Until Angela Braly resigned as WellPoint Inc. (WLP)’s top executive last week, six of the 10 outside directors on P&G’s board were active CEOs, the highest number of any company in the Standard & Poor’s 500 Index, according to an analysis by GMI Ratings in New York. Now that Braly is no longer a CEO, P&G ties International Business Machines Corp. with five, GMI found.
The concentration of leaders on P&G’s board threatens to turn from benefit to burden as the executives confront financial, operational and macroeconomic difficulties at the companies they run. Braly stepped down from health insurer WellPoint after investors called for her ouster, while James McNerney, another P&G director, is steering Boeing Co. (BA) through defense spending cuts and delays to new jets. P&G director Meg Whitman, CEO of Hewlett-Packard Co. (HPQ), had an $8.86 billion record loss last quarter as her company wrote down the value of its enterprise-services unit.
“This is probably not the kind of board you want for a company that’s about to face a crisis,” said Jay Lorsch, a management professor at Harvard Business School in Boston. “When you have directors who are busy with their own companies, that limits time they have for P&G and that can be problematic.”
McDonald, who lowered profit forecasts three times this calendar year at the world’s largest maker of consumer products, is trying to cut $10 billion in costs and restructure the Cincinnati-based company to focus on developing products and winning back market share. He also faces pressure from activist investor Bill Ackman, founder of Pershing Square Capital Management LP, who disclosed a stake in P&G in July.
P&G’s board unanimously supports McDonald and his plan and is monitoring its effectiveness, directors said in a July 18 filing with the U.S. Securities and Exchange Commission. The statement followed a Bloomberg News report that directors had discussed whether to replace McDonald, who has been CEO since July 2009, according to people with knowledge of the matter.
McDonald, who is 59, has been given more time after improvements in how he delivered financial results for the most recent quarter, said another person.
“P&G’s board has an extraordinary level of leadership experience, is highly engaged and has a strong track record of attendance and participation,” Jennifer Chelune, a company spokeswoman, said in an e-mailed statement.
So far P&G directors have kept up with board commitments, with 97 percent in attendance at seven board meetings and 23 committee meetings in the fiscal year ended June 30, 2012, according to regulatory filings. While a typical board seat requires about 20 hours a month of work, a company facing challenges can quickly consume more time, said David Larcker, a law professor at Stanford University.
“From the outside, Procter & Gamble is an all-star board but it’s hard to know what the dynamics will be in a crisis situation,” said Larcker, who co-wrote the book “Corporate Governance Matters.” “If they have an active position of their own and on another board, it can really ratchet up.”
During Hewlett-Packard’s fiscal 2010, when former CEO Mark Hurd resigned, the board met 34 times, compared with 10 times in 2009 and 9 in 2008, regulatory filings show.
Charles Elson, who was a director at Sunbeam Corp. and HealthSouth Corp. (HLS) during restructurings at those companies, said a turnaround effort will increase the time requirement for P&G board members “dramatically.” Directors would typically need to monitor the plan’s execution at each stage, looking at everything from how products are selling to financial statements to employee retention and hiring, he said.
“In some months, it would double or even triple your time requirements,” said Elson, who is director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “I know, I’ve been there.”
Ackman’s involvement with P&G gives board members an additional responsibility. Ackman may seek management changes, people familiar with the matter said in July. He previously waged campaigns for changes at Target Co. (TGT) and Fortune Brands Inc., and in June he successfully installed his candidate for CEO at Canadian Pacific Railway Ltd. after a proxy fight.
In addition to Hewlett-Packard and Boeing, the public company CEOs on P&G’s board are the leaders of American Express Co. (AXP), Archer-Daniels-Midland Co. (ADM) and Frontier Communications Corp. (FTR) McDonald, who is the board’s chairman, and four of the other CEOs are on at least one additional public board.
The CEOs for the companies declined to comment through spokesmen. Braly, the former WellPoint CEO, remains a “productive and valued member” of Procter & Gamble’s board, P&G’s Chelune said.
“Under our governance guidelines, a major job change requires the board to reassess the director’s continued service on the board, and the board will follow its established process,” Chelune said. There isn’t a specific timetable for the review, she said.
Kristin Binns, a Wellpoint spokeswoman, declined to comment on behalf of Braly.
GMI, a corporate governance advisory company, gave P&G a letter grade of “D” on corporate governance last year, saying “multiple overcommitted directors can seriously weaken a board.” American Express, Boeing, Hewlett-Packard and WellPoint also received “D” grades for governance issues relating to compensation or board composition, while Archer-Daniels-Midland and Frontier were given “C” grades.
Frontier CEO Maggie Wilderotter, who joined P&G’s board in 2009, is trying to reverse seven straight quarters of revenue declines after the company purchased Verizon Communications Inc.’s local wireline business in 14 states for more than $8 billion. She is also a director at Xerox Corp. (XRX) alongside McDonald and at bankrupt media company Tribune Co.
Archer-Daniels-Midland, the corn processer led by P&G director Patricia Woertz, is confronting the U.S. drought and rising costs to buy corn from farmers. The Decatur, Illinois- based company has missed analysts’ earnings estimates in four of the last five quarters.
American Express CEO Kenneth Chenault leads the best- performing company among the chief executives on the P&G board. The biggest credit-card issuer by purchases reported a second- quarter profit in July that beat analysts’ estimates. The shares have risen 24 percent this year. Chenault, who joined the P&G board in 2008, is also on the board of IBM with McNerney.
The other P&G directors include Intuit Inc. founder Scott Cook, who remains an Intuit board member and is also an EBay Inc. director; Susan Desmond-Hellman, chancellor of the University of California, San Francisco; Johnathan A. Rodgers, former CEO of TV One LLC and a director at Nike Inc. and Comcast Corp.; and Ernesto Zedillo, former president of Mexico, who is also a director at Alcoa Inc., Citigroup Inc. and Grupo Prisa.
The lineup at P&G is increasingly an anomaly, said Stanford’s Larcker, who recently wrote a paper on whether CEOs make the best board members. In 2000, 53 percent of newly elected, independent directors were a CEO or other active high- level executive compared with 26 percent in 2010, he said, citing a 2010 study by recruiting company Spencer Stuart.
In a separate survey last year of corporate directors from Stanford’s Rock Center for Corporate Governance and recruiter Heidrick & Struggles, 87 percent of respondents said active CEO directors are too busy with their own companies to be effective, Larcker said.
A better strategy is to mix directors with experience in the industry of the company, specialists like technologists or accounting experts and then a minority of generalists such as sitting or retired CEOS in other fields, said Robert Pozen, a senior lecturer for Harvard Business School and the Brookings Institute.
“It’s easy to see what expertise each of these CEOs bring, but I wouldn’t have a majority of these people as a general rule,” said Pozen, who is also a director at Nielsen Holdings NV and Medtronic Inc. “These are all very good, smart people but CEOs have less time to be on boards.”
To contact the reporter on this story: Jeff Green in Southfield, Michigan at firstname.lastname@example.org