P&G's Succession Race Narrows

With global President Susan Arnold retiring, the path looks clear for COO Robert McDonald to become CEO when A.G. Lafley retires

The pathway to the chief executive's chair at Procter & Gamble (PG) now looks clear for Robert McDonald. The chief operating officer of the consumer packaged goods giant emerged on Mar. 9 as the No.1 candidate to take the helm once current CEO A.G. Lafley retires—a move many expect to be announced within a year.

McDonald had shared top-contender status with Susan Arnold, president of P&G's global business units. But P&G said Monday that Arnold, one of the top-ranking women in business, is retiring and that the executives who reported to her will now report directly to Lafley. P&G said that Arnold, who turned 55 on Mar. 8, will step down as president immediately but will remain with the company to work on special assignment until September. "It has long been her intention to step down upon her 55th birthday," the company said in a prepared statement

That wasn't clear to many on Wall Street, though. And now all eyes are on McDonald, also 55, who became a leading candidate to replace Lafley when he was named COO during a management restructuring in 2007. McDonald has been a key leader at P&G for almost 30 years. After graduating from the U.S. Military Academy at West Point, N.Y., and serving in the military, he joined P&G in 1980 as a brand assistant in the detergent business. McDonald served in a number of brand management and advertising positions, including brand manager of Tide, before being tapped to run the laundry division in Canada and serve as a vice-president in various parts of Asia.

Well-Rounded Background

The leadership bench at P&G remains strong even with Arnold out of the picture. Other possible successors to Lafley, according to analysts such as Ali Dibadj of Sanford C. Bernstein, include the vice-chairs that run P&G's business units: Robert Steele, head of health and well-being; Dimitri Panayotopolous, head of household care; and Ed Shirley, head of beauty and grooming. Among future leaders who are not vice-chairs, there's up-and-comer and highly regarded female executive Melanie Healey, who reports to Steele and is head of feminine and health care. Regarding succession, a P&G spokesman would not comment specifically on McDonald succeeding Lafley but did say that "we're fortunate to benefit from a strong and deep bench of senior management talent that we can draw from."

But historically, those who become vice-chairs rarely get the top job at P&G. And few have McDonald's breadth of experience.

"He did his tour of duty," says Charles Tribbett, co-leader of the CEO/Board Services Practice at executive recruiting firm Russell Reynolds. "Bob has a well-rounded background."

Analysts and investors point to McDonald's dominant role in P&G's analyst meeting in New York last December as a key indicator that he had risen to the pole position in the race to succeed Lafley. At that meeting, at which all of the heads of P&G's global business units and top executive posts make presentations about the business, analysts say McDonald was given significantly more air time and more substantive topics than the others, including Arnold. McDonald discussed P&G's productivity and future growth profile, explaining how P&G will embark on the most ambitious expansion program in the company's history. "We will literally transform our manufacturing and distribution system by proactively managing our capacity needs around the world," he told the group.

"McDonald was given the meaty topics," says Bernstein's Dibadj. "To me that is a signal."

Vast International Experience

Lafley, widely respected as one of industry's most capable leaders today, has talked in recent years about "delivering the decade" by continuing a long-standing record of double-digit earnings growth during his tenure. His legacy will no doubt be P&G's doubling down on consumer input by going beyond focus groups to enter their homes and online worlds, his broadening of innovation by seeking ideas from outside the company, and successful acquisitions such as the deal to buy Gillette. The question is whether McDonald, if he takes over as P&G's captain of the next decade, can be as successful a leader. One thing that bodes well for him is his vast international experience. McDonald spent nearly 15 years working in Canada, Japan, the Philippines, and Belgium. In an interview with BusinessWeek last week, 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."

McDonald and P&G leadership understand that P&G's future is based on capitalizing on opportunities overseas. Already, 60% of Procter's business comes from outside the U.S., up from 25% in 1980. Moreover, 60% of P&G's growth comes from developing markets such as Brazil, China, and Russia. 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 in the interview, McDonald reduced distribution costs and passed that savings to consumers by persuading Japanese distributors 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 never worked in or ran that division, having spent most of his brand experience in the household-care business. That has long been 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. Trouble is, with the recession now applying extreme pressure to retail sales, these growth engines are sputtering. The path might be clear for McDonald to take the reins, but it won't be an easy road for him to navigate.