Stock Research – Nyse’s Home Depot Rocks Investors With Ceo Resignation – Can Corporate Culture Survive
Our stock research has come up with an interesting play. As you know, Home Depot through its Board of Directors forced the resignation of General Electric trained CEO, Robert Nardelli, who had only been with Home Depot a couple of years. Somehow, Nardelli managed to get the Board to give him a $200 million severance package, which has Home Depot shareholders up in arms. How did a long-time General Electric guy like Nardelli screw up so bad that he was forced to resign, and not because he didn’t deliver the numbers? Our stock research we believe has provided the answer.
Many CEO’s have what is called the cult of personality. They make the corporation about them. Sumner Redstone of Viacom is like this, as was Harold Geneen of ITT in the 1960’s. Certainly Charles Revson, creator of Revlon was this way also. Nobody expected Nardelli to be the imperial CEO that he became very quickly once he was given the reins to Home Depot.
There’s an expression that people like to use. It’s called, “If it ain’t broke, don’t fix it” concept. Nardelli violated this cardinal rule of management. He came in, basically said I know how to run things, imposed his will, and then blew it. In the end, he may have blown much more than his own career. Our stock research shows that this company may need much more than Nardelli’s resignation, to effectuate the change that is now needed to reestablish Home Depot as the undisputed heavyweight champion of home improvement.
You might be aware that Lowe’s is breathing down Home Depot’s back as we speak. Wall Street loves Lowe’s, and for the moment dislikes Home Depot big time. Why is Home Depot in trouble? It’s because our work shows that Nardelli may have wiped out much of the original corporate culture that founders Bernie Marcus, and Arthur Blank instilled in the corporation over a 20-year run.
Home Depot is one of the truly great success stories of late 20th century corporate America. It is a classic roll-up (home improvement) of a multi-billion dollar fragmented industry. It was also a vertical roll-up. Prior to Home Depot, you went to one store for plumbing, another for paint supplies, and another for lumber. HD was the first mega store that carried it all.
What you have to keep in mind is that Home Depot was founded on a number of ethical principles, and values. As verbalized by founder Bernie Marcus, they included:
• Superb Customer Service
• Taking Care of the Employees
• Galvanizing, Recognizing, and Promoting Entrepreneurial Spirit
• Respecting all People
• Doing the Right Thing
When Bob Nardelli walked in the door, these principles and values that Home Depot was built on were cast aside in favor of an imperial CEO style. General Electric is the finest run company of its kind in the world, but its style is not appropriate for an entrepreneurial based company like the Home Depot. GE is known for working people all types of hours including all nighters and weekends.
Read any of former GE CEO Jack Welch’s books and he will tell you about how fighting for the CEO slot were the worst years of his life. It was pure politics. It was this atmosphere that Nardelli brought to Home Depot. Nardelli blew up the customer service excellence that Home Depot was known for, by killing the handoff rule. This procedure allowed every Home Depot customer to be brought directly to the store location where the merchandise he was seeking was shelved.
Nardelli injured the entrepreneurial spirit of the store managers by forcing them to comply with the GE management style template. As for taking care of the employees, it starts from the top. The imperial CEO systematically went about replacing as many of the key people in the company as he could with his own General Electric alumni.
The GE alumni are now in Charge at Home Depot
Our problem as a premiere Internet financial advisory firm is that the General Electric style of management which works work if your end user is another company, fails miserably when the end user is a consumer. At Home Depot the consumer was king, and treated appropriately. The employees, known as associates were treated great, because they were the intermediaries to the consumer. Give the employee a bad attitude and the customer picks up on it immediately.
I saw it today in a Home Depot store in Norwalk, Connecticut. We visit several stores each week to gauge for ourselves what is going on. The associate couldn’t be bothered by the customer, and it was obvious. Now if this continues, Lowe’s will eat Home Depot for lunch.
Nardelli gone – What’s the Problem?
The problem is the culture has been changed. The senior management of Home Depot is now a group of General Electric trained executives. All of whom have joined the company in the last five years. They are still there. The Board of Directors has handed the CEO and Chairman slots to Frank Blake who joined the company five years ago in 2002 from where? You guessed it – he spent the bulk of his career at General Electric. Oh yes, he served as deputy secretary for the U.S. Department of Energy. What does any of this have to do with dealing with a guy who wants to buy a paintbrush and a gallon of paint? The answer is very little to nothing. New CEO Blake has a law degree from Columbia, and was a law clerk to Supreme Court Justice Stevens. He’s a good guy in the wrong slot with the wrong background.
When we looked at the biographies of the rest of the senior management team, we noticed they too were basically all General Electric former executives brought in by Nardelli. These are people who spent the bulk of their careers at General Electric which means their corporate culture is the GE culture, not the Home Depot culture based on satisfying the customer.
At Home Depot, the customer ALWAYS CAME FIRST. Walk into a store now, and you don’t get that feeling. The stores are in worse shape than they were years ago. The employees are not as helpful, nor as well trained. The spirit that made this company go is no longer evident. The BIG QUESTION is whether or not Home Depot’s current valuation in the stock market makes the stock a buy TODAY, regardless of the management team’s ineptness. That dear investor is another question, and we will have the answer shortly.
Goodbye and Good Luck