Saturday, May 25, 2013

PG's CEO Shuffle: Why Are Shareholders Giddy?

Several of our recently covered themes about corporate CEOs reverberate in the story about PG asking the much ballyhooed, former CEO A.G. Lafley to parachute in to save the company from shareholder discontent. 

First of all, it appears that PG has underperformed the Household Products sector in both the five and ten year horizons. Since mid-2012, it has trailed its peers, but the secular underperformance clearly reflects something beyond the performance of the current CEO. 

As we have written about before, the economic environment which is then reflected in stock market sentiment accounts for much of what is falsely attributed to "CEO performance."  Mr. Lafley clearly had a better environment for consumer sentiment, income and spending than did his hand chosen, personally mentored successor Mr. Bob McDonald. 

The famous stories about the revival of Tide detergent under Mr. Lafley are a great example of misleading attribution.  The sale of "concentrated" Tide for HE washing machines meant consumers would pay way too much more for marginally different performance.  It was clever, and it succeeded because of PGs control over shelf space and end caps, plus aggressive advertising and couponing.  When the economy turned south, consumers said,'Goodbye Tide' and 'Hello Arm and Hammer' generic low price detergent for their high efficiency machines.

As things turned south within the company, McDonald was coached on how to deal with investors by Mr. Lafley.  Unfortunately, sentiment inside the company got so bad that a former high ranking executive with the company "sent a 13-page letter to lead director Jim McNerney, Boeing Co.'s CEO, detailing a number of concerns about Mr. McDonald's leadership and calling on the board to split the CEO and chairman jobs. Dissent with Mr. McDonald's leadership was bubbling up through management's senior ranks, with some executives reaching out to board members asking for a change, people familiar with the matter said." (Wall Street Journal)

This kind of behavior by those current and former executives is not professional.  Note the comment to split the CEO and board Chair positions.  How did the board not have any idea about the sentiment among senior executives?  Wouldn't they be able to pick this up from meetings and social occasions with the executives during board sessions and retreats with management? 

So now Mr. Lafley is brought in to right the ship, which will probably right itself through some of the measures already in place, and to choose another successor. But since he recommended Mr. McDonald and coached him, why would a board hand the important task of CEO succession to Lafley? 

PG is famous for its bloated brand management structure which is mind numbing for bright new recruits and for middle managers alike.  After your Ivy League MBA, you can be the Deputy Assistant Brand Marketing Analyst for Dash detergent. Wow. If you can move around and luck into a hot brand and be seen through the layers, perhaps your career can advance after ten years.  Lafley didn't address the bloated corporate structure during his halcyon tenure, and his successor only made a weak start.

The board which has sat through secular underperformance, failed to insist on succession plans for the CEO, ignored corporate sclerosis, failed to stem the loss of future leaders, and could not take the pulse within its own organization. 

I don't understand why investors are so excited by today's developments. 

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