Home Depot announced yesterday that it has received notice from Relational Investors, an investment firm based in San Diego, California, that Relational intends to submit a proposal at the next annual meeting of shareholders of The Home Depot. Relational relatively recently purchased roughly 13 million shares of Home Depot stock, which is just over one half of 1% of the company’s common stock. The proposal will request that the board of directors of The Home Depot appoint a special committee of independent directors “to evaluate the strategic direction of the Company, the performance of management and strategic alternatives for the Company.” Relational says this proposal is part of an “advocacy program” planned by Relational with respect to the Company, that Relational plans to solicit proxies to have its proposal adopted, and that Relational may nominate one or more directors for election at the 2007 annual meeting. In addition, Relational has requested a meeting with The Home Depot’s chief executive. Home Depot responded by saying it will “oppose the resolution and proxy solicitation that Relational intends to pursue.” Home Depot said that its board of directors unanimously supports the CEO Robert Nardelli’s management team, and its plan “to continue enhancing value for all shareholders through the execution of its current strategy.” According to Home Depot, sales have nearly doubled, from $45.7 billion in 2000 to $81.5 billion in 2005, and earnings per share have increased more than 140%. in the same period. Home Depot said it will meet with Relational, however, consistent with its “policy of engaging in an open and direct dialogue with shareholders.” In its letter to Home Depot, Relational complained about the retailer’s “chronic inferior stock price performance” experienced since 2000 (and its) deficient strategy, operations, capital allocation, and governance.” Relational said it will seek to nominate someone to the Home Depot board this spring. The Relational proposal will request that the Board of Directors form a “committee comprised exclusively of independent directors to evaluate the strategic direction of the Company and the performance of management, with duties to include, among other things, studying strategic alternatives for the Company, including a major operational restructuring and/or recapitalization, a partial or complete sale or buyout of the Company, and/or a major recomposition of the executive team.” Relational says that the Company’s owners should have an opportunity to express their wishes in respect of these matters for consideration by the Board of Directors. The managing members of Relational Investors are Ralph V. Whitworth and David H. Batchelder.
Within 5 days after receiving the Relational proposal, Home Depot sent a certified letter to Whitworth saying that the retailer “recently completed a strategic review and does not believe that the committee you seek to form is necessary or useful, and it will oppose any solicitation of proxies in that regard.” But the company did agree to meet with Whitworth. This is the time of season when a number of investor groups will file shareholder resolutions, and most of them will be rejected outright by the target companies. No doubt Home Depot will end up facing several more resolutions at its annual meetings. Sprawl-Busters believes that such shareholder resolutions are largely a waste of time, and that investors in big box retailers should instead focus their energies on making adjustments on the portfolio side. For example, several large pension funds have recently adjusted their portfolio to “exclude” Wal-Mart from their holdings. After trying for months to engage Wal-Mart in a discussion of their business practices, the pension funds dropped Wal-Mart stock. In this way, investors can simply move onto other investments, without wasting their time at annual meetings making symbolic resolutions that have no chance of passage. If more investors engaged in “portfolio activism,” companies like Wal-Mart would feel more pressure to change their business model to hang on to investors. For earlier stories, search Newsflash by “shareholders.”
