Market Place: A Warning Shot By Investors To Boards And Chiefs

Arrogance has never been attractive in a leader. Now, in corporate chief executives anyhow, it may be a career ender.

Demonstrators at the Home Depot annual meeting in May protested Robert L. Nardelli’s pay package.

Robert L. Nardelli, chief of Home Depot, right, visited employees at one of the company’s stores in Atlanta.

The surprising defenestration yesterday of Robert L. Nardelli, head of Home Depot and one of the nations most imperious and highly paid chief executives, was a victory for shareholders hoping to force corporate directors to be more accountable on the increasingly incendiary issue of executive pay.

Even though the board gave him $20 million that was not a part of his employment contract, perhaps smoothing his way out the door, the departure seemed to be a watershed. No longer can executives demand — and directors happily grant — contracts worth hundreds of millions of dollars without at least some shareholders uttering a peep.

Indeed, Mr. Nardellis resignation seems to indicate a rising fear among Home Depots directors that they would be subject to even more investor ire and personal embarrassment during the 2007 proxy season than they encountered in 2006, when Mr. Nardelli ran the annual shareholder meeting like a lord over his fief.

The departure of Nardelli is good news for shareholders, said Frederick E. Rowe Jr., a money manager in Dallas and president of Investors for Director Accountability. To borrow from Winston Churchill, this is the end of the beginning in the war to make directors accountable to the shareholder owners they represent. Mr. Nardellis fall from the executive firmament was fairly stunning. In just six years, he went from being one of the most sought-after chief executives, forged in the management crucible that is General Electric, to a top target of investors outraged by his $245 million in total pay over the last five years. That amount was seen as completely at odds with the dismal performance of Home Depot stock on his watch. Yesterday, the shares closed at $41.07, almost 6 percent lower than they were the day Mr. Nardelli arrived at Home Depot in December 2000.

C.E.O.s now will understand that theyve got to put their conscience and shareholder wealth well above their personal gain, said Jeffrey M. Cunningham, chairman and chief executive of Directorship, an online information service for board members. Boards create termination packages when no one even contemplates there is going to be a termination and they are extraordinarily rich. You are going to see all those plans rethought and rationalized for the new environment.

Shareholders of Home Depot have been smoldering for several years about the companys executive pay practices. Back when Mr. Nardelli arrived, for example, shareholders raised eyebrows after the company granted him a $10 million loan that it subsequently forgave. He has earned $20 million to $37 million each year since he joined the company.

In 2004, the company quietly changed the measurement it used to calculate long-term incentive pay for executives, upsetting investors when they learned of it later. Previously, the performance measure was based on a peer-group comparison, but the new measure involved only the companys growth in earnings per share. It was more easily reached because it was based solely on Home Depots performance not that of other companies.

To some shareholders, changing the performance target in the middle of a year seemed an attempt to ensure a payout despite a dismal performance.

We had a problem with that change, said Bess Joffe, manager for the Americas at Hermes Investment Management, a money management firm owned by the British Telecom Pension Scheme, the largest pension plan in Britain. After all, shareholders dont get to change the terms under which they bought their shares midstream.

But it was not until last year that Home Depots shareholders began to express serious disenchantment with the companys directors over Mr. Nardellis pay. Last March, about two months before Home Depots annual shareholder meeting, the board was named one of the 11 worst executive pay offenders by the Corporate Library, a corporate governance research firm. In the weeks leading up to the meeting, shareholder advisory firms recommended withholding votes from Home Depot directors to voice their dismay over the disconnect between performance and pay at the company.

But Mr. Nardellis biggest error, and the act that may have set his demise in motion, was his shocking decision to run the annual meeting last May alone, insisting that his directors stay away and limiting questions from the shareholders.

Ive never heard of anything like that happening before, where directors dont show up, Ms. Joffe said. Its the one time of year that shareholders have a right to be present and stand up and speak their mind and directors have to respond.

Stockholders were outraged. At least 30 percent of shareholders voting at the meeting withheld support from 10 of the companys directors. Some 32 percent withheld support from Mr. Nardelli. Almost 36 percent of those voting withheld support from Claudio X. Gonzalez, chairman and chief executive of Kimberly-Clarks Mexico operations and the director who had headed the compensation committee when the company changed its performance goals midstream.

Many shareholders also favored a proposal urging the Home Depot board to allow its investors to vote on an advisory basis to approve the companys compensation; 40 percent voted for the measure.

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