OT: Scorn from companies you own
Six signs that management is not working for you
sort of topic but is it really?
JENNIFER OPENSHAW
Scorn from companies you own
Six signs that management is not working for you
By Jennifer Openshaw
Last Update: 9:55 PM ET Jun 6, 2006
LOS ANGELES (MarketWatch) -- Normally I don't pay much attention to corporate annual meetings, even if I'm a shareholder. Most are everything-is-OK dog-and-pony shows with little real business accomplished. However, what happened two weeks ago at Home Depot's annual meeting shocked me, especially for such a large, mainstream American consumer icon. It made me think about what prudent investors, as owners of companies, should look for -- and expect -- from a management team.
Here's a brief review of the facts. The Home Depot (HDThe Home Depot, Inc. annual meeting, scheduled for May 25, did happen that day. But only one of the 11 directors showed. In fact, no chairs were set up for them. Instead, alone, front and center sat Chairman and CEO Robert Nardelli.
Nardelli announced that "questions are limited to one minute on one person." Apparently, answers were limited to one line. Which was usually something like: "This is not the forum to answer such comments." So went the meeting -- for less than an hour. Business issues were avoided, shareholder questions deflected, vote tallies kept secret.
I was stunned.
Here is one of the most widely held companies with one of America's most recognized brands thumbing its nose at shareholders.
Here is a Chairman/CEO making some $37 million last year, almost $10 million of it in direct cash compensation, thumbing his nose at his owners. Never mind that stock in his company has lost 16% of its value in the last five years while he earned a reported $245 million and, during that same period, arch-competitor Lowe's stock rose 77%.
And if he's thumbing his nose at his owners, what must he think of his customers?
Shouldn't this meeting have been about strategy or competitive initiatives to neutralize the Lowe's threat? Attract more customers? Build a better brand image? Or perhaps, some of the good things this company has done for shareholders?
No, apparently not -- it was all about Bob Nardelli. His eleventh-hour tactic, explained as a pressing need to "keep his directors in the office working on business matters," was apparently nothing more than a heavy-handed attempt to deflect shareholder questions about his exorbitant pay package and all-encompassing hegemony over this company.
Lessons learned
I am not writing this article as an investment advisor. If you're a Home Depot shareholder, you can do what you want with your shares. But I saw this as a good opportunity to remind you as a shareholder just what should be expected from your management teams. After all, at least in theory, management teams are supposed to be working for you.
You, as a shareholder, are an owner of your company. Yes, there are other owners, and many are a lot bigger than you. But you're still an owner. You have a right to expect certain treatment, just as if you were the only owner. You can expect performance. You can expect a return on your investment. You can expect management to work for you.
But what if management is failing you? And how can you even tell it that's the case?
While it isn't easy to know what goes on behind closed corporate doors, here are a few signs that management is not working for you:
Transparency and honesty. Do you feel like you know what is going on inside the company? What its successes and failures are, and why they happened? Does management admit mistakes? Do they do something about it? We look to Sun Microsystems and Scott McNealy's unwillingness to downsize his company, just reversed last week by his successor, as an example of what not to do.
Commitment to strategy, not self. Does the CEO put the company in front of his/her own interests? Are most headlines about the company or the CEO?
Czars not allowed. A well-intentioned boss should be able to share some of the limelight, and decision-making authority, with others. Nobody is so good that they ought to be Chairman, CEO and President of a publicly traded company. Anybody remember Carly Fiorina?
Pay for performance. Any direct compensation over $1 million should raise eyebrows. Even the IRS disallows deducting it as a business expense. Look at competitors. See if it passes your own "smell test". Nardelli brought home $18,000 per store last year. More than many employees earn annually. Yes, his business grew last year. But its stock is now priced at a meager 13 times earnings, reinforcing, if nothing else, Wall Street's frustration with Nardelli.
Cash returns as dividends to shareholders. Good, honest management gives something back to owners to compensate for the use of their hard-earned capital. Even if a company is growing fast and needs capital, good ones find a way to pay back something in the form of dividends. It sends the right message. Witness Cincinnati-based LCA Vision, which recently began paying a modest dividend even while growing over 40% a year. Don't accept "due to the needs of our business we anticipate paying no dividends in the near future" at face value.
Cash returns as stock buybacks. Repurchasing shares is another way of returning something to shareholders. Repurchases effectively increase the value of remaining shares. But watch for companies giving more to management and employees as stock or stock-option grants than they buy back. Home Depot gave out $175 million in stock-based compensation last year but just increased its authorized buyback to $1 billion.
Home Depot does do some things right. It earns a lot of money, has built a world-class brand and franchise and gives some back to shareholders. But for shareholders, that's not convincing that this CEO is really working for them. As long as Nardelli and his board cronies are firmly rooted at the helm, it would be hard to commit any more hard-earned capital to this enterprise.
Incidentally, the resulting firestorm of criticism about the annual meeting has had some impact. In a statement issued late last week, Nardelli claimed that "consistent with the way we run our company -- in which we listen, learn and lead -- we will return to our traditional format for next year's shareholders meeting, which will include a business overview, presentation of proposals, an opportunity for shareholder questions, and with the board of directors in attendance."
Does an orange tiger change its stripes? We'll see.
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