Focus on Home Depot as a Value Play

Nardelli, who came to Home Depot in 2000 from General Electric, hasn't managed to raise the company's stock price, but he has increased its returns on capital from 17.5% to 25%. With sales averaging $380 per square foot, the retailer leads its industry, and its recent shift toward the supply business has the potential to drive more growth.

Despite all of these attributes, votes for the company's directors at its May 25 annual meeting showed less than full confidence from its shareholders. All of the directors except one were supported by roughly 60% of the votes cast. Only Angelo Mozilo, the chairman and chief executive of Countrywide Financial, who joined the board in February, garnered over 90% support.

The weak backing of Home Depot's board reflects recent criticism about Nardelli's compensation and the way in which the annual meeting was conducted. Aside from the lack of attendance by other directors, Nardelli reportedly refused to answer most questions posed by shareholders, who were given limited time to speak before their microphone was shut off.

The only shareholder proposal adopted after the votes were cast was a measure that will require a majority vote from shareholders for the election of board members rather than the plurality that was required this year.

"That's not much, but it's a step in the right direction for a company that really needs to step back and re-evaluate how it treats its shareholders," says Craig Johnson, president of Customer Growth Partners, who owns shares of Home Depot. "They've got a public relations problem on their hands right now."

That problem manifested itself in a series of criticisms launched at Home Depot's conduct on the airwaves of news networks and the editorial pages of major newspapers like The Wall Street Journal and The New York Times.

"Consistent with the way we run our company -- in which we listen, learn and lead -- we will return to our traditional format for next year's annual shareholders meeting, which will include a business overview, the presentation of proposals, an opportunity for shareholder questions and with the board of directors in attendance," Home Depot announced Thursday, in an acknowledgment of the controversy. Previously, the company said the recent meeting shouldn't be interpreted as a "lack of respect for our shareholders or a lessening of our commitment to high standards of corporate governance and transparency."

Still, the drumbeat of criticism continues. If Home Depot is eventually forced to make more changes as a result, its corporate governance may be improved. Even better, the increased attention may get investors to realize the company's true value.