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Regarding broader investor views, an inset on the right side of the article below presents graphs of the Shareholder Forum's reports of each referenced US company's shareholder voting support of management compensation, based on percentages of total voting rights rather than on percentages of votes cast. The graphs of past activist targets are presented as a separate group at the end for convenient comparisons. Companies are presented alphabetically within the two groupings, and links are provided from each graph to the company's initial reference in the article.


Source: Wall Street Journal, September 27, 2012 article


BUSINESS  |  September 26, 2012, 10:31 p.m. ET

P&G's Stumbles Put CEO On Hot Seat for Turnaround

On Sept. 4, Robert McDonald, chairman and chief executive of Procter & Gamble Co., finally met the hedge-fund manager who began making his life difficult this summer.


Bloomberg News

CEO Robert McDonald, with P&G's new Tide detergent pods





Hedge-fund manager William Ackman, left, has suggested that P&G's board search for a replacement for McDonald.



William Ackman greeted him with a 75-page litany of complaints about his three years at the helm of the consumer-products giant—poor results, eroding investor confidence and sagging employee morale, according to several people familiar with the meeting.

Mr. Ackman, whose Pershing Square Capital Management LP had bought $1.8 billion worth of P&G stock in June and July, capped the roughly 90-minute get-together in downtown Manhattan, these people said, with a pitch aimed more at the two P&G board members in attendance, Boeing Co. Chief Executive James McNerney Jr. and American Express Co. CEO Kenneth Chenault: Strip Mr. McDonald of his board-chairman role and search for a new CEO.

The board hasn't done either. But Mr. McDonald's job could be at risk if the cost-cutting and product-refocus plans he has announced don't deliver results, according to two people familiar with the board's approach to the issue. P&G's stock, which had been flat for most of the past two years, has climbed 12.9% since Mr. Ackman's interest became public, hitting a 52-week intraday high on Tuesday before closing Wednesday at $69.30. P&G's chief competitors, however, have done better.

Mr. McNerney, the board's presiding independent director, said that the entire board had reviewed and endorsed the company's restructuring plan, and that it "wholeheartedly supports" Mr. McDonald. He added that the board will "actively oversee the plan's implementation to ensure its effectiveness." P&G's annual meeting is scheduled for Oct. 9.

Cincinnati-based P&G, known for such brands as Tide detergent and Pampers diapers, finds itself in an unfamiliar position. It has stumbled recently in areas where it has long been adept: understanding consumers, pricing products and getting new and revamped products to market. Snafus marred the launches, for example, of Tide detergent capsules and an overhauled line of Pantene shampoos and conditioners.

Profit has declined for three straight years, and the company has reduced profit forecasts three times this year. In recent quarters it has lost market share in a majority of what P&G calls "product-country combinations," including oral care in China and beauty in the U.S.


Some of the problems are rooted in decisions made by Mr. McDonald's predecessor, A.G. Lafley, who stepped down in 2009. Mr. Lafley engineered the blockbuster, $57 billion acquisition of Gillette in 2005, for example, which swelled P&G's size. And his relentless focus on the domestic market left the company lagging behind its rivals in fast-growing emerging markets.

It is up to Mr. McDonald, a former U.S. Army Ranger who has spent his entire business career at P&G, to turn things around. In February, he rolled out the company's first major cost-cutting plan in years, with a goal of shedding 4,000 jobs and saving $10 billion by 2016. In May, he imposed a "no-fly zone" that cut spending on anything not directly linked to selling products. And in June, he laid out a plan to focus on the company's 40 most lucrative markets and products.

To mollify investors, P&G reversed course this summer and said it would resume buying back stock. The board cut Mr. McDonald's pay for the last fiscal year by 6%, and senior executives, including the CEO, are on track to collectively earn less than 50% of their three-year performance award targets.

The repair efforts have shown some results. In the quarter ended June 30, P&G's profit came in better than investors had expected, lifting its stock. But profit margins narrowed and market-share losses worsened, with P&G losing ground in two-thirds of its product markets over the three months. And the company's profit forecast for the current quarter was lower than analysts were expecting.

