Friday, January 05, 2007

Bob Nardelli's Fatal Flaw: Failing to Understand New Demands on CEOs

The firestorm around Bob Nardelli's pay finally culminated in his departure two days ago as head of Home Depot. Although Nardelli can't be faulted for negotiating the best deal possible for himself 6 years ago when he left GE, Alan Murray has the best analysis I've seen on why he does deserve the blame for having a political tin ear in failing to adapt to the new post-Enron world since then. His failure was avoidable. Yet, for some executives, when criticism comes, they dig in their heels.

Many comparisons have been made to Steve Jobs and Bob Nardelli in the wake of the Home Depot news, asking why Jobs has avoided the same criticisms as Nardelli. While I don't think this is an apples-to-apples comparison, I think Jobs has had two things going for him:

1) Technology companies have, to date, come under less governance scrutiny than other industries (although this will likely change shortly) and;

2) Jobs has done a fantastic job at addressing any criticisms of the business or himself head on. Nardelli was extremely ineffective at dealing with criticism -- often coming across as angry and hurt, which clouded his message.

Yet, this is a cautionary tale for all CEOs. In this new world, authenticity and directness is a must in dealing with problems and criticisms as they come up. Putting numbers on the board is not enough. You must effectively manage your stakeholders.

Here's the full text of Alan Murray's article with the original link here:

January 4, 2007; Page A1

Robert Nardelli's demise as chief executive of Home Depot resulted, in part, from his failure to understand how profoundly the job of CEO has changed in recent years.

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.


Did Home Depot Chief Executive Bob Nardelli deserve to lose his job? And if so, why? Join the discussion. Alan Murray will read your thoughts and post replies.

What Mr. Nardelli missed, however, is that in the post-Enron world, CEOs have been forced to respond to a widening array of shareholder advocates, hedge funds, private-equity deal makers, legislators, regulators, attorneys general, nongovernmental organizations and countless others who want a say in how public companies manage their affairs. Today's CEO, in effect, has to play the role of a politician, answering to varied constituents. And it's in that role that Mr. Nardelli failed most spectacularly.

There were plenty of other reasons a board might want to dump him. He provided no return to shareholders. He pursued a controversial strategy of expanding into the low-margin wholesale business. And he accepted an exorbitant pay package.

But other CEOs have survived similar criticisms. Mr. Nardelli's failure to do so reflects, at least in part, his inability to adapt to a new era of greater scrutiny.

"I used to play football," he said when asked about the challenges of being a public company CEO today. "In football, you always know the score. Now, it's like we are ice-skating, and you've got a bunch of judges on the sideline shouting out the scores."

As failures go, Mr. Nardelli's isn't half bad. He walked away with an exit package of $210 million -- and that figure was calculated before announcement of his resignation boosted the potential value of his stock options yesterday.

Much of the package is due to the rich employment contract he negotiated with the Home Depot board before leaving General Electric Co., where he was one of three finalists to succeed Jack Welch. Mr. Welch convinced his board to give all three finalists large batches of stock options, telling board members they would have to make good on only one man's options, one director says. Upon leaving GE, the board was told, the two runners-up likely would use those awards to negotiate pay at their next jobs -- which is exactly what Mr. Nardelli and James McNerney, who is now CEO of Boeing, did.

Yet Mr. Nardelli's extravagant pay became his biggest problem. It prompted an attack from shareholder advocates like Richard Ferlauto, who runs investment policy for the American Federation of State, County and Municipal Employees, one of the nation's largest labor unions.

Political Error

Mr. Ferlauto helped organize protests at Home Depot's annual meeting last year, prompting Mr. Nardelli to commit his gravest political error: Aware of the protests to come, he convinced other board members to stay away from the meeting, and restricted shareholder questions to one minute. That sealed his public image as a callous and entrenched corporate leader, and even prompted a call from his former boss, Mr. Welch.

In response, Mr. Nardelli belatedly tried to become a politician. He went on a "listening" tour to visit 25 of the company's largest shareholders, and he granted interviews to a number of television and newspaper reporters. He apologized for his ham-handed handling of the annual meeting.

