San Diegan Foresaw Home Depot Woes

— Robert Nardelli is corporate America's new symbol of wretched excess. He resigned under pressure last week after refusing to take a cut in his bonus. He had been making more than $10 million a year in his six years as chief executive of retailer Home Depot. On his watch, sales growth had receded and the stock had dropped from above $50 to $41, while shares of competitor Lowe's had zoomed. Nardelli got a going-away gift of $210 million. The public is outraged. At last, people may have awakened to the obscenity of chief executive pay.

Retired banker M. Faye Wilson, a resident of Rancho Bernardo who was instrumental in the early financing of Home Depot, resigned from the company's board in early 2001, right after Nardelli was hired. "His selection had a big role in it," says Wilson. One of the two founders of the company, Arthur Blank, a longtime associate of Wilson's, retired at the same time she did.

Wilson feared that the Home Depot entrepreneurial, customer-centered culture, fostered under Blank and the other founder, Bernard Marcus, would disappear under Nardelli, a veteran of General Electric who would favor centralization, top-down decision making, militarized bureaucratization, and cost cutting that would alienate customers. Wilson was right. That is exactly what happened. Pundits say Home Depot has lost its edge.

That's why another San Diegan, Ralph Whitworth of investment advisor Relational Investors, took the leadership role in calling for the shake-up at Home Depot. The corporate strategy is "way off track," says Whitworth.

"The original culture was very important to the success of the business," says Wilson, who was a senior vice president at the former Security Pacific Bank in 1981, when she took on the role of helping to finance Home Depot, which was then opening its third and fourth stores. She dealt with Blank and Marcus as they planned financing of the first 100 stores.

"Originally, the company was entrepreneurial and customer-focused," says Wilson, who ultimately became chairman of Security Pacific Financial Services and an executive vice president of Bank of America, from which she retired in 1998. She went on to a career in strategic financial planning with smaller firms. "Everyone who worked there thought they were the company. There were not a lot of rules. The rule was stay in stock [have inventory on the shelves] and take care of the customer."

She recalls, "It was total open door. There was no hierarchy. Bernie [Marcus] and Arthur [Blank] were involved in teaching every management-training class. They visited every store every year until it became physically impossible. They met personally with all the managers and groups; there was a lot of communication; they answered their phones; they talked to people and listened."

She recalls that at "mass meetings, a manager would stand up and say, 'That is really a bad idea.' Other managers would chime in, and Bernie and Arthur would change their minds; they knew their idea wouldn't work."

By contrast, "Nardelli brought the General Electric command-and-control-style manager -- very bureaucratic, very rules driven. They put in central processes that were very beneficial, that saved money and made things work better. The old Home Depot people left. I left the board, although I did stay on for a while as an officer."

Under the founders, store employees were very well paid by retail standards. "They did not have pay strata. They would continue to increase people's earnings as long as they would increase value to the company, as long as they could keep customers happy and increase sales. They paid more than $20 an hour to salespeople on the floor. That's unheard of today. They paid above-market to hire good people. Every manager in the company had to spend time in stores, had to walk stores. Stores were the center of the company, not corporate headquarters."

At that time, Marcus and Blank took pay "that was modest by chief executive officer standards," she says. "Even as Bernie and Arthur left the company, they were at a million a year; their compensation even with bonuses didn't come to $2 million a year, even in 1990," when chief executive pay was beginning to escalate into the stratosphere. "They never took a stock option or a stock grant at any time. But they granted stock options deep into the company," she says, explaining that many levels of people were able to prosper from the company's success. Of course, Marcus and Blank got rich from the original stock they held, but they didn't try to enhance it as current chief executives do. (It has now come out that during those early years, the company was backdating stock options; thus, Home Depot has joined more than 130 other companies under investigation for this odious practice.)

Before Wilson left the board, "I saw signs the culture was changing," she says. "There were decisions made about bringing in and replacing existing workers who were more highly paid with part-time workers at a lower salary. It was a big shift. There was a huge loyalty factor running from the employee to the company. That was broken."

It wasn't just employee pay that was chopped. It was also employee latitude and decision-making ability. "Home Depot had worked hard to decentralize so that it could move decision-making to the marketplace."

But Nardelli centralized. "Decisions were increasingly made by people in central services. Authority began to be taken away [from people at the store level]. For employees, it just became McJob." Nardelli hired many retired military officers to run stores. To this day, Home Depot customers are aware of such changes; employees are less eager to serve, less able to make decisions that please customers.

This strategy hardly made sense, because when arriving at Home Depot, Nardelli had no retailing experience and little knowledge of consumer businesses. At General Electric, he had headed such things as locomotive manufacturing. He knew how to run mines. At Home Depot, he was an autocrat with little knowledge of the business.

He had been passed over for the top job at General Electric after the fabled (and overrated) Jack Welch retired. At Home Depot, "The original idea was that someone would be hired as chief operating officer to work with Blank [who would still be chief executive officer]. There would be a transition," and then Blank would retire, says Wilson. "But Nardelli would only come in as chief executive officer. Blank graciously stepped down so we could get the guy who was touted as the management catch of the century, who wouldn't be available on the market very long."

In spring of 2001, the company announced that Blank and Wilson were leaving as boardmembers. "I made a decision not to stand for reelection when Nardelli came on board. I was not aligned," says Wilson. She continued her banking career. In San Diego, she has been president of San Diego Opera and a boardmember of the Neurosciences Institute, among many things.

Blank went on to become owner of the Atlanta Falcons, a professional football team.

Nardelli went on to well-compensated infamy. Under him, the company spent $6 billion buying companies so Home Depot could sell to the construction trades -- not just to consumers. It hasn't worked well. As the stock languished, shareholders had questions. But Nardelli wouldn't answer them. At last year's annual meeting, he ran the show himself, telling boardmembers not to show up. He let shareholders ask only a few questions. They were miffed. Less than a year later, he was gone.

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