"The CEO is the link between the Inside that is 'the organization' and the Outside of society, economy, technology, markets, and customers…Results are only on the outside." —Peter Drucker
After a legendary nine-year run, one of the most celebrated CEOs in Corporate America, Procter & Gamble (PG) Chief Executive Officer A.G. Lafley, is expected to announce that he is stepping aside, according to sources close to executives at the Cincinnati-based consumer-goods titan. P&G is preparing a management transition that would replace Lafley with Chief Operating Officer Robert McDonald, a 29-year company veteran, as soon as Tuesday, June 9, according to a report in The Wall Street Journal.
Lafley is expected to stay on as chairman of the board for up to two years and to remain involved in setting the company's strategic direction. The P&G board could vote on the matter in its regularly scheduled meeting June 9 for a transition expected on July 1. "My bet is that there is an orderly transition [coming soon]," said one former P&G executive. Company spokesman Paul Fox declined to comment.
Few corporate leaders have accomplished as much as P&G's Lafley. When he took over in June 2000, the company was in crisis mode. It was missing projected earnings. Its business units—even the flagship household-care division with such power brands as Tide—were struggling. By the summer of 2000 the company had lost an astonishing $85 billion in market value.
Tichy: "An Incredible Track Record"
Lafley didn't flinch, launching a revitalization that included numerous acquisitions—most notably, the $57 billion takeover of Gillette in 2005—that helped more than double P&G's sales, to $83.5 billion in the fiscal year that ended last June. P&G's stock price nearly doubled as well during Lafley's tenure, growing 97%, from 26.93 to 53.14 at the close of trading June 8.
"The guy has an incredible track record," says Noel Tichy, professor of management and organizations at the University of Michigan Ross School of Business. "He came in during a crisis and repositioned the whole portfolio."
Most chief executives, as Lafley has often observed, get too internally focused and neglect the importance of what's going on around them. But if any CEO has deployed Peter Drucker's famed management philosophy of mastering the outside, it has been Lafley. P&G once was known for innovating entirely on its own. But Lafley took the bold step of forcing P&G to partner with other companies—even rivals—in order to innovate. He boosted P&G's commitment to consumer input by going beyond focus groups to enter consumers' homes and the online worlds they visit.
That led to such breakthrough new products as the Swiffer new-age mop. Innovation, whether inside or out, became synonymous with P&G's culture. "A lot of companies give lip service to innovation," says Rosabeth Moss Kanter, Arbuckle professor of business administration at Harvard Business School. "Lots of companies use the word, but it doesn't become part of the living conversation."
Lafley Didn't Seem Eager to Leave
Lafley spoke in recent years about "delivering the decade" by continuing his longstanding record of double-digit earnings growth. But challenging economic times have slowed progress of late. P&G recently offered dire sales projections for the current fiscal year, which ends June 30. As the recession wears on, penny-pinching consumers are buying less expensive household goods, including private-label products. P&G's organic sales, which exclude the effect of acquisitions, divestitures, and foreign exchange, are expected to increase 2% to 3%—just half the company's long-term target of 4% to 6%. And P&G expects sales growth to worsen next year, predicting organic sales gains of merely 1% to 3%.
Lafley, who turns 62 this month, has said publicly over the past year that he was not ready to step down. When asked in a recent interview with BusinessWeek whether he would be stepping aside any time soon, he said: "No. I'm here. C'mon, I'm 62. I've got some runway left…Right now, I'm focused like a laser on P&G and P&G stakeholders."
But talk of succession has been swirling around the company for a couple of years. The elevation of McDonald to COO in 2007 raised speculation. And the departure earlier this year of his chief rival for the top post, global President Susan Arnold, only fueled that talk. Furthermore, Lafley and other top P&G executives just completed a three-year cycle in the company's bonus program. So barring a renegotiated compensation package, there is less financial incentive for Lafley to stay aboard.
McDonald: A Globally Seasoned Executive
McDonald, 55, graduated from the U.S. Military Academy at West Point, N.Y., and served as a captain in the Army. He joined P&G in 1980 as a brand assistant in the detergent business. McDonald worked in a number of brand management and advertising positions, including as Tide's brand manager, before being tapped to run the laundry division in Canada and serve as a vice-president in various Asian markets.
The question is whether McDonald, if he takes over as P&G's chief for the next decade, can replicate Lafley's success. One thing he has in his favor is vast international experience. McDonald spent nearly 15 years working in Canada, Japan, the Philippines, and Belgium. In an interview with BusinessWeek earlier this year, he said: "Leaders of P&G believed that to be a leader of this company in the future, it is not sufficient to be able to lead only in your culture."
Already 60% of Procter's business comes from outside the U.S., up from 25% in 1980. Moreover, developing markets such as Brazil, China, and Russia contribute 60% of P&G's growth. McDonald is seen as one of the driving forces behind the company's success in Asia. By successfully walking a delicate cultural tightrope, he said, McDonald reduced distribution costs and passed the savings to consumers by persuading Japanese distributors that it was O.K. to stop sending P&G's goods through their centers.
The main hole in McDonald's rÉsumÉ is his lack of experience in the beauty business. He gained most of his brand experience in the household-care business—long P&G's biggest segment and for years its growth star. In recent months, Lafley has identified the beauty, grooming, and health businesses as the company's growth engines, delivering greater operating margins and growth trajectories.