P&G Shareholders Push For More Power Over Board Membership

Procter & Gamble Co.shareholders would be able to make board changes via simple majority votes – rather than super-majority votes – if the firm’s board adopts a proposal nearly 60% of voting shareholders recently supported.

With more power to shake up P&G’s board, shareholders could ultimately have a greater hand in changes to company management. Activist investor William Ackman – whose firm Pershing Square Capital owns roughly a 1% stake in the firm – is rumored to be pushing to replace P&G CEO Bob McDonald.

Given the advisory nature of the proposal, P&G’s board can decide whether to adopt or ignore it. McDonald, who also is board chairman, opposes the change.

During P&G’s annual shareholder meeting in Cincinnati Oct. 9, the proposal was favored by 59.3% of votes cast. The change in voting requirements would mean that P&G shareholders could make certain board member decisions based on simple majority voting – more than 50% – rather than the current super-majority, which requires 80% of votes to make changes to the board.

“Currently, a 1% minority can frustrate the will of our 79% shareholder majority,” a shareholder representative said while detailing the proposal during the annual meeting.

She added that the super-majority voting structure is “arguably” most often used to block initiatives that are supported by most shareholders but are opposed by management.

“Super-majority voting requirements have been found to be one of six entrenching mechanisms negatively related to company performance,” she said, citing a 2008 article published in the Review of Financial Studies by Harvard law professor Lucien Bebchuk and others titled “What Matters in Corporate Governance.”

The representative suggested the proposal would allow shareholders to have more of a hand in replacing board members who are “overcommitted,” serving on other boards or even as CEOs of other major companies.

“Directors who are overcommitted can seriously weaken a board,” she said.

Additionally, the proposal would give shareholders more of a say in the company's performance-based executive pay structure, currently based on organic sales growth and earnings-per-share performance.

“Long-term” incentive pay currently covers a three-year period, which the representative said is not long term. McDonald “was given a mega-grant of $6 million in 2011” and is “entitled to a potential payment of $20 million for a change in control,” she noted.

McDonald advised shareholders to vote against the proposal, saying the higher-vote standards are “important to safeguard the long-term interest of the company and you, its shareholders.”

McDonald On Commitment, Discipline

McDonald used the meeting to highlight his strategic goals and his commitment to improving P&G's results and shareholder value, in a presentation presumably aimed at Ackman and other shareholders who could be growing more discontented with his leadership.

Ackman, who owns $1.8 billion worth of P&G shares through Pershing, reportedly called for McDonald’s ouster during a recent meeting with the board.

Some analysts believe the investor will likely gain support from other shareholders in his drive to effect a turnaround at P&G (Also see "Activist Investor May Push P&G To Sell Non-Core Brands, Oust CEO McDonald" - Pink Sheet, 30 Jul, 2012.).

McDonald said the company will continue to aim for the “superior value” necessary to “gain confidence and trust from consumers and shareholders alike.” He added P&G will continue to “hold itself accountable” for results.

P&G remains committed to its goal of reaching $10 billion in cost savings by 2016 and achieving organic growth of 5% in 2014, McDonald said.

The firm plans to hit those targets by prioritizing according to its “40-20-10” scale, focusing resources on its 40 largest and most important markets, 20 largest innovations and 10 most important developing-market businesses (Also see "P&G Defends Savings/Growth Strategy, Plans To Slash More Prices In FY 2013" - HBW Insight, 13 Aug, 2012.).

McDonald told shareholders the company relies on a model that has been working for P&G for generations, a “virtuous cycle of reinvestment, growth and shareholder return.”

However, “the model itself doesn't guarantee our success. We have to execute it consistently across the business and we have to do it with discipline,” he said.