Leadership Development Rotation: Transforming Internal Audit into a Talent Pipeline

1. Leadership LDR Development Rotation Internal Audit:Transformation into a Talent Pipeline Chuck Pfister Vice President, Internal Audit

2. Who is The Home Depot • Youngest company to reach $30, $40, $50, and $60 Billion in Sales • World’s #1 Home Improvement Retailer • 13th largest US company • 4th largest retailer in the world • Unprecedented growth yields outstanding career opportunities • Created 40,000 new jobs in 2002 Laying the foundation for success

3. Where are we going? The Home Depot Transformation: 2004+ 2003 Sustained Growth 2001 - 2002 Transformation Transition • Enhance the Core • Extend the Business • Expand the Market • Associates • Operations • Merchandising • Infrastructure • Leadership • Centralization • Operating Efficiencies • Cash Generation

4. Leadership LDR Development Rotation The Home Depot Internal Audit’s Charter Vision To assure The Home Depot Is positioned to achieve its strategic objectives by delivering the best auditing and business solutions to the Company and its shareholders Mission DELIVER outstanding customer service to all company associates and shareholders by assuring the goals of the company and the financial interests of the shareholders are being achieved through effective, efficient, and well-controlled processes DRIVE continuous improvement by conducting independent and objective business reviews and partnering with our customers to improve company operations DEVELOP future management talent for the company by offering diverse business experiences and by providing a rigorous learning curriculum Independence • Conducts all work uninhibited, to arrive at conclusions objectively, to recommend changes when changes are necessary, and to eliminate any conflict of interest potential • Reports functionally to the Audit Committee Board of Directors and administratively to the Chief Financial Officer

5. Internal Audit Transformation to Best in Class Internal Audit Vision HD Internal Audit Goal (Best Value for Investment) Problem Solver (Best in Class) Activist (Best Practices) Talent Detective Value Internal Audit Goal: Transform Internal Audit (IA) into a department that adds value by partnering with customers, evaluating financial controls, and delivering business solutions Develop IA associates into business leaders that have project experience in most major areas of the Company and who will have proficient knowledge of problem solving tools, including Six Sigma

6. Problem Solver Activist Detective Internal Audit Transformation Strategy 2004 - Beyond 2001 - 2003 Pre 2001 • Conducts risk based business performance reviews • Cross functional, seen as business advisor • Identify process opportunities/solutions • Solid functional leaders Strategy Process Structure People • Checklist approach, little link to business risks • Functional, not a business advisor • Financial/compliance/ store audits • Career auditors • Six Sigma, process analysis, risk focused • Integrated with the business • Determine and implement solutions • Hi-potentials, future business leaders

7. Leadership LDR Development Rotation Internal Audit Benchmarking • Approach • Visited with over 50 Fortune 500 companies with Internal Audit functions • Interviewed leadership at all companies and conducted some site visits • Common Themes • Competitive advantage • Enterprise-wide reputation for adding significant value • Reputation for adding value through traditional financial audit view • Favorable career path

8. The LDR Vision The LDR program is designed to deliver a continuous pipeline of leadership talent to the entire organization The LDR Program’s Foundation for Success 1. Recruit & hire the talent 2. Train, deploy & rotate associates 3. Measure, coach & reward associates 4. Graduate & place associates in key roles LDR Program People and Staffing • Select twice a year for entry classes: • Internal Selection: Referrals, other leadership programs • External Selection: 2-3 years experience, BA required • Rigorous assessment process prior to acceptance if pass assessment, in department for minimum of 2 years • LDR Candidates’ Required Skills: • Project Management • Process Analysis and Problem Solving • Data Collection and Analysis • Change Management and Building Relationships • People Development

9. The LDR Organization The structure of Internal Audit promotes open communication lines between all levels of Associates

10. The LDR Assessment Assessment Activities THD’s Leadership Essentials • Auditor Assessments Activities • Structured interviews • Business Case - leaderless group discussion • Math/Verbal test • Meet & greet • Additional Manager Assessment Activities • Role play exercise • Business case - strategy focus • Deliver Results • Acts Strategically • Drives Excellence • Excels in Customer Service • Inspires Achievement • Lives Integrity • Builds Relationships • Creates Inclusion

11. The LDR Model LDR associates participate in a 2 year rotational program, during which they will gain valuable knowledge and experience about all of THD’s primary business functions 2-year Rotational Program Business Development Corporate Ops HD Supply Services Career Path Operations EXPO International Finance IT HR/Compliance Merchandising Global Logistics Advertising Business Process Review & Six Sigma Methodologies • Business Experts • Experience in: project management, analytical problem solving, change management, financial analysis, accounting and/or IT • Industry experience and/or specialty experience in supply chain, logistics, M&A • Backgrounds • Various work and educational backgrounds ( e.g. CPA’s, Financial Analysts, Engineers, Consultants, Home Depot Store Associates)

12. LDR Associate Development The LDR development model starts with Leadership as its core trait, and through a number of training methods builds additional skills with increasing degrees of specialization based on associate and company needs • Qualities • Leadership is the “nucleus” of the LDR development program • Proficiency levels are developed at every level within the department • The development model establishes a baseline for employee performance and career development BPR & Specialized: Technical & Functional Leadership Finance Six Sigma Defined by Leadership Essentials Examples: Functional knowledge/skills, M&A Defines “The Way We Work” Emphasis on controls, risk management

