P&G Says A.G. Lafley Rejoins as Chairman, CEO

Procter & Gamble Co. is replacing Chief Executive Officer Bob McDonald with his predecessor, A.G. Lafley, as the world’s largest consumer-products maker struggles to rekindle growth at home and abroad.

McDonald embarked on a turnaround plan last year to cut $10 billion in costs through 2016 and renew focus on the company’s leading businesses after losing market share to such rivals as Unilever. Activist investor Bill Ackman bought a stake valued at $1.8 billion last year and pushed to replace McDonald. The shares advanced 4 percent to $81.88 at the close in New York, for the biggest one-day gain since October 2009.

Lafley, 65, who started working at the Cincinnati-based company in 1977 and served as president and CEO from 2000 to 2009, will succeed McDonald immediately, P&G said yesterday. McDonald, 59, will retire on June 30 after 33 years of service and won’t receive any severance payments, the company said.

“The board called me and asked me if I would come back, and frankly, duty called,” Lafley said in a telephone interview yesterday. “I’m back. I’m full on, I’m engaged, and I’m ready to get into the business.”

McDonald chose to retire, spokesman Paul Fox said.

Lafley, who will earn a base salary of $2 million a year, said he plans to continue McDonald’s turnaround plan.

Replacing McDonald

P&G’s board discussed the prospect of replacing McDonald as far back as last July, people familiar with the matter told Bloomberg News at the time. Some directors talked about contacting former executives to potentially take the top job, one person said.

Lafley gained a reputation for pushing innovation at P&G, telling employees to get their ideas directly from consumers by observing them in their homes as they did household tasks. He pushed into emerging markets in Asia and Latin America and expanded P&G’s global reach with the $57 billion acquisition of Gillette Co. in 2005. He also pushed premium-priced products such as high-end versions of Tide and Bounty.

When he stepped down and handed the reins to McDonald, it was to an executive who’d been his right-hand man as chief operating officer and longtime confidante. While Lafley groomed McDonald for the top job for several years, McDonald’s main experience was overseeing operations rather than setting strategy and motivating change in the ranks.

Lafley’s return echoes one at J.C. Penney Co., where CEO Ron Johnson was replaced by predecessor Myron Ullman after an ambitious strategy alienated shoppers and tanked sales.

‘Something Bold’

“This is the time in Procter’s history when they’re most receptive to change,” said Matt McCormick, who helps manage $9.1 billion at Cincinnati-based Bahl & Gaynor Inc. “He’s not going to be in there to be a caretaker. He’s going to do something bold.”

Lafley’s mandate from the board is likely to get P&G growing again and groom a new CEO who can take over in a few years, said Peter Crist, chairman of Crist/Kolder Associates, an executive search firm in Hinsdale, Illinois, that places CEOs and other top executives.

“His charge from directors has to be, ‘come back and help us right the ship and grow the next CEO and then you’ll be a hero,’” Crist said. “When a board brings back an iconic leader like this, that tells you they came to a conclusion they had to make a change now and couldn’t wait any longer.”

‘Difficult Task’

McDonald became CEO in July 2009, less than a year after the collapse of Lehman Brothers Holdings Inc., and as Americans watched housing values plummet and unemployment climb. Consumers abandoned premium-priced products like those sold by P&G for more basic, private-label goods.

“He’s had a difficult task, and a difficult economic situation, and it’s tough replacing a rock star,” McCormick said.

While McDonald talked about adding new customers in new places, P&G lost market share in some of its established businesses such as U.S. laundry detergents as Unilever and other competitors popped out lower-priced goods. The introduction of blockbuster products stalled, and the company was criticized for being timid about trimming expenses.

In February 2012, McDonald announced his cost-cutting plan. Yet investors and analysts grew impatient, accusing executives of making excuses for P&G’s lagging performance. The company cut its profit forecasts three times last year.

During a call in April 2012, analysts including Ali Dibadj of Sanford C. Bernstein Co. and Citigroup Inc.’s Wendy Nicholson challenged McDonald, saying he was making excuses for lagging performance.

Company Makeover

“I’m just trying to understand how long do you expect investors to wait?” Dibadj said on the call. “How long does your current plan have to work? How much patience does the board have?”

To jog sales, McDonald rejiggered the company’s research and development structure, creating a companywide team of marketers, researchers and executives to figure out how to develop bigger breakthroughs, and more quickly.

In a memo announcing his retirement, McDonald said the attention focused upon him in the past year was “a distraction that is not in our best interests.” In his own memo, Lafley said he planned to continue with McDonald’s turnaround priorities.

Ackman Pressure

As McDonald sought to remake the company, he reversed some of Lafley’s strategy that made business-unit heads in charge of new product development. In an interview last year, Chief Technology Officer Bruce Brown said that decentralization had the unintended consequence of slowing breakthroughs because unit heads became more focused on short-term gains.

In January, Ackman told CNN that McDonald may not be the right man for the job and that the board might have to replace him. By then, Ackman, who leads hedge fund Pershing Square Capital Management LP, had already sought management changes and breakups of companies including Fortune Brands Inc. and Canadian Pacific Railway Ltd.

“Clearly Bob was under pressure,” said Dibadj. “The turnaround was facing many challenges, and last quarter may have been the straw that broke the camel’s back. They spent a lot of money, and didn’t get any results.”

Dibadj has an outperform rating on the shares, the equivalent of a buy.

Succession Planning

P&G’s net sales in the quarter ended March 31 rose 2 percent to $20.6 billion, trailing the $20.7 billion average of analysts’ estimates. The company projected earnings in the current quarter that trailed estimates, pushing down the shares the most in four years. Sales rose an average of 3 percent in the past three years, lagging behind Unilever’s 8.9 percent, according to data compiled by Bloomberg Industries.

The return of Lafley shows poor succession planning on the part of P&G’s board, said Jeffrey Sonnenfeld, senior associate dean at the Yale School of Management.

“They had so much forewarning, so how could they be in this spot of not having a clear successor,” he said. “This company has groomed so many top executives that it’s hard to understand why they’re in this spot.”

McDonald’s inability to implement changes more quickly at P&G ultimately cost him favor with the board, Sonnenfeld said.

“He’s a loyal insider and a very likable guy but he’s too structured a thinker for fluid situations and his style was getting in the way of making the kind of rapid responses P&G needs to changes in the market,” he said.

Lafley said in the interview that he “wasn’t sitting at home waiting for the board to call. I had plenty to do. I was not on the golf course, either. I have a lot of business and other interests, and obviously I will shut those down, and I will focus 110 percent on P&G.”