But he didn't apologize for his pay package. And he didn't reduce it.

That left him vulnerable last month when an investment firm, Relational Investors LLC, announced it was mounting a proxy battle to put new directors on the Home Depot board. Ralph Whitworth, who heads Relational, said his complaint had less to do with Mr. Nardelli's pay than his strategy. Mr. Whitworth believes Home Depot erred in expanding into the contractor-supply business. But Mr. Nardelli's weakened standing greatly increased the odds that Mr. Whitworth might win his proxy battle. So Home Depot's directors acted first.

Raised in a blue-collar family and educated in public schools, Mr. Nardelli was upset when informed by Mr. Welch that he had lost out to Ivy Leaguer Jeffrey Immelt for the top job at GE. He believed he had been a better performer, building revenue at the company's power-turbine business from $770 million in 1995 to $2.8 billion in 2000.

But subsequent events have confirmed the wisdom of Mr. Welch's choice. Like Mr. Nardelli, Mr. Immelt has struggled with a languishing stock price. But in addition to generating good operating results, Mr. Immelt has played the CEO's political role with great skill. He has tied his own pay closely to performance. He has eschewed the kind of employment contract that is now rewarding Mr. Nardelli. He has reached out to a wide range of constituent groups. And he has adopted a number of popular initiatives, such as his "eco-imagination" program which, among other things, includes an effort to reduce GE's emissions of greenhouse gases.

As a result, Mr. Immelt wins awards, graces magazine covers, and is widely praised as one of America's best CEOs.

Learned the Lessons

Procter & Gamble Co.'s A.G. Lafley is another CEO who has learned the lessons of the post-Enron era. Instead of catering just to shareholders, he makes a broad appeal to "stakeholders" -- a group that, by his definition, includes shareholders, employees, customers, consumers and the communities in which all these people live. When I asked him last year whether that makes his job sound like that of a global politician, he responded: "Like it or not, we are in a global political world. I've concluded I'm in it anyway, and I might as well deal with it anyway."

No one exemplifies the new CEO more than Wal-Mart Chief Executive Lee Scott. When Mr. Scott found his company under attack by a well-organized political campaign, he responded in kind. He reached out to his opponents, took polls of opinion leaders and hired political consultants. He also embraced environmentally friendly policies, improved employee health-care coverage and began advocating policies like an increase in the minimum wage.

Mr. Scott insists the environmental positions he's taken and the other policies he's adopted are all good for the company's bottom line. In an interview in his office in Bentonville, Ark., last year, Mr. Scott said: "The generation of people I work with -- like A.G. Lafley, who has been here in this office in the last two months, or Jeff Immelt, who has been in this office in the last three weeks -- feel there is a business reason to do this."

Taking the political route may be necessary to success in the post-Enron world, but it, alone, is not sufficient. Citigroup CEO Charles Prince has tried to appease his critics by making ethics a hallmark of his time at the top, but that hasn't helped the bank's lagging performance or silenced its critics.

In any event, it's clear Mr. Nardelli never bought into the approach favored by his colleagues like Mr. Immelt, Mr. Lafley, and Mr. Scott. Instead, he fretted that the corporate system is under attack.

"I am very concerned with the future of business and the capitalistic system in this country," he said last fall, expressing his concern about the repeated attacks on public companies. "Somebody has yelled fire in the auditorium. If you stand back, you've got to say that we as a country should share a growing concern as it relates to the capitalist system. The things that got us to where we are are under attack."

One consequence of the increased pressures on public companies and their CEOs, Mr. Nardelli noted, is a rush of both money and talent into private equity, which is shielded from many pressures that affect public companies. "Not everyone can go private," he said.

Not everyone, but how about Mr. Nardelli? He wasn't giving interviews or any hint of his plans yesterday. But his strong background in operational management, his distaste for the public spotlight and his hefty severance check in need of investing may make him the perfect candidate for a private-equity firm.

Sphere: Related Content