P&G Proxy Fight Pits Mentor vs. Protégé -- WSJ -2-

By Sharon Terlep and David Benoit Features Dow Jones Newswires

Former CFO sides with activist investor Peltz against his old colleagues

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This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (September 5, 2017).

CINCINNATI -- Clayton Daley gave 35 years of his professional life to Procter & Gamble Co., rising to finance chief and then grooming his successor, Jon Moeller.

Now, the mentor and his former protégé are on opposing sides of a boardroom fight over how best to reinvigorate P&G, a consumer-products giant that at one time boasted brands in nearly every aisle of the supermarket.

In a challenge of P&G leadership, Mr. Daley was hired this summer to help win a board seat for activist investor Nelson Peltz, who believes the maker of Tide and Pampers isn't moving fast enough to revive sales and profits. The company said Mr. Peltz would disrupt its progress and has cast Mr. Daley, who retired at the end of 2008, as too long out of touch to be taken seriously.

P&G, which has a market value of about $235 billion, is the largest company to ever face such a proxy fight.

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The battle has upended longstanding relations between Mr. Moeller, chief financial officer, and Mr. Daley, who last spoke with his former colleague over lunch this summer at the private Queen City Club.

Mr. Moeller said Mr. Daley told him he was considering "becoming an enemy of the company." Mr. Daley denied that in an interview: "I told him, 'I don't want to become an enemy of the company,'" he said.

Whatever was communicated, Mr. Daley was hired as an adviser by Mr. Peltz's Trian Fund Management LP to aid in the activist's quest. Both sides are courting investors who are set to decide at the company's Oct. 10 shareholder meeting. Trian's blueprint to revamp P&G is due out this week and, among its points, will be criticism of the company's connection with millennials, said people familiar with the plan.

"The only word I can use that is appropriate is, 'disappointing.' There are many other things I could say, but that's the word I'll use," P&G Chief Executive David Taylor said of Mr. Daley's new allegiance. "To be working against the company, the board, the folks who supported him while he was here."

There was a time when the idea of a longtime company insider siding with an activist investor was shocking. But activists have come to tap industry experts to help create and legitimize plans they use to win over shareholders.

This year, Jana Partners LLC hired experts to push Whole Foods Market Inc. to sell itself and to shake up the board at Tiffany & Co. Elliott Management Corp. tapped a former Arconic Inc. executive for its board fight at the automotive and aerospace-parts maker.

Mr. Daley said his intentions were noble: "I dedicated 35 years of my life to this company and still feel a lot of attachment." P&G has become too insular, bureaucratic and accepting of mediocrity, he said, and Mr. Peltz can help spur change. "As a retired executive, it's been very frustrating for the last eight years to see what's going on there," he said. "I want to help."

Mr. Moeller, 53 years old, said P&G and the consumer-products world have changed too rapidly for even well-informed outsiders to fully understand. He said he agreed with Trian's assessment of P&G's past problems, but he believes neither Mr. Daley nor Trian can chart a better course.

"The world has changed completely, the way business is done has changed completely and the company has changed completely," said Mr. Moeller, who has worked with three P&G CEOs as finance chief. "You don't stay on top of those things by reading reports or even sitting on boards."

After Mr. Daley's retirement at the end of 2008, he and Mr. Moeller used to meet socially a few times a year. That ended in 2012, when Mr. Daley told his protégé that he had spoken with investor William Ackman, who was challenging P&G's leadership at the time.

Mr. Daley said he declined to join Mr. Ackman's campaign. "I tried very hard to exit and stay out of the way and give Jon Moeller his space," said the 65-year-old resident of Longboat Key, Fla.

The two men continue to speak highly of one another. "Of all of P&G's many problems, Jon Moeller is not one of them," Mr. Daley said. And Mr. Moeller compliments Mr. Daley's prowess during his tenure as CFO. Yet as the former colleagues campaign in public and during one-one-one meetings with investors and institutional shareholders, one thing is clear: This is war.

Head to head

The proxy fight has divided P&G's employees and its sprawling alumni network, according to current and former executives. Many are loyal to Mr. Taylor, who like Mr. Moeller is a low-key executive who spent decades climbing the corporate ladder. Others say they are frustrated with the poor performance of P&G's share price and feel the company has lost its competitive edge.

"There are a lot of employees in this area whose retirement and well being depends on how P&G does. You can't live here and not get drawn into it," said Jim Russell, a portfolio manager at Bahl & Gaynor Investment Counsel in Cincinnati. The firm advises many hundreds of P&G retirees, he said, both former executives and those from the rank-and-file.

P&G's shares have underperformed the S&P 500 and its competitors for the past 10 years. They have returned about 8.1% to investors over the past 12 months, including dividends, compared with a 16% return for the S&P 500.

