Bob Nardelli

Bob Nardelli
Born	Robert Louis Nardelli 1948-05-17May 17, 1948 (age 78) Old Forge, Pennsylvania, U.S.
Nationality	American
Education	Western Illinois University (B.S.) University of Louisville (M.B.A.)
Alma mater	Western Illinois University (BS) University of Louisville (MBA)
Occupation	Business executive
Years active	1971-present
Employer	General Electric (1971-2000) The Home Depot (2000-2007) Chrysler (2007-2009)
Title	Chairman and CEO
Term	2000-2007 (The Home Depot) 2007-2009 (Chrysler)
Predecessor	Arthur Blank (The Home Depot)
Successor	Frank Blake (The Home Depot) Sergio Marchionne (Chrysler)
Known for	CEO of The Home Depot CEO of Chrysler GE succession race with Jeff Immelt and Jim McNerney
Spouse	Susan L. Schmulbach
Children	4

Robert Louis Nardelli (born May 17, 1948), known as Bob Nardelli, is an American business executive who served as chairman and chief executive officer of The Home Depot from 2000 to 2007 and as chairman and CEO of Chrysler from 2007 to 2009. He spent the first three decades of his career at General Electric, where he rose to lead GE Power Systems and became one of three finalists to succeed Jack Welch as chief executive.

Nardelli's career is closely associated with two questions that dominated American corporate governance in the 2000s: whether general management skill transfers between industries, and how far executive pay should track shareholder returns. At The Home Depot he roughly doubled revenue and more than doubled net earnings while the company's share price stagnated and its main competitor's doubled, a divergence that made him one of the most criticized chief executives of the decade. His departure in January 2007 with a severance package valued at approximately $210 million became a reference point in the debate over executive compensation and contributed to the "say on pay" shareholder movement.

Early life and education

Nardelli was born on May 17, 1948, in Old Forge, Lackawanna County, Pennsylvania, in the anthracite coal region north of Scranton. His father worked for General Electric, and the family later moved to Rockford, Illinois, where Nardelli attended Rockford Auburn High School.

He enrolled at Western Illinois University in Macomb, earning a Bachelor of Science degree in business. At Western Illinois he played football and was a member of the Tau Kappa Epsilon fraternity. He later earned a Master of Business Administration from the University of Louisville while working full time, a pattern of part-time graduate study common among GE managers of his generation.

Nardelli has described his upbringing as working class and has cited his father's long GE career as an early influence on his decision to join the same company.

Career

General Electric

Nardelli joined General Electric in 1971 as an entry-level manufacturing engineer. He spent most of the following three decades at the company, moving through a succession of operating roles in GE's industrial businesses.

From 1988 to 1991 he left GE to serve as an executive at a division of the J. I. Case Company, the construction and agricultural equipment maker then owned by Tenneco. He returned to GE and continued to advance, and by 1995 he had become president and chief executive of GE Power Systems, one of the company's largest industrial units, while also holding the title of GE senior vice president.

At GE Power Systems, Nardelli oversaw a business selling gas and steam turbines and related services to electric utilities worldwide. The division expanded substantially during his tenure, benefiting from deregulation of electricity markets and a wave of gas-fired generation construction in the late 1990s. His operating record there established him as a candidate for the top job at GE.

The succession race

Nardelli was frequently referred to within the company as "Little Jack," a reference to his mentor Jack Welch and to the similarity of their direct, results-focused management styles. He had long-standing ambitions to succeed Welch as chairman and chief executive.

GE's succession process, which unfolded publicly over several years in the late 1990s, narrowed to three internal candidates: Nardelli at GE Power Systems, Jeff Immelt at GE Medical Systems, and Jim McNerney at GE Aircraft Engines. The contest attracted extensive press attention and became one of the most studied executive successions in American business.

In November 2000 the GE board selected Immelt. Consistent with Welch's stated plan for the process, both losing candidates left the company rather than remain in subordinate roles. McNerney became chairman and CEO of 3M and later of Boeing. Nardelli's exit was even faster: by his own account, roughly ten minutes after Welch informed him that he had not been chosen, he received a telephone call from Ken Langone, a Home Depot co-founder who sat on the boards of both GE and The Home Depot, offering him the chief executive position at the home improvement retailer.

The Home Depot

Nardelli became chief executive of The Home Depot in December 2000, succeeding co-founder Arthur Blank. He arrived with no retail experience, and his appointment was treated at the time as a test of the proposition, strongly associated with GE, that professional management technique is broadly transferable across industries.

Strategy and operational changes

The company Nardelli inherited had grown rapidly under its founders through a decentralized, entrepreneurial model in which individual store managers held wide discretion over merchandising, inventory and staffing. Nardelli judged this structure inadequate for a chain of more than 1,100 stores and set about centralizing it.

He imported the Six Sigma process methodology he had used at GE and applied it across the organization. He eliminated and consolidated division executive positions, replacing the regional structure with centralized functions reporting to headquarters in Atlanta. He installed a computerized automated inventory system and centralized supply orders, moves that gave the company greater purchasing leverage with vendors and reduced working capital tied up in stores.