Over the summer, Mr. McDonald regularly acknowledged that the company's performance has fallen short. "These results are not as strong as we'd like," he said during a June investor conference. "None of these are excuses. It's our job to overcome these—but we haven't always been able to do this."

Mr. McDonald is a detail-oriented executive known for his work ethic. He wakes at 4:30 every morning for two-hour workouts, a habit he has maintained as CEO even as he travels extensively around the world. Since his earliest years at the company, he has made a point of never heading home without clearing off his desk completely.

When he was tasked with rehabilitating P&G's operations in Japan after the 1995 Kobe earthquake, he learned enough Japanese to chat with employees and retailers.

Mr. McDonald took over the top job in July 2009, just as the financial crisis was putting a grim bookend on a strong decade by his predecessor, Mr. Lafley.

The Gillette deal substantially increased P&G's size, and when consumers turned more frugal, P&G's rivals cut costs more swiftly than it did. That made it harder for P&G to maintain its profit margins while cutting prices to help its products sell.

Under Mr. Lafley, the company had approached expansion into developing markets with little urgency. P&G had focused on creating more expensive versions of its household staples. U.S. shoppers, then flush with cash, were willing to pay extra for Tide's new scents, Olay's extra-moisturizing creams and softer Charmin toilet paper.

Then the recession hit, and fast-improving store-branded products left American consumers wondering whether P&G's pricier brands were worth the cost.

Mr. McDonald rushed to boost the company's presence in fast-growing emerging markets. He poured resources into launching existing P&G brands in new markets, such as Pantene shampoos in Brazil and Tide in India, and he took aim at Colgate-Palmolive Co.'s global dominance in toothpaste.

Mr. McDonald didn't want the company to cede any territory to its competitors overseas. "You're either active everywhere or nowhere. There can be no in-between," he said during a 2010 visit to Brazil. "If you're in-between, you give them pockets of inactivity, and they will use that money and spend it back against you."

The U.S. is P&G's most important market. It delivers just over one-third of its sales, but an estimated 60% of pretax profit. As Mr. McDonald worked to extend P&G's global reach, problems intensified at home. With the U.S. economy weak, consumers continued to switch to cheaper products, and P&G lacked its rivals' array of midprice brands.

Mr. McDonald and his team initially promised investors they would take a "surgical" approach to cutting prices. Their determination to maintain P&G's premiums appears to have hurt financially. The company has told investors that lower pricing by competitors has contributed to sales shortfalls.

More recently, as the global economic crisis began easing and rising commodity costs increasingly hit P&G, the company ran into problems by increasing prices too aggressively, which cost it market share in a number of areas, including powdered laundry detergent, oral care and shaving. That setback led the company to lower its profit forecast for its June fiscal year and to roll back earlier price increases. By midsummer, P&G had regained some of the ground it lost.

Product launches have been another trouble spot. A year into Mr. McDonald's tenure, P&G tried to reinvigorate its Pantene brand in the U.S., which Sanford C. Bernstein analyst Ali Dibadj estimates is a nearly $2 billion business. Both P&G and retailers say consumers had become lost in the tangle of varieties of the products, and Pantene was losing ground to lower-priced rivals.

The new Pantene line was years in development. A team of P&G's designers, marketers and scientists gathered at the company's Clay Street innovation center in Cincinnati for weeks to plot the relaunch. Researchers measured whether new formulations made women feel better emotionally about their hair. To determine whether Pantene's new television ads were stimulating enough, P&G measured the brain waves of focus-group viewers.

The revamped Pantene hit shelves in 2010. It soon became clear that the changes were too much for consumers. Certain Pantene products eliminated from the lineup, such as the 2-in-1 shampoo and conditioner and large sizes popular with cost-conscious shoppers, had more loyal users than P&G realized, so sales fell, according to people familiar with the results.

Sanford C. Bernstein estimates that Pantene's share of the U.S. shampoo market fell to 11.6% in September 2012, from 16.5% in January 2009—a huge setback in the consumer-products sector in which minute market-share changes loom large.

