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Agency Theory, Home Depot, and Stakeholders January 24, 2007

Posted by Jordi in agency theory, Retail, Stakeholder management.
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There was a lot of media coverage of former Home Depot CEO Nardelli being paid too much in his severance package. Today, Home Depot announced that they would pay the new CEO “only” $8.9 million. And, 89% of this is based on performance.

Home Depot, under fire by critics who charged that it overpaid former Chief Executive Robert Nardelli, on Wednesday said the 2007 compensation package of its new CEO was valued at $8.9 million, with 89 percent of that at risk based on company performance.

This seems like a fine example of the agency problem discussed in Chapter 2. The former CEO’s compensation of $210 million (in severance!) was because he had an information advantage in terms of evaluating his performance. Who was on that board, anyway? Did it have outside directors? Traditional arguments will say that this is what the “market will bear.” One flaw I see with that argument is that market theory assumes equal information. Because the former CEO’s pay was divorced from the actual market performance of the company, he took advantage of the agency problem.

Home Depot, now, as an organization, has to deal with some irate stakehodlers. To induce their contributions, it has modified its policies.

What role did institutional investors like CalPERS play in this?

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