Procter & Gamble announced Friday night it will add activist investor Nelson Peltz to its board of directors in 2018, even though a final vote count showed Peltz fell 498,312 votes short of winning the board seat on his own.
According to an open letter Chairman David S. Taylor issued to P&G's shareholders, the results of October's proxy vote were close enough -- Peltz and former Mexican president Ernesto Zedillo were neck-in-neck -- to merit negotiations with Peltz about his desire to join and change the company.
Peltz and his company, Trian Fund Management, claimed an "overly complex organizational structure" stymied P&G's growth and discouraged innovation at the Cincinnati-based maker of Tide detergent, Pampers diapers, Gillette razors and Crest toothpaste. He had proposed, among other things, dividing P&G into three autonomous branches rather than the 10 global business units it now operates.
P&G criticized that idea as a first step toward breaking up the company. Neither side will say whether Peltz is continuing to push for the reorganization, but P&G's letter to shareholders said both sides found common ground on other issues.
For example, P&G agreed to modify its executive compensation practices to promote sales growth and shareholder return that exceeds levels achieved by P&G competitors.
P&G is one of Cincinnati's most important companies, with about 10,000 local employees, thousands of local shareholders and a history of civic contributions that have shaped the region, and the prospect of seeing it vivisected in pursuit of greater profits sparked vocal resistance from P&G's existing board of directors.
However, Taylor wrote Friday, "the Board heard that there is broad shareholder support for P&G's strategies -- a stronger and more focused portfolio, significantly improved productivity, a simpler and more accountable organization, and raising the bar on superiority. At the same time, shareholders indicated that P&G needs to move faster to deliver improved results, which the Board and Management team are committed to doing."
Taylor said the strong showing of shareholder support for Peltz's agenda convinced him and other directors, after a process of negotiation, that the investor could "refresh" the board in accordance with shareholder preferences. There will be changes but they will not, he added, include any corporate mitosis -- P&G will stay where it is while pursuing alternative strategies to innovate and improve its practices.
"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," Taylor wrote. "We have committed to work together with Mr. Peltz for the best interests of all shareholders."