P&G also ran into trouble in the laundry aisle. The company announced plans in April 2011 for a new type of Tide detergent that would come sealed in single-use pouches. But the launch was delayed twice because of manufacturing problems. By the time Tide Pods hit the shelves in February, P&G's competitors had developed their own detergent pods to launch at the same time. Supply problems forced P&G to launch Tide Pods "shelf-only," meaning the company couldn't stock the big displays used to capture shoppers' attention.

Then another problem popped up. The packaging for Tide Pods looked like a candy bowl and the bright blue-and-orange pods looked enough like candy that some children ate them—a problem faced by some competitors as well. That prompted the American Association of Poison Control Centers to issue a warning about all detergent pods.

P&G's researchers early on recognized the risk of accidental ingestion, and the company included warning labels. In the end, P&G retooled the packaging to add a double-latch to the container's lid.

Sales eventually picked up. Tide Pods accounted for more than two-thirds of all laundry-pod sales through July, and all brands of pods accounted for 6% of the laundry-detergent market, according to P&G's annual report.

In conference calls with investors and analysts, P&G executives have acknowledged that other supply-chain issues since January 2011 have led to product shortages, hurting brands including Fusion ProGlide razors, Old Spice body wash, Iams pet food, Crest 3D White and Olay skin creams.

Closely watched surveys of retailers conducted by WPP PLC's Kantar Retail, a consulting firm, have consistently given P&G No. 1 rankings in many performance categories. Kantar's latest survey, released last November, shows that although P&G has retained its top ratings, its approval levels have slid in nearly every major category including supply-chain management, clarity of strategy and most-important consumer brands.

Some former P&G executives have been critical of Mr. McDonald's management style. His predecessor Mr. Lafley held informal meetings on Mondays at 8 a.m. to hear from seven to 10 executives about the state of the company. Under Mr. McDonald, attendance over the past year has swollen to more than two dozen, and meetings that used to take 45 minutes now stretch to as long as two hours, and few decisions are made, according to former executives who attended the meetings under both executives. A P&G spokesman said the meetings are now monthly.

There has been a recent exodus of executives at a company known for its ability to retain talent. They include finance executive Christopher Peterson, who left to become chief financial officer at Ralph Lauren Corp.; Stephen Schueler, general manager for P&G's global retail operations group, who joined Microsoft Corp.; and Sameer Singh, P&G's vice president of media for Asia, who joined GlaxoSmithKline PLC.

In May, a month after the company announced another disappointing quarter, Chief Financial Officer Jon Moeller told investors the company would put the brakes on the all-out global expansion effort. In June, at an investor conference in Paris, Mr. McDonald said the company would focus on the 40 product markets responsible for about half of P&G's sales and nearly 70% of its operating profit.

Around the same time, Mr. Ackman, who has led campaigns for management or strategy shifts at Target Corp., J.C. Penney Co. and Canadian Pacific Railway Ltd., began shifting funds that he had invested in Citigroup Inc. into P&G stock. P&G is an unusually large target for activist investors like Mr. Ackman, whose usual game plan is to build a stake in a company, then use his standing as a big shareholder to agitate for changes that might boost the value of his holdings. As of August, his P&G stake amounted to only about 1%.

Some other investors have voiced support for the pressure he is putting on management.

"He has moved the ball, he's propelled them higher," said Matt McCormick, a portfolio manager with Bahl & Gaynor Investment Counsel in Cincinnati, which owned 4.9 million P&G shares at the end of June, according to FactSet. "There's no question that he has agitated for changes, and those results have been in the share price."

In mid-August, Mr. McDonald outlined his planned fixes at a town-hall gathering for P&G employees at its Cincinnati headquarters. According to employees who attended, he acknowledged some mistakes, praised the company's still-dominant brands such Head & Shoulders shampoo, then took questions.

The moderator opened by asking Mr. McDonald if he had the board's support to remain CEO and about the latest developments with Mr. Ackman.

"We don't need an activist investor to tell us what's right," he replied. "We have more of an interest than anybody else does."

Write to Emily Glazer at, Ellen Byron at, Dennis K. Berman at and Joann S. Lublin at

Copyright ©2012 Dow Jones & Company, Inc. All Rights Reserved

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Ó Copyright 2012 The Shareholder Forum, Inc.





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