The Wall Street Journal reports today that activist investor Nelson Peltz has launched a proxy fight with Proctor & Gamble. No company this large has ever faced a proxy fight. The investor seeks a board seat in hopes of driving change. Peltz has been frustrated with the lackluster revenue and earnings growth at the consumer products giant over the past several years. According to the article, "Mr. Peltz’s Trian Management Fund argues that P&G failed to capitalize on a five-year savings plan that shrank the company by tens of thousands of employees, more than a dozen factories and hundreds of brands. Trian casts doubt on whether a second, five-year, $10-billion savings plan announced by P&G last year will produce results."
Many observers and analysts have wondered whether activist investors would push for a breakup of P&G. After all, the company does operate a number of businesses including grooming (e.g., Gillette), fabric and home care (e.g., Tide, Cascade), oral and personal care (e.g., Crest, Prilosec), baby and feminine care (e.g., Pampers and Tampax), and household items (e.g., Bounty, Charmin). However, the company already has divested several units that appeared to be somewhat unrelated to their core brands; P&G divested its pet food, battery, coffee, and potato chip businesses in recent years. Peltz has signaled that he's not pushing for further divestitures at this time.
What's the problem at P&G? In my mind, the company can't cut its way to enhanced long run performance. Perhaps costs are bloated, and some efficiencies must be attained. However, the core problem remains innovation and growth. In the heyday of A.G. Lafley's first tenure as CEO, P&G excelled because it generated product innovations that drove robust revenue growth (consider the remarkable success of Febreze and Swiffer). These innovations have not come at the same pace in recent years. Moreover, customers have traded down from the premium-priced products offered by P&G to more affordable brands. Consider the success of upstarts in the razor business, as well as the increasing success of private labels in a number of P&G categories.
What then of the proxy fight led by Peltz? It seems to me that activist investors can be helpful at times in forcing difficult reorganizations, cost-cutting initiatives, and divestitures that management may be unwilling to undertake. However, activist investors are not well-equipped to help companies jumpstart innovation and revenue growth. How will this proxy fight solve the underlying growth problem at P&G? It won't. The company has much more challenging work to do than simply fending off an activist investor's attempt to snag a board seat.