Dennis Kneale's Views on Nardelli, Fiorina, et al

Dennis Kneale, Forbes Magazine's managing editor, appeared as a guest host on CNBC this morning. He believes that Carly Fiorina and Bob Nardelli fixed, respectively, Hewlett-Packard and Home Depot, and then were fired, after which their successors have or will get the credit.

Don't you believe it.

Kneale's argument, taken to its extreme, is to return to allowing CEOs to escape accountability for their firms' total returns, unless, that is, the returns are healthy and rising. This will simply become another excuse for lack of board performance and vigilance.

My proprietary research shows that, when company performance is consistently superior, the market will contemporaneously reward the company and, thus, the CEO, with higher stock prices. Correspondingly, the market 'rewards' other performance patterns appropriately. Investors reward what they value, period.

If Fiorina and Nardelli chose the wrong strategies, and failed to deliver what the market wanted, then they failed their shareholders. Period.

It's not appropriate, nor consistent, to let CEOs pick and choose which investor behaviors to consider 'right.'

For instance, later this afternoon, CNBC replayed a tape of an interview Nardelli gave to one of its reporters, in which he admitted to having changed the bases on which he and his "leadership team" were compensated. Originally, upon being recruited to Home Depot, he was to be rewarded for increasing the stock price. After some three years as CEO, the basis was changed to various fundamental, internal operating measures, such as earnings, sales and margin growth, relative to other retail firms. He alleged that it was thought better to move to bases which were more 'controllable' by the "leadership team."

That Home Depot's board consented to this seems, to me, to be outrageous and pathetic. For the compensation Nardelli earned as CEO of Home Depot, he certainly should have been responsible for knowing what performance to effect in order to improve shareholders' wealth. Whether every member of his team was also responsible may be another matter. But someone in the firm has to take responsibility for operating the firm in a manner calculated to increase shareholder wealth, not to mention at a rate which makes owning the shares of the firm preferable to those of an S&P500 index fund.

Otherwise, the firm's senior management will happily focus on internal financial or market share performance, oblivious to whether or not any of these affect the total returns to shareholders.

It reminds me of something I saw years ago, in my managerial youth, at the Chase Manhattan Bank. My partner and I were conducting an assessment of the productivity and profitability of the various functions which composed the firm's Securities Trading group. The business head of the unit took credit for the profitable years' performance, but lamented that 'unavoidable market conditions' had led to some years of losses.

How convenient. The SVP in question got a bonus for the profitable years, but he didn't have to return any of it in the losing years. I suggested that we could replace him with a monkey and save the then-average compensation of a bank SVP, about $350K. With a monkey, his subordinates would probably still perform in a manner correlated with the market, but we'd only have to buy bananas for the 'new' SVP of Securities Trading.

Nardelli and his ilk need to take care that they do not become eligible for replacement by lower primates. Shirking responsibility for producing consistently superior total returns for shareholders essentially relegates a CEO to the status of chief apologist, rather than Chief Executive. Someone has to be responsible for steering the corporation in the direction of presumably higher total returns.

In exchange for several million dollars of annual compensation and a hefty severance package in excess of $200MM at Home Depot, it had better have been Bob Nardelli.