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Why Procter & Gamble Thinks a Board Shakeup Would Be a Terrible Idea

By Demitri Kalogeropoulos - Sep 19, 2017 at 8:17AM

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P&G lays out its closing argument against an activist investor's proxy challenge.

Procter & Gamble (PG -0.39%) is taking its proxy challenge seriously. The management team last week took the time to make a detailed presentation to shareholders in which it laid out its case against putting activist investor Nelson Peltz on the board of directors.

P&G said that the stakes are high as shareholders cast their votes on this topic, with the company's long-term growth potential at risk.

Here are a few highlights from that presentation.

We're a strong company

CEO David Taylor and his executive team first argued that the business is so healthy today that a board shakeup in unnecessary. They reviewed how the company dominates market share across its key products, including with a No. 1 ranking in over a dozen franchises such as Gillette, Tide, and Bounty.

Executives noted the company's record at producing returns for investors through stock price gains and direct cash returns that make P&G one of the most generous companies on the market. Specifically, management has spent $138 billion on share repurchases and dividends over the last decade -- equating to 59% of market capitalization -- compared to $40 billion and 24% for rival Unilever (UL -0.04%).

Chart showing the total cash returns of the market's biggest spenders.

Image source: P&G investor presentation.

What P&G didn't mention is that its overall market share trend has drifted lower in each of the last three fiscal years. Its core Gillette franchise, meanwhile, has fallen to 65% of the global market from 70%, in part because of a successful challenge from Unilever's Dollar Shave Club. Still, management said that, "to suggest that P&G's innovation machine is broken is ludicrous" given that the company has succeeded in launching new brands and sub-brands over the past few years while upgrading existing lines .

Building momentum

Procter & Gamble went on to contend that the management team is producing results with its rebound strategy. Costs are way down, profitability is up, and the company hit all of its core operating targets in the fiscal year that just ended.

Chart showing that P&G met its main operating objectives in fiscal 2017.

Image source: P&G investor presentation.

P&G's portfolio reboot, where it whittled its properties down by over 100 brands to just 65 core franchises, is just beginning to show results, executives noted. "P&G is successfully executing a winning strategy and has strong momentum," they said, adding, "We firmly believe now is not the time to risk derailing our progress by adding Trian's Mr. Peltz to the P&G board [of directors]."

Taylor and his team can point to building sales momentum in support of this point. Organic sales growth is projected to rise to a 2.5% pace this year from 2% last year and 1% in fiscal 2016.

Peltz's plan is flawed

Management concluded by ripping holes in Peltz's plan, saying it is built on an outdated and misinformed view of the company and offers no constructive ideas. Their harshest criticism was on the point of reorganizing P&G into a holding company structure that executives say would make no sense for the business. It's "not clear that Mr. Peltz understands what we are doing," they explained, "which is not surprising as he has never asked."

Slide outlining management's opinion on Peltz' plan.

Image source: P&G investor presentation.

It's no surprise that Peltz would have a weaker grasp of Procter & Gamble's operating setup than the executives who work within the structure right now. That's a major drawback to bringing any outside voice into the management team, especially one that's agitating for an aggressive strategic shakeup. It could be an advantage, though, given that Peltz and the Trian fund are challenging many of the assumptions that are driving P&G's recovery plan.

Investors are balancing the potential benefits from a strategic shift against P&G's recommendation to stay the course when they cast their votes ahead of the company's Oct. 10 shareholder meeting.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends Unilever. The Motley Fool has a disclosure policy.

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