updated 6/9/2006 5:48:04 PM ET 2006-06-09T21:48:04

Weeks after Home Depot Inc.'s annual meeting, which featured no questions, no vote counts and no outside directors in attendance, shareholders of the nation's largest home improvement chain are still seething.

Home Depot has apologized, but its tone-deaf approach to its critics may boomerang.

"You didn't hear anything close to the level of anger being discussed about Home Depot before the meeting that you did after," said Patrick McGurn, executive vice president at proxy advisory firm Institutional Shareholder Services Inc.

If you missed the May 25 annual meeting in Wilmington, Del., here's what happened: The only director who attended was Bob Nardelli, the company's chairman, president and CEO. Nardelli refused to acknowledge comments, answer questions or stick around longer than 30 minutes.

The company allowed shareholders to speak about their proposals, but it put a strict time limit on their comments, which were tracked by a giant clock.

Shareholder activists had been planning to ask directors tough questions about Nardelli's pay package, which totaled $123.7 million, excluding stock option grants, over the past five years. Nardelli was awarded the money while Home Depot's stock sunk about 9 percent. In the same period, stock in its nearest rival, Lowe's Companies Inc., increased 185 percent on a split-adjusted basis.

Shareholder dissent
It wasn't just rabble rousers who were angry at Home Depot's governance. The votes on shareholder proposals showed an unusually high level of shareholder dissent, with at least one-third of shareholders voting for every proposal and some garnering far stronger support.

And those votes were cast before the meeting. If Home Depot doesn't mollify its shareholders, support for shareholder proposals could be even stronger next year. And, after this year's debacle, the next annual meeting is certain to attract shareholder proposals from activists nationwide.

The one proposal shareholders passed this year would change the company's voting method for electing directors. Directors, who are up for election every year, could only stay on the board with a majority vote of shareholders.

That could be bad news for CEO Nardelli. Under current rules at Home Depot, shareholders can only withhold votes from a director. A third of shareholders withheld votes for Nardelli, even though they knew the vote was meaningless.

"I'm getting tons of calls," said Richard Ferlauto, director of pension and benefit policy at the American Federation of State, County and Municipal Employees, and a critic of Home Depot's corporate governance.

The callers, he said, are individual shareholders who are outraged and "Home Depot employees who say Nardelli runs the company internally the same way he ran the annual meeting."

The company has had second thoughts about how it handled the annual meeting. It now says it will allow questions at its annual meeting and ensure all its directors attend.

Where was the board?

McGurn thinks at least one board member (his pick is Kenneth G. Langone, the lead director and a man with a reputation for combativeness) decided the board wouldn't show.

The company's official reason was that "many" of the directors were at "headquarters over the past few days as part of their quarterly meeting and remain there today on company business," the company said in a statement the day of the meeting.

That's hard to buy, since the notice of the annual meeting went out April 14, more than a month in advance. So the directors had plenty of time to block out the day on their calendars.

And Home Depot both pays directors' way to company events and has a corporate jet, according to footnotes in its most recent proxy statement. Don't companies own jets so busy executives and directors can keep working in transit, without the rigors of security checks and other passengers to distract them?

The cold shoulder investors got at the annual meeting could have another effect: It could scare them away. After all, they can easily take their money elsewhere.

Heidi Soumerai, director of social research at Walden Asset Management, attended the meeting.

"I, like everybody else, was astounded," she said.

The shareholder in front of her said he came to the meeting wanting to buy more stock, but had changed his mind.

As Soumerai remembers it, he said, "Arrogance will kill this company."

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