An Opinion Piece from the Chairman of The Center’s Board of Advisors
Albert Einstein insightfully pointed out that “Insanity is doing the same thing over and over again and expecting a different result.”
That insight is useful in evaluating the Procter & Gamble (P&G) Proxy Contest between P&G and Trian Partners/Mr. Peltz. As someone who worked for almost a quarter of a century at P&G in various executive roles in various business units, functions, and geographies retiring in 2012 at the Vice President level, it is easy to understand how it got to a proxy contest.
P&G is indisputably one of the greatest success stories in the history of corporate America. Founded in 1837, barely a half century after our country’s formation, P&G is approaching 200 years of an existence of excellence that parallels our great country’s while producing tremendous wealth creation for its shareholders through both price appreciation and a record of paying dividends that is almost unmatched in corporate America in terms of both its payout amounts and their uninterrupted longevity (127 consecutive years paying a dividend, 61 consecutive dividend annual increases). Its relationship of producing win-win for its headquarter city, the great city of Cincinnati, and its state, the great state of Ohio, is also worthy of praise.
P&G’s shareholders, employees, retirees, and communities in which the company operates have all benefitted from the centuries of wealth creation. Consumers in our country and around the world have benefitted from using great brands that improve their lives every day. The company’s Purpose, Values, and Principles exemplified by “always do the right thing,” “do the hard right, not the easy wrong,” “the interests of the company and its employees is inseparable,” etc., with one of the oldest continuous employee profit sharing retirement plans so that all employees benefit from the success of the company, is worthy of both praise and emulation. P&G cares about its employees and retirees. As just one example, it provides them great health care…
In my case, an immediate family member of mine was diagnosed with cancer. P&G’s health care plan has been both responsive and proactive to ensure great health care services are provided.
Our country itself has benefitted from P&G’s success in developing leaders as many former “P&Gers” have gone on to lead and grow many of our country’s other great companies like Microsoft, Ebay, Intuit, etc., etc. P&Gers have also served our country with distinction as Cabinet Secretaries under U.S. Presidents of both parties. It is statistically less likely to get hired by P&G than to get into Harvard based on percentage of applicants hired/accepted. The managers and leaders at P&G are individually extremely talented.
As part of that proud history, “that long blue line”, P&G’s culture is strong and one characteristic of that culture is this: P&G managers do not like to be told what to do unless concurrently it is explained to them, and they understand, why what they are being “asked” to do is the “right” thing to do to further the company’s interests. Furthermore, because of its centuries old success, P&G’s corporate culture is also permeated with an emphasis on, if not infatuation with, “process.” Of course, process often becomes the end instead of the means. This is a tendency successful companies face that becomes stronger and more perilous over time because they view their process as an element of their long-term success. But this tendency must be counterbalanced because success leads to failure. We succeed. We therefore don’t change. But things around us change. We therefore fail.
So, when someone tries to tell P&G what to do without following its “process,” it evokes a visceral counter corporate culture response akin to antibodies attacking bacteria. The response begins “I hear you, but….”
“I hear you, in terms of total shareholder returns, we have underperformed the S&P 500 and markedly underperformed our peer set the last 10 years, have lost market share in 68% of our top 20 markets over the last 5 years, but over the last 18 months or so we have outperformed in terms of total shareholder returns versus both the S&P 500 and our peer set. Our new CEO and his team’s strategy and plans are working. We do not need, and in fact would be counterproductive, to have a disruption of that progress by putting someone on our board who isn’t selected by our process.”
Both sides of the argument have merits. That is also not surprising since the principal voices of each side are so talented and skilled. Mr. David Taylor, Chairman of the Board, President, and Chief Executive Officer of P&G, is a great manager and leader. Any company would be fortunate to have him. Mr. Nelson Peltz, a Founding partner of Trian Management and its Chief Executive Officer, is a proven wealth builder with impressive achievements over many decades. Any company would be fortunate to have him.
I have never met or had any communication of any kind with Trian/Mr. Peltz or anyone associated with their entities or proxy contest efforts and similarly none with anyone at P&G regarding the proxy contest. Like other P&G shareholders, I have only read the materials sent to me by both sides of the proxy contest (“blue ballot” and “white ballot”).
But leadership is about getting things done through others by inspiring them. To inspire others, you have to listen, be grateful, and innovate. Innovation requires disruption. If you do not disrupt, you do not innovate.
