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Home Depot Thwarts Proxy Battle By Naming Activist To Board

Home Depot warded off a proxy fight with Relational Investors LLC by awarding activist investor David Batchelder a seat on the home improvement retailer’s board.

Home Depot had come under fire from shareholders for its governance practices and the $210 million severance package given to former Chief Executive Robert Nardelli.

“I think it was a brilliant strike on (Home Depot Chief Executive Frank Blake’s) part to bring hem on board,” said Jeffrey Sonnenfeld, a senior associate dean at the Yale School of Management and a prominent expert on corporate leadership. Sonnefeld told CNBC that it is better to have investors like Relational “in the tent” than to fight against them.

According to Sonnenfeld, Relational has shown it is willing to work with a company’s management, not just “take some money and leave.”

Relational, a San Diego investment fund, emerged as a leading critic of Home Depot’s performance and former Chief Executive Robert Nardelli’s efforts to diversify by purchasing wholesale companies that sell building supplies. In December, the group warned it was planning to launch a proxy battle for at least one board seat if the company didn’t form an independent committee to reassess its business strategy and management.

“What we believe is that management should be focused like laser beams on the core business, improving customer experience, improving their efficiencies in that business, and not engage in strategic adventure, out trying to get into the supply business,” said Relational Principal and Co-Founder Ralph Whitworth in an interview on CNBC in December.

Batchelder also is a principal and co-founder of Relational. He will join the Home Depot board Feb. 22, and will be named to the company’s leadership development and compensation committee and its audit committee.

Batchelder or another Relational Investor will continue to hold a seat on the Home Depot board for each of the next three years as long as the fund continues to own a significant stake in Home Depot. Currently, Relational Investors owns 1.3% of Home Depot’s shares.

Separately, Home Depot agreed not to extend the 72-year-old retirement age for four directors past its 2008 annual meeting. The provision has been waived for 2007 for John Clendenin, Claudio Gonzalez and Milledge Hart.

Blake, who replaced Nardelli in January, has been taking steps to reach out to shareholders, and is beginning to garner a reputation as a politically astute diplomat.

Goldman Sachs analyst Matthew Fassler said the “atypical concession” was a “favorable development.”

“Most notably, this peaceful resolution to a potentially messy episode recognizes that in parting ways with Bob Nardelli, setting incentive-oriented compensation parameters for new CEO Frank Blake and beginning to lever the company’s balance sheet, Home Depot has enhanced governance and taken steps in pursuit of shareholder value,” Fassler said, in a research note. Fassler doesn’t own shares of Home Depot, but Goldman has an investment banking relationship with the company.

While Blake has spent time trying to mend fences, it is still unclear what his strategy will be for the company.

According to Fassler, the next biggest question is whether Home Depot’s supply business is an “unnecessary” diversion of capital and management resources away from the retailer’s core business.

Relational could push Home Depot to think broadly about its strategy. In December, it raised a number of options, including the potential sale of the company.

Batchelder, 57 years old, also sits on the board of Washington Group International and ConAgra.

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