Nardelli also pushed The Home Depot beyond its retail base. He expanded Home Depot Supply, a wholesale distribution business serving professional contractors, institutional buyers and maintenance markets, through a series of acquisitions. The strategy was intended to reduce the company's dependence on the cyclical consumer home improvement market.

He replaced a substantial share of the company's knowledgeable full-time sales staff, many of whom had backgrounds in the building trades, with part-time employees. This lowered labor costs materially.

Financial results

By conventional operating measures Nardelli's tenure was successful. Revenue rose from $45.74 billion in fiscal 2000 to $81.51 billion in fiscal 2005. Net earnings after tax rose over the same period from $2.58 billion to $5.84 billion. The company roughly doubled its sales and improved its position against several competitors.

The share price told a different story. Home Depot stock was essentially flat across Nardelli's six years, while the stock of its principal competitor, Lowe's, approximately doubled over the same period. Investors concluded that the operating gains were being generated at the expense of the customer experience and the brand, and that Lowe's was taking share in newer suburban markets while Home Depot's stores deteriorated.

The staffing changes were widely blamed for a decline in customer service. Surveys of customer satisfaction placed The Home Depot last among major American retailers during this period, a reversal for a chain whose original competitive advantage had rested on knowledgeable floor staff who could advise homeowners on projects.

Management style and the 2006 annual meeting

Nardelli's management style was described by employees and press accounts as blunt, demanding and autocratic. He replaced much of the senior management team with executives recruited from GE and from the military, and instituted metrics-driven performance review throughout the organization. Supporters credited him with imposing needed discipline on a company that had outgrown its founding culture; critics argued that he had stripped out the entrepreneurial character that made the business distinctive.

Tensions became public at the company's 2006 annual meeting in Wilmington, Delaware. Nardelli was the only director present; the rest of the board did not attend. He limited shareholders to one minute each for questions and used a timer to enforce the limit, declining to answer questions about executive compensation. The meeting lasted approximately 30 minutes. The handling of the event drew widespread criticism from governance specialists and institutional investors and marked a turning point in board and shareholder support for his leadership.

Departure and severance

Nardelli and the board reached a mutual agreement for his resignation, announced on January 3, 2007. He was succeeded by Frank Blake, the company's vice chairman and executive vice president, who had served as Nardelli's deputy at both GE Power Systems and The Home Depot.

The severance package was valued at approximately $210 million. According to the company's filings and contemporary reporting, its principal components were a cash payment of about $20 million; acceleration of unvested deferred stock awards then worth about $77 million; unvested options with an intrinsic value of about $7 million; earned bonuses and long-term incentive awards of about $9 million; previously earned and vested deferred shares worth about $44 million; the present value of retirement benefits of about $32 million; approximately $2 million in 401(k) and other benefit plan balances; and about $18 million for other entitlements.

Because the package had been contractually guaranteed at hiring and was payable largely irrespective of performance, it became a focal case in the debate over executive pay. Total compensation across his six-year tenure was reported at approximately $240 million against a flat share price. The episode is frequently cited in discussions of the "pay for failure" critique and contributed to momentum behind advisory shareholder votes on executive compensation in the United States.

Coca-Cola board

While chief executive of The Home Depot, Nardelli served a single term on the board of directors of the Coca-Cola Company from 2002 to 2005.

Chrysler

On August 5, 2007, Nardelli became chairman and chief executive of Chrysler, which had recently been acquired from Daimler AG and taken private by the private equity firm Cerberus Capital Management. His nominal annual salary was $1, with other compensation not publicly disclosed; contemporary reporting indicated the arrangement was structured so that substantial payment depended on a successful turnaround.

Nardelli took charge of an automaker with an aging product line, heavy dependence on trucks and sport utility vehicles, and a dealer network larger than its sales volume supported. He cut costs and headcount aggressively and reduced warranty expense, but the timing proved unfavorable. Fuel prices rose sharply through the first half of 2008, undermining demand for Chrysler's most profitable vehicles, and the financial crisis that autumn cut off consumer credit and collapsed industry sales volumes.

In February 2008, before his first Daytona 500 as Chrysler chief executive, Nardelli publicly guaranteed that Dodge would win the race for the first time since 2002 and offered a $1 million bonus to the Dodge team that achieved it. Ryan Newman, driving the No. 12 Alltel Dodge, won the race, and team owner Roger Penske collected the bounty.

Congressional hearings and the bailout

In late 2008 Nardelli appeared alongside the chief executives of General Motors and Ford Motor Company before Congressional committees seeking federal assistance for the American automakers. The hearings drew attention when it emerged that the executives had travelled to Washington by corporate jet; on a second trip the executives drove.

In a December 4, 2008, appearance on CNN, asked about the argument that Japanese, German and Korean manufacturers built better cars, Nardelli pointed to roughly half a billion dollars spent on quality in his first months and a 29 percent reduction in warranty costs, and noted that senators at that day's hearing had cited their own American vehicles reaching 60,000 to 80,000 miles.

