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San Diego State University

Fowler College of
Business Administration

SDSU’s Corporate Governance Institute Hosts
Home Depot Turnaround CEO Frank Blake

Frank Blake being interviewed

San Diego State’s Corporate Governance Institute (CGI) and Relational Investors Founder David Batchelder hosted Home Depot turnaround CEO, Frank Blake, for a conversation at the Conrad Prebys Aztec Student Union on February 10, 2015. They discussed Relational Investors’ activist intervention with the company, and Blake’s ensuing tenure as CEO and chairman of the board. On Blake’s watch, return on equity moved from 22% to 57% today, and share prices, after a dip during the housing bust, roared back to increase from $35 in 2011 to $115 in 2015.

The story began when Robert Nardelli joined Home Depot as CEO in 2001, with shares trading at $51—6 years and $225 million in compensation later, they had fallen to $41. Nardelli had focused the company on store expansion and rewarded store managers for increasing revenues, leading to an explosion in unsold inventory. Recognizing the shortcomings in this approach, Relational Investors amassed more than $1B in Home Depot equity, and threatened the board with a proxy fight. That threat served as a “fracture point” for the board, according to Blake, and Nardelli was ousted in January 2007, when he walked away with a contracted $210 million severance package. David Batchelder joined the board that February, with new chairman and CEO Frank Blake at the helm, and a historic turnaround ensued.

Relational Investors helped save Home Depot by unseating its chief executive, Robert L. Nardelli, in favor of Frank Blake, leading to a decade of strong performance.
The New York Times, Nov. 20, 2014

Batchelder and his Relational Investors team, based in Del Mar, California, provided Blake and the board with critical data and analysis which convinced the board that further store expansion should be all but halted. Instead, Blake and the board determined that within-store returns should be emphasized, requiring drastic reductions in inventory and equally dramatic improvements in customer service, incentive systems, and employee morale. The success of these initiatives was demonstrated not only through the firm’s financial performance, but also through the enthusiastic comments from the 10 Southern California Home Depot store managers and executives that Blake hosted at the event.

Ralph Whitworth speaking at the podium

Relational Investors founder Ralph Whitworth, dubbed by Forbes magazine as perhaps “America’s Best Board Member” in 2014, introduced the speakers. He emphasized the collaborative relationship that arose between the CEO and activist investor as they worked in tandem to pivot the corporation’s performance.

In addition to San Diego business leaders, audience members at the event included Laban Jackson, director and audit committee chair of JP Morgan Chase; Bonnie Hill, just-retired Home Depot lead director; David Katz, partner at Wachtell, Lipton, Rosen & Katz, New York; Paul Tosetti, partner at Latham & Watkins LLP, Los Angeles; and Arnold Pinkston, Allergan executive vice-president and corporate counsel. Two of CGI’s advisory board members, WD-40 CEO Garry Ridge and Oberto Brands director and past Rubio’s Seafood Grill CEO Dan Pittard, were also in attendance. Students in the SDSU College of Business Administration’s (CBA) current MBA and Executive MBA Corporate Governance classes, along with a dozen CBA faculty, attended the event as guests.

This program is the second major event in the David Batchelder Lecture Series on Investor Activism. At last winter’s “Shareholder Interventions of the Year” event, Batchelder and CGI hosted CVS Caremark chairman Dave Dorman, Chesapeake Energy chairman Archie Dunham, and Hewlett-Packard chairman Ralph Whitworth. Batchelder also gave “Summer Lectures” in the series in 2013 and 2014.

Blake, who stepped down as CEO of Home Depot on November 1, 2014, and as Chairman on February 1, 2015, was named to the board of directors of Delta Airlines in 2014, and his election to the board of Procter and Gamble was announced the day after the CGI event. Batchelder, who has also served the boards of 10 other public companies, founded Relational Investors in 1996 (with his partner Ralph Whitworth) after working with T. Boone Pickens as President and COO of Mesa Petroleum.

Fair enough, Relational contributed, but, looking back, Home Depot’s turnaround was assured the moment the board named Frank Blake as CEO.
Ralph Whitworth, Relational Investors Founder, Aug. 25, 2014

The CBA’s Corporate Governance Institute, founded in 1998, is a research and education center dedicated to the study and application of responsible corporate governance principles worldwide. The CBA’s leading-edge efforts in corporate governance education include dedicated courses in corporate governance to MBA students since 1999, and to Executive MBA students since 2007. CGI also sponsors research colloquia, annual dinners, and annual research workshops for corporate governance scholars from around the world.

group photo

At last winter’s "Shareholder Interventions of the Year" event, CGI hosted panelists (l to r) CVS Caremark chairman Dave Dorman, Relational Investors founder and event sponsor David Batchelder, Chesapeake Energy chairman Archie Dunham, and Hewlett-Packard chairman Ralph Whitworth, shown here with CGI director Lori Ryan.