Nelson Peltz on Procter & Gamble Board: What It Means for Board, Management

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Even though Procter & Gamble Co. (NYSE: PG) says that raider Nelson Peltz lost his effort to get a board seat when the company counted votes at its annual meeting, Peltz will be on the board anyway. Procter & Gamble said it was due to the fact the Peltz had so many votes, which put his count very close to 50% of those cast.

Even without a seat, Peltz would continue to pressure for change. So the board has decided to get rid of him, ironically, by allowing him to join their numbers. It is a dangerous tactic.

In a letter, the board wrote:

Because the election results were so close, and because a large number of shareholders voted for Nelson Peltz to be a Director, the Board has engaged in numerous discussions with Mr. Peltz regarding a Board seat. That has included constructive engagements to get more closely aligned on strategic choices to transform P&G and deliver better results. For example, we agree that we are NOT predisposed to taking on excessive leverage, or substantially reducing R&D spending, or advocating for a break-up of the Company, or moving the Company out of Cincinnati. As a result, we have committed to work together with Mr. Peltz for the best interests of all shareholders, and the Board has appointed Nelson Peltz as a P&G Director, effective March 1, 2018. We look forward to his contributions as a member of P&G’s Board.

The people who had enough votes were also seated. These include Francis Blake, Angela Braly, Amy Chang, Kenneth Chenault, Scott Cook, Terry Lundgren, W. James McNerney, David Taylor, Margaret Whitman, Patricia Woertz and Ernesto Zedillo. Joseph Jimenez, CEO of Novartis, also joined.

Peltz joined the GE board in October, and CEO John Flannery said he will have a good deal of influence. P&G’s management should expect the same, even if they do not want it.

Peltz is expected to force P&G to restructure to be more profitable, as shares are only up 9% to $88 this year. The stock has underperformed the S&P 500 badly over the past five years. It is only higher by 34%, while the S&P is up 87%.

It is hard to take the other side of Peltz’s position. P&G revenue has fallen from $84 billion in 2013 to $65 billion for the most recent trailing 12 months. Some of this is due to M&A activity. Income before taxes was $14.8 billion in 2013, and in the trailing 12 months it was $13.3 billion. Activist investors might term this as “sleepy.”

Peltz already has had a “win” of sorts. As P&G announced he would be a new director, it added:

In addition, the Board heard shareholder views about the need to strengthen executive compensation practices. Based on that input, the Board’s Compensation & Leadership Development Committee has approved modifications to its Performance Stock Program to include relative sales growth metrics and a Total Shareholder Return modifier to ensure awards reflect performance versus external competitive benchmarks.

Those are measures Peltz wanted. He has gotten his way, partially, so far. The P&G board is about to find out that is only the beginning.