Fixing A Company’s Failure To Communicate

TO: Bob Nardelli, chief executive officer of Home Depot

FROM: Stephen Davis and Jon Lukomnik, those corporate governance guys at Compliance Week

RE: Communication

Thank you very much for admitting to a mistake in holding an annual general meeting where you asked board members to be absent, and refused to answer questions about Home Depot’s stock price and your compensation. On behalf of your company’s shareowners everywhere, we congratulate you for taking responsibility and for announcing in your interview with Maria Bartiromo of BusinessWeek that next year’s meeting will be more “traditional.”

But our counsel is that reverting to tradition won’t be enough for Home Depot—and shouldn’t be for any company. We suggest that you look forward, not back, and find best practices to communicate more effectively with your owners. Luckily, a model exists.

We suggest you take a page from Pfizer’s playbook. Long an acknowledged leader in communicating with its owners, that policy has helped Pfizer both offensively and defensively. Take the offense first. Pfizer’s relationship with its ownership base, and institutional investors generally, was credited with allowing it to win a takeover battle for Warner-Lambert a few years ago (and with it, full rights to Lipitor, the best-selling medicine in the world). Defensively, it allowed former Pfizer Chief Executive Officer Hank McKinnell to weather his own CEO compensation controversy this year with significantly less sound and fury than the one surrounding your pay package, even as he was prepping for retirement.

Pfizer recently opened the kimono a bit to reveal its communications strategy and tactics. We suggest you take a peek. Speaking at last month’s International Corporate Governance Network meeting in Washington, D.C., Margaret Foran, Pfizer’s senior vice president for corporate governance and corporate secretary, set out the company’s thinking.

Be proactive and be available.

Pfizer continuously seeks out places it knows its investors will be, and sends representatives to those venues, such as the Council of Institutional Investors and the ICGN. These are meetings where pension funds and money managers gather. Some 140 pension funds, representing about $3 trillion in assets, comprise the CII. The ICGN is larger, global and more diverse: Its 500 or so members include money managers, regulators, academics and service providers, as well as pension funds. In the aggregate, they manage some $10 trillion.

By seeking out investors frequently at nonanalyst meetings, Pfizer creates opportunities for informal communication—and early warning signals—regarding corporate governance issues such as CEO compensation or voting rights long before problems emerge.

It’s no accident that Pfizer was the first major American corporation to come up with ways to adopt shareholder-accepted variants of both the poison pill and majority voting, allowing it largely to sidestep battles over those two issues at its annual meetings. Moreover, Pfizer has attended investor events regularly for years, giving it a network of investors with which it can test corporate governance actions it is considering.

Let’s say it plainly: Pfizer tries to let no daylight between it and the investor community. Why not consider having Home Depot join the CII and the ICGN? We’re sure they’d be glad to have you as a member.

Be open.

Pfizer willingly discusses tough issues and hot topics. It provides email addresses for directors. It reveals how to dialogue with management and directors in both its proxy statement and on its Web site. Nor is that mere lip-service; the directors seem to buy into the openness policy as well. Constance Horner, chair of Pfizer’s corporate governance committee, attended the recent ICGN meeting. Indeed, it sometimes seems that Pfizer goes out of its way to engage owners in conversation: It answered nearly all 566 comments written on its proxy cards last year.

Contrast that with a no-directors-available, no-tough-questions-answered annual meeting, and you’ll understand why Home Depot attracted such enmity. We note that your Web site does provide an email link for audit- or fraud-related inquiries to directors. That’s a good first step upon which to build.

Improve the quality of the ownership dialogue.

Pfizer may be open to conversation, but that doesn’t mean it’s a pushover. Unfortunately, conversations between owners and companies aren’t always enlightening. There can be a fair amount of heat rather than light; we’ve even seen arguments devolve into name-calling.

By continuously engaging in dialogue, Pfizer has a store of built-up trust upon which to call, and the stature to seize the moral high ground and demand that its owners communicate responsibly. Pfizer doesn’t even acknowledge communications from owners who are “overtly hostile or threatening.”

More importantly, it has worked out a protocol with its key owners so that should one want to ask a question at the annual general meeting, it first informs the company as to what the question is and to whom it will be addressed—the CEO, or chair of the compensation committee, for example. This “no sandbagging” rule avoids cheap games of “gotcha” and insures respectful two-way dialogue.

Mr. Nardelli, we can understand the frustration generated by some annual meetings. Owners, executives and directors recite well-rehearsed lines while playing shopworn roles and talking past the other. Thought and dialogue are sometimes in short supply. You’re not the first CEO to feel that way. (Indeed, even shareowners have felt that way.) Add in a controversial pay package, and an annual meeting can seem like a collection of downside-only risks. So we can understand—but not accept—the motivation which led you to run the last annual meeting as you did.

As the prison captain said in “Cool Hand Luke,” “What we got here is a failure to communicate.” But annual meetings don’t have to resemble bad kabuki theatre, with the roles, plot and outcome predetermined. Done right, the annual general meeting can be an opportunity to reconnect with your owners, answer questions, explain corporate strategy. After all, you have center stage, the microphone, and a built-in audience on that day.

As Pfizer understands, however, truly communicating with your owners, and gaining their trust, requires effort not just at the annual meeting, but throughout the year. We encourage you, and others reading this memorandum, to do just that.

Time is slipping away. Start a new communications strategy today. Otherwise next year’s annual meeting will remain a chore, rather than an opportunity. And the other 364 days of the year won’t seem that glorious either.