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Procter & Gamble’s management should grow up and take its medicine.
For nine months, the US consumer goods company has been battling activist investor Nelson Peltz. He argues that the $226bn group — maker of Tide detergent, Gillette razors and Pampers nappies — has been too slow to react to changing consumer tastes.
Mr Peltz’s Trian Partners entered the fray in February by revealing a $3.5bn stake in the company. In July, he demanded a board seat but was rebuffed. David Taylor, P&G chief executive, said that he was already cutting costs and shedding less profitable brands and scoffed that Trian had provided “no new actionable ideas”.
So Mr Peltz launched what has become one of the most expensive proxy battles in American history. Individual shareholders, many of them company retirees, hold 40 per cent of shares, so both sides ended up funding massive media campaigns to mobilise them, including Facebook ads and YouTube videos on top of the usual deluge of paper statements.
Last month, it appeared P&G had successfully fought off Mr Peltz. After its annual meeting, the company claimed he had been denied a board seat by a thin margin. But now it has been forced to admit that he has pulled ahead in a recount overseen by an independent inspector. The margin is minute — winning by 42,780 out of 2.6bn shares voted, a margin of 0.0016 per cent.
P&G has said it plans to wait for the final tally, which could take three or four weeks. It also hinted that it might continue to fight on, saying “the results are still preliminary and are subject to a review and challenge period during which both parties will have the opportunity to review the results for any discrepancies”.
P&G is making a mistake. Even if the company ultimately wins the recount, the vote has revealed a deep level of discontent among many of its shareholders, particularly on the institutional side. The company needs to pay heed to their concerns.
The group’s brands have been losing market share for a decade and its sales have dropped for the past three years. Although its share price has risen nearly 17 per cent since Mr Taylor started in 2015, the S&P 500 is up nearly 25 per cent over the same time.
To an outside observer, Trian’s demands sound reasonable. Rather than share buybacks or other short-term fixes, it wants P&G to simplify the company’s structure, set more aggressive targets for its management and invest in smaller brands that could spark innovation. Rivals Unilever and Nestlé are already acquiring companies that appeal to millennials like Dollar Shave and Blue Bottle coffee. Trian’s plan won the backing of ISS and Glass Lewis, which advise institutional shareholders on how to vote. ISS observed that adding Mr Peltz to the board “appears likely to have benefits that outweigh the potential risks”.
P&G has already spent at least $35m to keep Mr Peltz off the board and tied up management time on a fight it can ill-afford. The company admitted last month that third quarter sales were “sluggish”, adding that the entire consumer sector was suffering.
Corporate governance experts have long argued that boards must be more than a rubber stamp for management’s ideas. P&G should halt the recount and admit that Trian has earned the right to provide that kind of challenge. If the company has really already found the cure to its ills, Mr Taylor should have no trouble winning over Mr Peltz.