On March 17, 2009, Nardelli said that Chrysler Financial would require a second round of loans. In April 2009 it was reported that a $750 million government loan had been declined on the grounds that accepting it would have required agreeing to executive compensation caps whose terms the Treasury had not yet defined.

Chrysler filed for Chapter 11 bankruptcy protection on April 30, 2009. The same day, Nardelli announced that he would leave the company once the bankruptcy concluded and a successor was named. The company emerged from bankruptcy under an alliance with Fiat, led by Sergio Marchionne.

Freedom Group

Nardelli became chief executive of Freedom Group, the North Carolina-based firearms manufacturer owned by Cerberus, in September 2010, serving on an interim basis while the company searched for a permanent chief executive. He stepped down in March 2012, at the same time relinquishing his role heading the operations and advisory business of Cerberus Capital Management.

Later activity

Nardelli subsequently founded and operates XLR-8 LLC, an investment and advisory firm. He has spoken publicly on manufacturing policy, supply chains and industrial competitiveness, and has appeared as a commentator on business news programming.

Business philosophy and management style

Nardelli's approach was shaped by his three decades at General Electric under Jack Welch. Its central elements were process discipline, quantified performance measurement, centralized control of operations, and rapid replacement of managers who did not meet targets.

At The Home Depot this took concrete form in the adoption of Six Sigma, the consolidation of regional management, centralized purchasing and inventory systems, and standardized store operating procedures. Nardelli also recruited heavily from the military, arguing that officers brought disciplined execution and comfort with hierarchy; by some accounts a substantial share of his senior hires had military backgrounds.

The record is regularly used in business education to illustrate the limits of transferring a management system between industries with different economics. GE's industrial businesses sold complex, high-value equipment to a small number of sophisticated institutional buyers under long-term contracts. Home Depot's business depended on high-frequency transactions with individual consumers, where the quality of a brief interaction with a floor employee often determined whether a sale occurred and whether a customer returned. Methods that reduced variability and cost in the first setting removed the source of competitive advantage in the second.

Nardelli has defended the strategy, arguing that the company required centralization to operate at its scale and that the financial results demonstrate the changes worked. He has attributed the share price performance in part to the market's earlier overvaluation of the stock relative to the company's growth prospects.

Controversies

Executive compensation

The $210 million severance and roughly $240 million in total compensation drew sustained criticism from shareholders, governance organizations and the press. Critics focused on the guaranteed nature of the package and the absence of any linkage to shareholder returns. Institutional Shareholder Services and other advisory firms cited the arrangement in campaigns for compensation reform, and the case featured in Congressional discussion of executive pay disclosure.

Conduct of the 2006 annual meeting

The 2006 annual meeting, at which Nardelli appeared without other directors and restricted shareholder questions to one minute each, was widely characterized as a governance failure. Corporate governance specialists cited it as an example of board disengagement, and the episode damaged the board's standing with institutional investors.

Employment practices

The shift from full-time tradespeople to part-time staff drew criticism from employees, customers and commentators, and was linked in press accounts and customer satisfaction surveys to a decline in service quality. The company also faced litigation during this period relating to employment practices.

Chrysler and the federal loans

Nardelli's tenure at Chrysler ended in bankruptcy, and his conduct during the bailout negotiations, including the corporate jet travel to Congressional hearings and the reported refusal of loan funds tied to compensation limits, attracted criticism. Defenders have argued that the collapse of Chrysler resulted from conditions largely outside the chief executive's control, including the financial crisis, the fuel price spike and the condition of the product portfolio inherited from Daimler.

Personal life

Nardelli is married to Susan L. Schmulbach. The couple have four children. He is Roman Catholic and has attended church regularly throughout his career.

During his Home Depot tenure the family lived in Atlanta. Nardelli met President George W. Bush at the White House in 2002 and was appointed to the President's Council on Service and Civic Participation, a position he no longer holds. On May 20, 2004, he hosted a garden reception and fundraiser for Bush at his Atlanta home.

Nardelli has maintained a long-standing interest in motorsport, reflected in his public involvement with Dodge's NASCAR programme during his time at Chrysler. He has also been involved with his undergraduate institution, Western Illinois University.

Legacy

Nardelli occupies an unusual position in American business history: an executive whose operating results were strong by most conventional measures but whose tenure is generally treated as a cautionary example. The Home Depot under his leadership nearly doubled revenue and more than doubled earnings, yet he left amid shareholder revolt and is remembered principally for the size of his exit package and the deterioration of the company's service reputation.

The case is taught in business schools as an examination of several linked questions: whether management technique transfers between industries, how far cost reduction can proceed before it damages the asset generating revenue, and how boards should structure contracts for executives recruited from outside. The severance is cited in the history of the say-on-pay movement, which produced advisory shareholder votes on executive compensation under the Dodd-Frank Act of 2010.

Frank Blake, Nardelli's successor, reversed several of the changes, restoring investment in stores and staff, divesting Home Depot Supply and refocusing the company on its retail business. Home Depot's share price and customer satisfaction scores recovered substantially in the following decade.

External links

• The Home Depot filings at the U.S. Securities and Exchange Commission