Too close to call: Why Procter & Gamble proxy fight is bound to be tight

Index funds could be tie breaker

CINCINNATI - Nelson Peltz has 60 million shares in his pocket on the eve of Procter & Gamble Co.’s annual meeting. He’ll need about 1.1 billion more than that to win a board seat at P&G, based on WCPO’s analysis of voting trends at P&G’s last three annual meetings.

WCPO looked at the number of shares voted in P&G board elections from 2014 to 2016. Directors, running unopposed, consistently earned about 1.8 billion shares each year, all of them securing about 97 percent of all shares voted. But in all three elections, less than 80 percent of shares actually submitted a vote.

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This year, it will be different. Peltz and P&G have invested more than $60 million to gin up shareholder support for their dueling proxies. Shareholders were asked to submit blue proxies if they like the direction P&G is moving and support the company’s slate of 11 directors. Peltz is asking shareholders to vote a white proxy to make him a 12th board member, where he’ll push for another restructuring of P&G that he thinks will help the company grow faster.

The hotly contested election is likely to increase shareholder participation. P&G has about 2.6 billion shares outstanding. If you assume 85 of those shares cast a vote, Peltz would need nearly 1.1 billion shares to reach a majority. A 95 percent participation rate would require 1.2 billion votes for the victor.

To garner that level of support, Peltz needs to attract votes from all three of the broad categories in P&G’s shareholder base: Index funds, institutional investors and retail investors, including P&G retirees and their heirs.

Here’s a breakdown of each voting block:

  • Large index funds -- Vanguard Group, Blackrock Inc. and State Street Corp. -- own a combined 452 million shares, or 18 percent of the company, according to Yahoo Finance. This group is sometimes described as passive investors because their trading is based on formulas intended to match broader market categories, such as the S&P 500 or Dow 30 Industrials.
  • About 2,600 institutional investors – including hedge funds, pension funds, mutual funds and investment advisors – own another 1.1 billion shares, or 43 percent. This group includes actively managed funds like Yacktman Asset Management and state teachers pension funds in California and Texas. All three recently declared their allegiance to Peltz – bringing his pre-meeting vote count to 60 million.
  • Retail investors, mostly individual investors, own about 1 billion shares, or 39 percent. P&G has a high number of retail investors, who tend to support management but often don’t vote in corporate elections. Employees and retirees represent about 25 percent of this group, or 270 million shares.

Peltz wins Wall Street

Peltz is expected to get lots of support from institutional investors because three of the nation’s biggest proxy advisory firms have endorsed Peltz. The most recent endorsement came from Egan Jones Rating Company, which said Peltz’s election would cause P&G’s “talented and competitive incumbent board to step up its game and improve both the structure and performance of the firm in the long run.”

Bernstein Research analyst Ali Dibadj surveyed 70 institutional investors for a September 25 report that showed 73 percent of this group support a board seat for Peltz. If you assume that number holds true for all 2,600 institutional owners of P&G stock and you also assume that 95 percent of institutional shareholders vote a proxy, Peltz would win about 760 million shares to P&G’s 281 million.

“Support would need to come from other constituents as well,” Dibadj wrote.

P&G wins Main Street

P&G is expected to get lots of support from retail investors, including current and former employees like Kirk Perry, president of brand solutions for Google Inc.

Perry, former president of P&G’s Global Family Care segment, thinks the company is “moving in the right direction and putting the right things in place for the long term.” Perry wouldn’t say how many shares he still owns, but did say he voted those shares in favor of the company’s board slate.

“I think they’ll be in good shape this week,” he said.

“I think P&G’s going to win because of the retail vote,” said Mark Reuter, a P&G shareholder who works on proxy campaigns as part of his securities practice at the Keating Muething & Klekamp law firm Downtown. Reuter also voted a blue proxy in favor of P&G’s board slate.

“It’s not obvious to me that one director is going to make that much of a difference," Reuter said. "And our experience with boards indicates that collegiality is a pretty important thing. For Mr. Peltz to be admitted to the board in this fashion I would suspect might have an impact on collegiality. I think the retail vote is going to come out and there will be a lot of people who want to support P&G.”

But the support won’t be unanimous, based on another Bernstein Research survey of 121 former P&G executives, 37 percent of whom said Peltz deserves a seat on P&G’s board.

That number “rises to almost 50 percent for those who left P&G in the past five years,” Dibadj wrote. “Alumni think P&G's biggest problems have been competition, bureaucracy, and innovation.”

Assuming P&G enjoys the same percentages in retail as Peltz gets among institutional investors, P&G would gain 698 million “votes” from retail shareholders. Combining those two categories, the vote would be 1.02 billion shares for Peltz and 979.8 million for P&G, a difference of 39 million shares.

State Street breaks the tie

That means either side can probably win the contest by claiming two of the three big index funds. In other words, Peltz could claim Vanguard’s 180 million shares and P&G could still overtake him, winning 156 million from Blackrock plus 115 million from State Street.

Index funds also played a key role in the last big proxy fight Peltz lost, CNBC anchor David Faber reminded fellow anchor Jim Cramer in this Oct. 3 discussion of the P&G proxy fight.

Faber: “In the case of Dupont, the proxy advisory firms all went for Trian, and they didn’t get any of the index funds.”

Cramer: “Do any of these firms have conflicts?”

Faber: “They do have 401k business that they solicit from the P&Gs of the world. You always wonder whether that figures into it.”

Vanguard confirmed that P&G is a client, but declined to reveal how its voting shares. In fact, that information is not required to be disclosed publicly until next year’s annual report, which will be released next August.

“The Vanguard funds’ votes are cast solely in the long-term interest of fund investors,” said Vanguard spokeswoman Carolyn Wegemann. “The Investment Stewardship team’s voting responsibility is entirely separate from our client-facing businesses, and a company’s relationship with Vanguard has absolutely no bearing on the funds’ voting decisions.”

Blackrock provided a similar response, also declining to reveal how its shares will be voted in the P&G contest.

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