What Nelson Peltz wants from Procter & Gamble Co. (PG)

Wall Street analysts react to P&G proxy fight

CINCINNATI - Activist investor Nelson Peltz wants to cut the bureaucracy at Procter & Gamble Co., not break up the company or get rid of CEO David Taylor.

Those are among the details in an SEC filing Monday, in which the hedge fund founder seeks a seat on P&G’s board. The filing sets up a proxy fight in which shareholders will be asked to decide whether to add Peltz as a 12th board member, representing Trian Fund Management L.P., a New York fund that owns more than $3 billion in P&G shares.

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“We believe that P&G has an overly complex organizational structure and a slow moving and insular culture,” Trian said in its notice to company shareholders. “Structural and organizational bureaucracy may be preventing management from identifying and responding to commercial opportunities in a timely manner, hindering product innovation and dampening sales growth.”

Trian called for “decisive action that goes above and beyond what the company has presently committed to do.”

The filing said Peltz met with P&G officials in May, seeking a public commitment to appoint him as a board member within 12 months unless the company’s performance improved. After a series of additional meetings, P&G declined the request, prompting Peltz to seek shareholder support at the company’s annual meeting in October.

P&G released a statement about the looming proxy fight:

“P&G has maintained an active and constructive dialogue with Trian since it made its investment in the company. P&G’s board and management team are keenly focused on executing the company's strategy to drive innovation, accelerate organic sales and volume growth, improve productivity and cost structure, and strengthen P&G's organization and culture. The board is confident that the changes being made are producing results, and expresses complete support for the company's strategy, plans, and management.”

Proxy battles at companies the size of P&G can cost millions of dollars, as both sides lobby shareholders to support their position.

“P&G could have avoided all of this if it had listened to investors and analysts a long time ago, and before Trian got involved. Now, it’ll be in for a fight,” said Bernstein Research analyst Ali Dibadj. “We continue to believe breaking up the company will still be the best solution to reduce costs, reduce bureaucracy, and become more nimble, but we certainly look forward for improvements any way we can get them.”

Trian told shareholders it does not want the company to reduce pension benefits, research and development, marketing expenses or capital investments. But it does want the company to reduce “overlapping organizational structures” in its management ranks.

“These overlapping structures obscure accountability, increase bureaucracy and slow decision-making and impede sales growth and market shares,” the Trian proxy statement said.

That analysis will ring true to many current and former executives at P&G, said Tim Meyer, founder and chief investment officer at Meyer Capital Management. A former P&G business analyst, Meyer thinks the company has spread out its decision-making authority into too many segments of the company. That forces any manager with a good idea to first spend time and energy convincing other bosses to agree.

“P&G has evolved to a culture that is extremely risk averse,” Meyer said. “Nobody gets rewarded there for sticking their neck out and taking a risk. If you’re running a multi-billion dollar brand, the opportunity to screw that up is really big. So, that’s bred a kind of cautiousness and a sense of complacency.”

Morningstar analyst Erin Lash said P&G is on the right track, but needs more time to establish that the sale of 100 brands and cost reductions in excess of $10 billion will result in more rapid growth.

“In light of the vast array of actions the firm is undertaking, we fail to see a major impetus behind Peltz’s approach and little to suggest that his oversight would accelerate change,” Lash wrote. “P&G continues to be plagued by intense competitive pressures and slowing global growth, which has acted as an outsize strain on its grooming and beauty care segments, representing one fourth of sales in the aggregate.”

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