"I've been contacted by more former executives who have offered to help in this investment, by a multiple, than ever before," said Mr. Peltz, whose past targets included DuPont Co. and H.J. Heinz Co. "I chose Clayt to work with because he has the stature, credibility and knowledge to really shape P&G."

Mr. Daley's hard-charging, often blunt, style contrasts with Mr. Moeller's more democratic approach, say people who know both men. They each rose through the finance ranks at P&G, starting out in the accounting departments of P&G factories and advancing to headquarters.

Mr. Moeller, whose wife also works at P&G, started at the company in 1988. He worked in different finance positions under Mr. Daley until he reported directly to him.

Mr. Daley joined P&G in 1974 and served as finance chief from 1998 until the end of 2008, a time of rising profits and double-digit sales growth. Mr. Daley was lauded by P&G -- and rewarded with a $1.5 million bonus -- for leading the integration of the Gillette razor business following P&G's $57 billion acquisition of the company in 2005. P&G had called the deal one of its most successful.

Mr. Daley, in his last conference call with analysts before turning his job over to Mr. Moeller, described his successor as "an excellent business strategist."

Crisis management

Soon after Mr. Daley retired, the financial crisis and a slowdown in developing markets sapped P&G's business. One of Mr. Moeller's first tasks as CFO was to lower the company's financial targets and explain why P&G would miss projections.

As growth slowed, P&G was forced to shrink. In 2012, it launched a $10 billion cost-cutting program that eliminated 24,000 jobs and 14 factories. It sold off dozens of brands, including Pringles snacks, Iams pet food and Duracell batteries. In 2015, P&G agreed to sell 43 beauty brands, including some like Clairol and Wella that it had bought a decade earlier. Since Mr. Taylor took over as chief executive in November 2015, he has promised to cut another $10 billion in annual expenses by 2021.

Trian has questioned what the cost cuts have yielded for investors.

The Gillette business, which accounts for 10% of sales but 16% of P&G's profits, has become a drag. Sales in the business have declined in recent years, and such online upstarts as Dollar Shave Club and Harry's have chipped away at its U.S. market dominance. P&G responded this year with broad price cuts in the U.S., breaking from Gillette's strategy of new features coupled with higher prices.

"There was an underestimation of the consumer interest in that type of a proposition," Charles Pierce, who took over P&G's grooming business in 2015, said in an interview. "Once we saw what was going on there we made some big, big interventions."

Mr. Daley said he doesn't need to be an insider to understand how P&G has stalled. He has studied the company's financial reports, he said, listened in on analyst calls and stayed in touch with current executives.

The company's own goals are evidence of trouble, Mr. Daley said. In a recent filing, P&G outlined three-year targets -- 2.8% organic sales growth, 4.7% operating profit growth and a 6% increase in per-share earnings -- that he said were well below what the company should be delivering.

"Those goals mean the management and the board of directors have accepted mediocrity," Mr. Daley said. He also argued that P&G shouldn't have sold the beauty brands -- evidence, he said, that the company wasn't capable of managing smaller, trendy brands.

P&G said its goals reflected a realistic, long-term approach to growth, and that Trian was pushing short-term share gains at the expense of long-term progress. It noted the company total shareholder return has outpaced the S&P 500 and its peers since Mr. Taylor became chief executive. A yearslong effort to pare P&G's bureaucracy has taken hold, executives said.

"We're at the point where the nose is lifting and we're going up," Chief Brand Officer Marc Pritchard said. "A big derailment is the last thing we need."

The two sides have particularly clashed over the structure of P&G's management, which Trian said remained slow and bureaucratic.

The campaigns for shareholder votes have been costly. P&G, which has hired investment banks, is spending at least $35 million. Trian, which owns roughly $3.3 billion of P&G stock, is spending about $25 million.

Mr. Taylor held a town hall meeting to rally P&G staff on Aug. 3. "You delivered what we committed without an asterisk," he said to the applause of hundreds of employees.

Last week, Trian released a video of Mr. Daley saying it was "simply time to do something different."

The public fight follows months of private negotiations between Mr. Peltz and P&G's board, which is stocked with business leaders including the chief executives of American Express Co. and Hewlett Packard Enterprise.

Mr. Peltz, age 75, said he needed to perform work that could be done only from inside the P&G boardroom. Mr. Taylor and other directors have refused to give their support, saying Mr. Peltz wasn't proposing new ideas and that his style of activism would disrupt the progress already being made. Mr. Peltz said he planned to support Mr. Taylor if he wins a seat.

"You look at what he says and it sounds all wonderful: 'I love the company, I want to see it do better,' " said Mr. Taylor, P&G's chief executive. "But if you just want to help, wouldn't you come in with your plan and lay it out?"

(END) Dow Jones Newswires

September 05, 2017 02:47 ET (06:47 GMT)