Relational Investors and Home Depot

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Professor Jay W. Lorsch and Research Associate Kaitlyn A. Simpson prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2009 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. JAY W. LORSCH

Relational Investors and Home Depot (A)
We see ourselves as stewards of our clients’ shareholdings. Proper stewardship requires active engagement of corporate leadership to spur improved performance.
— Ralph V. Whitworth, Principal, Relational Investors, LLC, San Diego, CA In the summer of 2006, Ralph Whitworth, principal of Relational Investors, was considering investing in Home Depot. The stock price hovered around $35. Whitworth had been watching Home Depot for a while because he felt it was underperforming and had potential for improvement. Moreover, the recent activities of the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) Office of Investment related to Home Depot really focused his attention on the company.

The AFL-CIO Office of Investment had decided to concentrate its resources on several companies who seemed to have excess CEO pay, and chose to focus on Home Depot as a case study in compensation abuse. Those in the Office of Investment believed that CEO Bob Nardelli had received exorbitant pay—total compensation of $245 million from 2001 to 2006—especially in light of the 12% decline in the stock price during the same period.1 The AFL-CIO believed that an independent board would not have granted such compensation at a time when shareholders were doing poorly. After it became clear to the AFL-CIO representatives that the board would not reconsider his pay package, the tension around Nardelli’s compensation erupted at the Home Depot annual meeting in May 2006. The AFL-CIO encouraged other shareholders to withhold votes from directors, and put forth a shareholder proposal recommending that shareholders have a “say on pay.” Approval of “say on pay” would give shareholders the right to an advisory vote on the CEO’s compensation. The Home Depot board did not submit this proposal to a shareholder vote. In what became an infamous move, Nardelli instructed other Home Depot directors not to attend the meeting held in Wilmington, DE, so that he was the only director in attendance. Nardelli presided over the meeting using an electronic timer to limit shareholders to one minute to speak, after which their microphones were shut off. During his 60 seconds, Richard Ferlauto, the director of corporate governance and pension investment at AFSCME (one of the unions within the AFL-CIO) voiced his concerns about board independence at the meeting and then added: “I think it is absolutely outrageous that the board is not here. The board is too chicken to face the shareholders.”2 Meanwhile, AFL-CIO members protested outside the meeting, wearing chicken suits, yelling, "Hey Bob, why are you chicken while the stock price takes a lickin'?"3 409-076 Relational Investors and Home Depot (A)

All of this described in news reports caused Whitworth to want to investigate further. “Home Depot had been coming onto our screens previous to May 2006, but it wasn’t really differentiated against other companies we were looking at. The activity of the AFL-CIO differentiated it,” said Whitworth. On the basis of research conducted by Relational’s analysts, Whitworth...
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