncers at a rowdy club. Here's something else strange. In the front of the room, facing the audience, I see two large digital timers. It also seems odd that there is only one seat on each side of the podium. Where are the board members going to sit?

10 A.M.: Mr. Nardelli takes the podium, and the meeting is under way. He is accompanied by two people who sit in the seats next to him and no one else. Suddenly, we all understand what's going on: the board isn't coming to the annual meeting! In all my years as a business reporter, I have never seen that before. As Charles Elson, the corporate governance expert at the University of Delaware, will tell me the next morning: "Your one obligation as a director is to show up at the annual meeting. The fact that the directors didn't show up is disgusting."

The first item on the agenda, Mr. Nardelli says, is the election of directors. He invites comments from shareholders. "Questions are limited to one minute and one person," he adds. Sure enough, when the first person gets up to speak, the timer starts counting down. The timer is another new one for me.

"I have a question about board independence and conflicts," says the first questioner and then proceeds to rattle off a few of the conflicts that afflict the Home Depot board. "What steps will the board take to address these conflicts?" he asks.

"This is not the forum in which to address these comments," Mr. Nardelli replies.

Mr. Ferlauto steps to the microphone. Again, the timer starts counting down. "If the candidates are up for election, can we be introduced to them?" he asks.

"They are not in attendance today," Mr. Nardelli says.

I think it is absolutely outrageous that the board is not here," Mr. Ferlauto retorts. "The board is too chicken to face the shareholders." As he speaks, the timer hits zero and the microphone is shut down. Mr. Ferlauto continues speaking. Two of those big burly men take a step toward him. He sits down.

10:10 A.M. : The meeting moves to its next phase the pleadings on behalf of the shareholder proposals. There are eight in all. This time, the speakers are allowed all of three minutes to make their case.

Mr. Ferlauto jumps up to discuss his union's proposal that shareholders be allowed an advisory vote on executive pay. He goes through the litany of Mr. Nardelli's compensation abuses: the guaranteed bonuses, the $10 million loan that costs the shareholders $21 million because the company pays the tax on it, and so on. When he has finished, Mr. Nardelli replies matter-of-factly, "The board recommends you reject this proposal."

Two speakers later, a shareholder named Sam Yake stands up to talk about his proposal to have Home Depot separate the job of chief executive and chairman of the board, a practice that many companies have instituted over the last few years. But Mr. Yake is so mad he doesn't really want to talk about his proposal. "I love Home Depot," he says. "I came here wanting to buy more stock. But I am totally offended by the way you are conducting this meeting. Are we even going to have an opportunity to ask questions?"

Mr. Nardelli refuses to answer the question about asking questions. "If this is the way you are conducting this meeting, I can see why G.E. didn't pick you." He storms off.

"The board recommends you reject this proposal," Mr. Nardelli says.

Next up: A woman from the United Brotherhood of Carpenters, which has offered a nonbinding proposal calling for Home Depot to require its directors to get a majority of the shareholder votes to remain on the board. Currently, directors who run unopposed as they invariably do could have 99 percent of the votes withheld and still be re-elected as a director. This change to majority vote is also something many companies have begun to adopt.

"Thank you, Catherine," Mr. Nardelli says when she finishes. "The board recommends that you reject this proposal."

And so it goes. "This is really disturbing," says one man, referring to the way Mr. Nardelli is conducting the meeting. "It really reflects what we have been reading in the press about the style of this board." The room bursts into applause.

"Thank you," Mr. Nardelli says. "The board recommends that you reject this proposal."

Then, the proposals finished, Mr. Nardelli asks the bouncers to hand out voting cards to anyone who wants to vote. But of course the overwhelming majority of shareholders have already voted and Mr. Nardelli can't even be bothered to wait for those in the room to hand in their votes.

"It appears that each of the directors has been selected for a one-year term," he says. "A majority of shareholders have supported management recommendations" except, he quickly adds, No. 6, the one concerning majority vote. "Ladies and gentlemen, that concludes our meeting." And just like that, he's gone.

10:37 A.M. I look down at my watch and I suddenly realize, Mr. Nardelli did not even tell his shareholders what the vote totals were, nor did he divulge how well the shareholder proposals did. It's mind-boggling. As for the proposal about majority vote the one the company actually lost it seems pretty unlikely that Mr. Nardelli and the rest of the board will abide by the wishes of the company's shareholders. If there is one thing the meeting proved, it is that they don't much care what their shareholders think.

Afterward, the words on people's mouths are "appalling," "disgraceful" and "arrogant." I would add one more: contemptuous. I'm sure there are plenty of boards and chief executives who have contempt for their shareholders, but most of them are at least smart enough to keep it to themselves. On Thursday morning, in Wilmington, Del., Mr. Nardelli and the Home Depot board let the world know exactly how it feels about the people for whom they are supposed to work.

One other thing: late yesterday, Home Depot issued a statement that said in part, "While we understand that the approach we took to the annual meeting was a departure from past practice, it should in no way be construed as either a lack of respect for our shareholders or a lessening of our commitment to high standards of corporate governance and transparency."

Apparently, Mr. Nardelli and the Home Depot board think their shareholders are stupid, too.

Copyright 2006 The New York Times Company

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