Consumer

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Procter & Gamble Co.'s board should give Nelson Peltz a chance.

The maker of Tide detergent again rebuffed the activist investor's bid for a board seat on Thursday after Peltz fleshed out his ideas for improving its business in a white paper published the previous evening. These include reorganizing the company and hiring more outsiders to reduce the bureaucracy he believes has slowed innovation and growth. P&G says it's already executing its own simplification strategy and doesn't need his help.

Still a Fixer-Upper
P&G has outperformed the S&P since CEO David Taylor took over in 2015. But over the long term, it's performance has left much to be desired.
Source: Bloomberg

Its latest statement was surprisingly aggressive considering Peltz, the CEO of Trian Fund Management, isn't asking for anything that radical and primarily seems interested in helping P&G better accomplish the transformation it's already begun. The gut punch comes toward the end as it notes "positive recommendations were not forthcoming" from boards and CEOs that have worked with Peltz, a comment seemingly aimed at defying the activist investor's view of himself as generally collaborative. Apparently P&G's been taking notes on Automatic Data Processing Inc.'s counter-attack on activist investor Bill Ackman. But here's the thing: Peltz's track record is less embarrassing than Ackman's, and P&G is no ADP.

For all P&G's talk of execution, its long-term returns have been disappointing. Even amid the company's largely positive quarterly earnings report in July, there were some troubling sales trends for its baby, oral-care and Gillette razor brands as competition ratchets up. The company itself seems to know all this or why else would it have undertaken its own remodeling efforts? All P&G achieves with this defiant tone is to prove Peltz's point that it's resistant to outside perspective.

While Peltz's first statements on P&G were short on ideas and actionable fixes, I don't think it's fair to say there's "still nothing substantive" in the 90-plus page white paper. Yes, it's light in some places: Peltz doesn't seem to have a specific plan yet as to how to fix P&G's innovation lapses or what this "decisive digital strategy" that it needs should look like. But he's got some solid points here, too.

Change for the Better?
Peltz says P&G has been lowering the bar for performance, despite its transformation efforts
Source: Trian white paper

Why are compensation targets tied to 2.8 percent organic sales growth through 2019 when the company sees its markets growing by 3 percent to 3.5 percent? Also, P&G does seem to have missed some opportunities to invest in new products or digital expertise with takeovers of startup consumer companies. And if it's true that P&G CEO David Taylor told Peltz that "we cannot bring in outside people at too senior a level or they will fail," that hardly seems like the ideal corporate culture.

Peltz's idea of reorganizing P&G into a lean holding company with three business units -- beauty, grooming and health care; fabric and home care; baby, feminine and family care -- is intriguing. It does the job of a breakup by making the businesses nimbler and more accountable, without the duplication of shared costs that you see in more formal splits.   P&G says this kind of reorganization would result in higher costs and an extra layer of management complexity. But it offers little explanation for that conclusion. I'm a bit stumped as to why it was a good idea when P&G decided to streamline its 16 product categories into 10 but an utterly horrible idea to reorganize those into three business units. 

Falling Short
Peltz points to P&G's lagging organic sales growth as evidence it's losing market share. He thinks further simplifying the company will help stop this trend.
Source: Trian white paper

P&G points out that Peltz has been fully supportive of the company's strategic plan and management team in conversations with the company. It says this defensively, but the fact that there's now a white paper doesn't mean he's looking to be any less collaborative. Peltz isn't trying to kick out other board members or the CEO. He just wants a seat at the table -- a single seat, I might add  -- that isn't going to count for much if he can't win some of the other 11 board members over to his proposals. What does P&G have to lose by adding his perspective?

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Roper Technologies Inc., a maker of legal software and electronic highway tolls, has made good use of this model. 

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net