13. LDR Learning 15% 60% 25% Classroom On the Job Communication • Leadership • Change Management • Project Management • Six Sigma • BPR • Lunch ‘N Learns • Functional • IT Basics • HR Basics • Finance University • Stats Class • Store Systems • Labor Model Class • Growth Case Studies • Leadership • Change Management • Project Management • Strategic Thinking • Problem Solving - Six Sigma • General and HD Business Knowledge • Store Walks & Visits • Functional Knowledge • Advertising/Marketing • Merchandising • Supply Chain • Finance/Accounting • IT • HR • Compliance • Operations • Store Systems • Business Valuation • Mergers and Acquisitions • Services • Champion Reviews • Six Sigma Tollgate Reviews • CEO Report Outs • CFO Report Outs • Audit Committee Report Outs • Business Owners Report Outs • CDM Meetings • Individual Development Plans • Project Reviews Individual Development

14. D Change to Data Problem M DevelopData Solution A I C The LDR Project Approach Qualityx Acceptancex Execution= Value Add TECHNICAL STRATEGY CULTURAL STRATEGY SUCCESS ACCEPTANCE QUALITY Formulate Practical Problem How does the project tie to a business priority/initiative? How do the customers view the problem? What do we want to improve? Do the customers accept the need to change? What are the paradigms? Is the desired outcome clear, understood and shared? Project Management How good is the situation today? What’s the best way to measure? Can we trust the output data? Do we need to benchmark to set targets? Do the customers accept the data? What are the sources of resistance? How good does it need to be? What’s at the root of the problem? What factors make a difference? How much are the customers willing to change? Will the customers really feel the improvement? Are indicators established for accountability? Is the goal realistic? Customers agree? How tight does the control have to be? How can we sustain the improvement? How do we monitor progress? How can we make changes to encourage the desired behavior? Can we show results? How has the change been integrated into other business initiatives? Implement Practical Solution Success is measured by value delivered to the business

15. LDR Project Examples Each member of the LDR program will work on a diverse set of projects with enterprise-wide impacts Examples of Our Projects • Identified and corrected a $7M Transit Facility inventory overage problem • Enabled the successful implementation of an automatic inventory replenishment program • Reviewed the financial processes and controls of the China Sourcing Office • Improved the Direct Ship Special Order Cancellations and identified & avoided $500,000 in potential shrink Operations Merchandising Business Development & HD Supply Finance &HR / IT • Assessed the account reconciliation process and surrounding environment to understand potential risks of failure, identify concentrations of financial reporting risk, and develop a risk management strategy • Developed the processes, resource plans, and system requirements to take a new AHS program from validation of concept through national implementation

16. Project Example - Property Tax Reconciliation Project Methodology 6s Tools • Property tax adjustments exceeded tolerance specifications, putting THD at risk for sizable adjustments in the future D • A defect is any adjustment to the real estate tax expense account that exceeds the tolerance limits M • Property tax adjustments are driven by geography and store age A • Initially focus on mature stores and develop a systematic approach to assess the complexity of determining property tax on a state by state basis I • Expect to implement policies and procedures that ensure timely reconciliations and more accurate budgets C

17. The LDR Project Scorecard and Customer Survey Project Scorecard Customer Survey

18. Job Description Department Goals Developing Leaders Annual Performance Evaluations Performance Management Tools Performance Management Home Depot’s Performance Management Process Overview Evaluation Rewards Metrics Measurement • Department goals are established and cascaded down to each individual • Department goals are captured and tracked in the Target & Countermeasure Matrix • Annually, metrics are developed in four key areas on the 4-Block Metrics Screen: • Financial • Operational • Process Improvement / Six Sigma • People • Once metrics are established, managers work with associates to develop individual and team goals: • Performance Screen • Career Development Plan (CDP) • Project Reviews: • Project Evaluation • End of Trimester / HR Review • Annual Reviews: • Performance and Development Summary • Associates’ performance will have a direct impact on their opportunity for rewards • Rewards recognize and compensate associates for their contributions

19. LDR Associate Skills Graduating LDR associates are equipped with a variety of tools and experiences to make an immediate impact to the business Associates with the Leadership Essentials... • Project management experience • Process re-engineering experience • Team project experience • Financial acumen • Understanding the company strategy • Diverse business backgrounds • Business integration experience • International exposure • Experienced communicators • Champions of controls/business risk mgmt who have the skills and experience to succeed! Leadership • MBAs • CPAs • Supply Chain • Merchandising • Management consultants • Store Operations • THD Systems • Six Sigma • Change Mgmt experience • Problem solvers LDR Development Rotation

20. VP Director Senior Manager Manager Auditor/ Senior Auditor The LDR Career Path 25% of LDR associates are promoted within the department to fill the open positions left by graduating associates Internal Audit Career Ladder • Developing department strategy • Managing executive-level relationships • Aligning IA strategy with business drivers • 10 years VP • Developing business unit strategy • Building officer-level customer relationships • Managing audit and resource plans • 8 years Director • Developing functional area strategy • Building director-level customer relationships • Managing rotation resources • 6 years Senior Manager Minimum Experience Leadership Development • Developing project strategy • Building project-level customer relationships • 4 years Manager • Driving total project results • Managing project deliverables • Scheduling team resources • 3 years Senior Auditor • Producing quality project deliverables • 2 years Auditor

21. LDR Associate Transition 75% of LDR associates leverage relationships and career interests formed throughout their time in LDR to take positions in various business areas throughout the company