February 2007 Big Grower

Who’s The Boss?

When 2006 ended, Frank Blake was the vice chairman of The Home Depot’s board of directors and an executive vice president at the company. When 2007 started, he was the company’s chairman and chief executive officer.

This all happened when The Home Depot kicked off the new year by announcing on Jan. 3 that Robert Nardelli and Depot’s board of directors “mutually agreed” that Nardelli would step down from his position as chairman and chief executive officer. Blake was named to succeed him.

In the six weeks following his appointment, Blake reduced his own salary, made a concerted effort to reach out to employees, added an “activist investor” to the company’s board, announced the addition of 15,000 associates this spring and eased several of Nardelli’s colleagues out the door. He also announced the company would investigate divesting its wholesale supply business.

At the time of Blake’s appointment, the company also announced that Joe DeAngelo, executive vice president, HD Supply, had been appointed to the newly created position of chief operating officer. He also continues to oversee HD Supply and will assume additional responsibilities for the retail business.

Who Is Frank Blake?

Blake joined the company in 2002 as executive vice president of business development and corporate operations where he was responsible for real estate, store construction, credit services, strategic business development, growth initiatives, call centers and the Home Services business. Before joining Depot, Blake served as deputy secretary for the U.S. Department of Energy. Prior to that, he served in a variety of executive roles at General Electric (GE). Nardelli was also a GE alumnus, but that is where the similarity between the two ends.
During his tenure, Nardelli reportedly focused on the comp-any’s business operations (much like the management style at GE) and not on what was actually happening in the individual stores. Blake, on the other hand, wants the company to get back to its roots as a customer-friendly retailer and put more qualified orange vests in the aisles to help customers when they come into a store. Years of cost-cutting had a detrimental impact on employee morale.

Service With A Smile

One of Blake’s biggest challenges will be to change the company’s corporate culture. Many industry insiders believe Blake must concentrate on Depot’s customer service issues and employee morale. So far, it seems like he has made that a huge priority.

Immediately after his appointment, the company released a statement saying Blake “plans to spend the next several weeks engaging with associates at all levels to listen to their ideas and input and relate his vision for the business going forward.” During his first week, Blake recorded a video greeting to be broadcast in employee break rooms reaching out to workers. In the video, he said he said he wanted employees to be able to enjoy their jobs again.

According to media reports, Blake also plans to reinstitute the company’s “inverted pyramid” principle that has the CEO on the bottom of Depot’s hierarchy and customers and employees on the top. He closed the executive dining room at the company’s Atlanta, Ga., headquarters and implemented a $3,000 “fun fund” at each store for employee perks.

Help Wanted

Blake vowed to address Depot’s customer service issues in the company’s 2,000 stores, so shortly after he took the reins, the company announced it would be adding 15,000 new associates during the spring season. The chain said it would be hiring full-time, part-time and seasonal employees in all areas of its stores. In the Atlanta area, 2,500 positions are expected to be filled, 2,400 in Los Angeles, 2,300 in Washington and 2,000 in Chicago. Commenting on the hiring blitz, a company spokesperson said, “To continuously improve the customer experience in our stores, The Home Depot must attract job candidates with skills on which our customers depend.”

Management Shuffle

Blake did not waste any time when it came to shaking things up in the boardroom, too. In late January, Frank Fernandez, executive vice president, secretary and general counsel, and Dennis Donovan, executive vice president, human resources, resigned from the company. Fernandez and Donovan had been recruited from GE by Nardelli. Upon their resignation, Blake named Tim Crow vice president, human resources, and Jim Snyder was named interim head of the company’s legal department.

Blake also extended an olive branch to one of its most critical shareholders. In early February, the company said David Batchelder, a principal of Relational Investors, would join Depot’s board of directors, beginning Feb. 22. The stockholder activist group owns approximately 1 percent of Home Depot’s outstanding shares. Prior to this move, Relational Investors had been very vocal in its displeasure with some of the company’s strategies and even had threatened a proxy fight over the company’s strategic direction. Analysts predicted that this move would probably ward off any immediate proxy battles the company might face.

Nardelli’s Golden Parachute

Blake’s management style is considerably different than Nardelli’s, and so is his compensation package. “When Frank Blake accepted the job as our chairman and CEO, both Frank and the board of directors agreed to construct a compensation agreement that closely links his success with that of our associates and shareholders,” the company said in a statement released right after his appointment.

Blake’s base pay for 2007 is $975,000 compared to Nardelli’s 2005 salary of $2.16 million. With bonuses and stock awards, Blake could make an additional $8 million, whereas Nardelli received more than $27 million in bonuses and stock awards in 2005. Blake’s compensation plan also does not include any locked-in benefits, automatic renewals or the huge severance plan that Nardelli received.

Nardelli’s severance package raised many eyebrows both inside and outside the company. His $210 million separation agreement included a $20 million cash severance payment. This had stockholders filing lawsuits to try and block the payout. The stockholders said the company would “suffer irreparable harm” if Nardelli were to receive the full severance package. A judge refused to stop the payment, but the company did announce that it would change its bylaws regarding CEO compensation. Now two-thirds of Depot’s independent directors must approve the company’s CEO compensation package. Before this change was made, a simple majority was all that was required to approve the CEO’s pay.

Wholesale Supply On The Block?

Blake is looking at all aspects of the company to see what makes the most strategic business sense going forward. On Feb. 12, he announced the company “decided to evaluate strategic alternatives” for its HD Supply business unit. According to the company, this evaluation could include a possible sale, spinoff or initial public offering of the business.

Nardelli’s plan had called for HD Supply to deliver 20 percent of the company’s revenue by the year 2010. Investors had called for the company to shed the business unit due to its low profits. One analyst predicted that The Home Depot could get as much as $13 billion for the division.

The Future

So what does all of this mean for big growers? How will these changes and any others that Blake makes affect Home Depot’s garden centers? It’s still too early to tell. However, with Blake’s emphasis on customer service, it looks like the role of pay by scan and in-store merchandising could be affected. Stay tuned… it’s only February!