Tuesday, January 09, 2007

It Wasn’t Nardelli’s Fault

So how can we make sense of the fact that Bob Nardelli—who doubled Home Depot’s revenues and earnings during his six- year tenure as CEO—was fired by the Board, and then given a $210 million goodbye kiss as he went out the door? There’s actually a rational explanation for this seemingly bizarre set of facts, but you wouldn’t know it from reading most analyses. Most explanations of Nardelli’s abrupt exit revolve around his leadership persona (imperial, distant, controlling) and his annual compensation package (obscenely large and seemingly uncorrelated to Home Depot’s stubbornly flat market cap during his reign). Undoubtedly these are important considerations, but they’re not sufficient explanations. After all, when it comes to critical financial metrics like revenues and earnings, Nardelli did well. And most of that $200 million severance package was built into his employment contract six years ago, so nobody should have been surprised. Here’s my take on what happened. From the very beginning, Home Depot’s Board of Directors screwed up big-time. First of all, Nardelli should never have been hired, regardless of the pay package. The Board got mesmerized by his stellar performance at GE, which was irrelevant. Nardelli ran GE Power Systems. He was a nuts and bolts manufacturing guy, an operations and processes guy, a B2B (business-to-business) guy who understood institutional customers like utility plants and factories. Home Depot is a retailer with customers like individual homeowners and small contractors. What’s retailing about? Ask the best retailers, like Bob Ulrich at Target, or Howard Schultz at Starbucks, or Hal Rosenbluth at the old Rosenbluth International travel empire. They’ll talk about things like customer service, design and colors, cool products, the look and feel of the physical facilities, and a vision of the intangibly great experience that the customer can always count on. They’ll go further and talk about highly-trained and committed employees, a culture that emphasizes innovative care on behalf of the customer, and information systems that permit faster and more personalized responses to the customer. Nardelli understood next to zero about that. He understood centralized controls to squeeze out low-hanging fruit of excess costs, he understood corporate-imposed systems like Six Sigma to improve quality and operational efficiencies, he understood high-level strategic planning to enter new markets like building supplies even as Home Depot’s big core business was fraying. Operational efficiency and cost reduction are excellent goals in any business, but the soul of retailing (and for that matter, most businesses) is about things like service, design, experiences, employees, unique vision and such. Under Nardelli, the health of all of those factors deteriorated, which is why same-store sales suffered, why so many customers defected, why so many front-line people were alienated, why many of the best managers left, and why competitors like Loew’s were able to capitalize at Home Depot’s expense. And that’s why Home Depot’s stock value stayed stagnant (in fact, declined) over Nardelli’s tenure, even as the S & P 500 rose 16% during that same time period. It’s not because he was autocratic or hard-ass; great leaders like Jack Welch and Steve Jobs have occasionally been described using those same labels, and besides, investors don’t care all that much about leaders’ personas. Investors are interested in one thing: future performance, and with cold, dispassionate eyes, they reckoned that even though Nardelli was able to squeeze out some laudable hard financials today, his persistent failure on the critical “soft” variables was setting up Home Depot for a big fall in the near future. I don’t blame Nardelli. He did what he’s capable of doing and what he’s always done. You don’t hire a Hall-of-Fame defensive lineman and ask him to dance ballet. I blame the board. They hired the wrong person, and compounded their error by offering him a ridiculous contract. Nardelli will now cry all the way to the bank, and then he’ll most likely supplement his golf outings with a lucrative position at a private equity firm which will properly channel his operational, distribution and manufacturing skills to the right venues. And hopefully, in seeking a new CEO, the Home Depot board won’t blow it a second time.

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