The P&G proxy contest is symptomatic of a broader need in corporate America: innovation through disruption.
Boards of Directors and the companies they lead need to disrupt themselves to innovate.
Who is more likely to produce innovation through disruption, a board of directors with all of its members selected by and through the company’s process (i.e., its current members) or having at least one member of the BOD be a major “shareowner” nominated and approved by its other shareowners?
To those who would argue that the current “process” allows for independent directors to be put on the ballot by shareholders, please consider the plausibility of that argument when someone who represents a company owning over $3 billion dollars of stock in a company has to engage in and spend tens of millions of dollars to get on the ballot to be voted on as a possible director of that company. And of course, the company has “deeper pockets” (the shareholders pocket) to spend more money to prevent that from happening. Spending shareholders money to prevent shareholders from having a voice in the company they own. Wow.
A basic understanding of in-breeding issues, self-selection biases, and need for owner interests representation, would dictate that at least one of the board of directors members should be a major shareowner.
Every board of directors in public corporations should have at least one board member that is a “major share owner” owning/representing at least 1% of the stock of the company.
This can be accomplished through open ballot nominations including self-nominations.
Would not having at least one of eleven or twelve board members be a “major share owner” help the company be better aligned with their owners interests and innovate through disruption?
What would be the downside?
To have the position that having one of so many board members be a “share owner” is a bad thing for a company that is doing well for its owners is difficult to comprehend. It is akin to saying that such a shareowner would go to board meetings and have a negative impact on the meetings by saying something like: “I have over $3 billion dollars of stock in this company and you are over delivering shareholder value causing the value of my stock to go up more than if I had invested the money in other companies. Please stop and change your strategy and plans. I beg you. I am allergic to money.” Equally difficult to comprehend is if you can’t handle internally one focused board member owning over $3 billion dollars of the company’s stock who wants to see it increase in value, how are you going to handle externally one focused competitor who wants to see the value of the company’s stock go down?
The concept of having different “constituencies” represented at the governance level is not a novel concept. University boards of trustees can have “student” and “faculty” representatives. Should not public companies have an “owner” representative?
This is particularly important in public companies for at least two reasons. First, board members (and executives) are not “paying” for shares of the company they are leading, they are “granted” those shares. Hence, money out of their pockets is not at risk. Second, as a corollary to the insightful articulation of “Too Big to Fail” by Andrew Ross Sorkin, we must also be mindful that as public companies grow bigger in certain industries, we must be mindful of “Too Big to Succeed.” Their boards of directors and executives become enamored with becoming bigger, having more resources, getting paid more, while not adequately accounting for the performance reducing factors bigger brings with it such as, but not limited to, complex processes, bureaucracies, and cultural integration barriers.
Don’t keep doing the same thing over and over again and expect a different result.
If shareowners do not have a seat at the table, shareowner interests are not as well served as they should be.
P&G and Trian/Mr. Peltz should for the sake of shareholders reach a compromise prior to the October 10 annual meeting. As one option, having Trian/Mr. Peltz hold a “shareowner” seat on the board for a 5-7 year period and then that seat is held by another “shareowner.” As another approach, have Trian/Mr. Peltz Chair an Advisory Council of the Board that presents to the board at least every quarter at a Board meeting and that Chairperson rotates every 5-7 years among major share owners. With either approach, alternatives are presented if desired results are not being produced.
Going back to my mention of cancer, in treating cancer one follows a chemotherapy strategy (Plan A) but in parallel one begins the work to find suitable donors to do a transplant (Plan B) in case the chemo doesn’t produce the desired results. We can’t wait for Plan A to not produce the desired results to then start work on Plan B. That’s “Too Late to Succeed.”
Either approach serves to ensure shareholders win as opposed to one side winning.
An agreed-to engagement is better than a forced marriage or forced divorce.
Either approach would be innovation through disruption.
It is about doing the hard right, not the easy wrong.
About the author
A graduate of Cornell and Harvard, Manuel “Manny” Gonzalez, is President of MGM Consulting and MGM Capital. He is in his second term as Chairman of the Board of the FIU Center for Leadership and a member of the Board of Directors of Alfalit International and SofBoost, Inc. while also serving on advisory boards for companies in the banking and private equity industries. Mr. Gonzalez received the National Hispanic Health Foundation Leadership Award in 2014.