One of the costliest proxy battles ever, between activist investor Nelson Peltz and Procter & Gamble Co. (NYSE:PG), ended with Peltz losing the right to a board seat by roughly one-third of one percent, at least according to preliminary tallies released this week by Procter & Gamble.
Since neither side can claim a decisive victory, the onus is now on P&G's board to prove that the company will indeed thrive without implementing Peltz's suggestions, which included a reorganization of the company into three global business units, a sharper focus on small and midsize brands, and a more substantive digital advertising approach.
Through Peltz's TV interviews, and his firm Trian Partners' lengthy white paper outlining the case against P&G, one theme appeared to rise to the surface during the lead-up to the proxy vote. Trian asserted that P&G has an extremely insular culture, and that this as much as anything underlies the company's weak shareholder return versus its peers over the last 10 years.
Calling out culture as a limiting factor on business results is tricky. For its part, P&G supplied cogent retorts. It pointed to its $10 billion productivity program (though the effects of this initiative have mostly been eaten up by a strong U.S. dollar), its market-leading megabrands, and higher operating margins over the last few years.
The improved margins, by the way, are a direct result of P&G's extreme trimming of brands over the last three years. Management clearly had the Pareto principle in mind when it reduced its brand count from 170 to 65. In doing so, P&G got rid of 62% of its brands which it claimed were responsible for only 6% of profits.
Incrementalism versus real risk-taking
I believe the cultural shortcomings Peltz took issue with (the fact, for example, that a decent percentage of P&G's top management executives have spent most of their careers at P&G) are manifested in the organization's approach to innovation. The company is vested in the dominance of its big, multibillion-dollar brands such as Tide, Pampers, and Crest. P&G pushes incremental innovation in packaging for these lucrative names over the outright creation of new brands.
Hence, Peltz was not out of bounds to claim that P&G hasn't introduced a new leading brand since Swiffer household cleaning products hit store shelves over 20 years ago. Conversely, P&G asserts that new packaging formats, like Tide Pods, the K-cups of the detergent world, are more than adequate to fuel growth.
This thesis remains to be proven. Simply concocting new brand variants and SKUs may not be enough to create meaningful and sustained top-line growth. This is especially worth considering in an age when, as Trian argued, small and midsize local brands find it easier, through e-commerce and social media tools, to filch market share from incumbent, multinational labels.
Further, Procter not only eschews creating new brands, but it hasn't been alert to brand-acquisition opportunities either. After the organization's huge divestment initiative, the last thing executives seem to be open to is purchasing local, emerging brands as Peltz has urged.
The practice of scooping up and scaling tiny but promising product lines is being honed successfully in the beverage world by the likes of Coca-Cola and PepsiCo, but also by P&G's direct competitor Unilever (NYSE:UL), which recently reported that its acquired companies in the last 12 months have expanded revenue at a rate of 20% after folding into Unilever.
Unilever's billion-dollar purchase of Dollar Shave Club last year crystallizes the benefits of acquiring diminutive brands streaking into prominence. According to CEO Paul Polman, as part of the Unilever system, Dollar Shave Club is also expanding revenue in the double digits.
P&G, which arguably should have been first to this acquisition, has instead had to belatedly create its own subscription model for its razors, losing market share to both Dollar Share Club and Harry's in the process. Ironically, before the advent of outfits like Harry's and Dollar Shave Club, P&G's Gillette division had the idea to launch a subscription razor business, but according to Trian, corporate management quickly "shut down" the project.
P&G can still digest the lessons of this fight
To be clear, Procter & Gamble's management has actively improved the business, and in fact, its previous brand-downsizing project gave the company convincing ammunition to push back against Trian's encroachment.
Yet there's a downside to the very worthy objective of using the Pareto principle to optimize a business. Once you get through an "80-20 rule" exercise, and narrow offerings down to the 20% of brands which are responsible for 80% of profits, it can be difficult to grasp that the composition of the 80-20 group can change again -- it isn't static, and can shift within a period of months or business quarters.
A corporate culture more geared toward risk-taking, like that at Unilever, which has also conducted its own trimming through brand and product rationalization, will continually emphasize more diverse innovation and business acquisitions to supplement internal growth -- even as non-performing assets get divested.
I've argued recently that P&G's calcified approach to shareholder returns is antiquated and counterproductive. Beneath that complaint lies a theme similar to Peltz's arguments on the company's cultural mindset, of management that steps too cautiously where strategy is concerned.
P&G reports earnings this week and will have a chance to prove that, in the near term, it's amplifying both top- and bottom-line growth. But over a longer period, the organization would do well to absorb a few simple points from its expensive campaign to avoid having to take regular advice from billionaire Nelson Peltz: loosen up, think smaller, and embrace real risks.