Analysis: P&G all-star board's oversight questioned as CEO departs

The sudden exit of Procter & Gamble Co's Bob McDonald as chief executive and the return of former CEO A.G. Lafley in his place has raised questions about the vigilance of one of America's highest-profile corporate boards.

On paper at least, P&G, the maker of a myriad of household products such as Crest toothpaste and Tide detergent, has one of the strongest boards in the world with CEOs from six other companies among its 12 members, including three from companies in the Dow Jones industrial average. The CEOs include Boeing Co's James McNerney, Hewlett-Packard Co's Meg Whitman, American Express Co CEO Kenneth Chenault, and Macy's Inc CEO Terry Lundgren.

P&G in its annual proxy statement to shareholders last year described the board as "highly qualified and each Director brings a diversity of skills and experiences." It said all of the directors - who also include Archer Daniels Midland Co CEO Patricia Woertz, Frontier Communications Corp CEO Maggie Wilderotter and former Mexico President Ernesto Zedillo - qualify as possessing "extraordinary leadership qualities and are able to identify and develop leadership qualities in others."

But some investors and corporate governance experts say that having so many powerful directors could also be a weakness because serving CEOs are under a lot of pressure in their own jobs and therefore cannot commit much time to being a director of another company.

They also suggest that major P&G investors, such as Warren Buffett's Berkshire Hathaway Inc (which had a P&G stake of about 2 percent at the end of March), and activist hedge fund investor Bill Ackman's Pershing Square Capital Management (with around 1 percent), would also have more at stake than the CEOs, who only have modest P&G shareholdings.

While boards in corporate America are often dominated by current and retired executives, many also have investors represented - Coca-Cola Co , for example, has Buffett's son Howard Buffett on its board (Berkshire has a 9 percent stake).

The lack of big investors on the board is a concern, said Frank Feather, chairman of Toronto-based corporate strategy consulting company Geodevco. There should be some directors who own significant amounts of shares that were not paid for or issued to them by the company. "Directors should have skin in the game," he said.

Added Urmi Ashar, who founded the Pittsburgh chapter of the National Association of Corporate Directors and teaches governance at Carnegie Mellon University: "The heavyweight board of P&G packed with CEOs is a definite red flag and it leaves one wondering how much time they have to dedicate to the challenges at P&G."

Whitman, for example, has been trying to engineer a turnaround at HP, following a failed acquisition by her predecessor and amid a struggling personal computer market. Meanwhile, McNerney has faced a crisis at Boeing after overheating batteries grounded its new Dreamliner aircraft since January, with flights only now resuming.

Still, their attendance record - and that of other directors - for P&G board meetings last year was strong. And several of the CEOs, including Whitman and Lundgren, weren't on the board when McDonald was appointed in June 2009. Also giving a CEO a reasonable period - just under four years in McDonald's case - to produce results would be pretty standard at most major companies unless the share price was imploding.

All the board members contacted for this article either declined to comment or were not available, including McNerney, who holds the title of presiding director at P&G. The presiding director, among other things, oversees director meetings when management is not present. A P&G spokesman declined to comment.

Even Ackman, who had been pushing for McDonald to be replaced, in October described the board as "one of the best" in America. He declined to comment for this article.

SHARE PRICE LAGGING RIVALS

It is still unclear what finally triggered McDonald's retirement, which was announced late last Thursday, and P&G has declined to answer questions. The company disappointed investors last month when it said that earnings in the current quarter would be lower than Wall Street expected but on Friday P&G Chief Financial Officer Jon Moeller told analysts on a brief call that the CEO change would not lead to a strategy change and was "not indicative of any kind of bigger problem or financial issue.

Still, its share price did underperform between the time McDonald was appointed in June 2009 and the announcement of his departure. Its shares have risen about 50 percent in that time but that is less than the gains achieved by major consumer products rivals over the same span: Unilever Plc's shares are up 85-93 percent depending on which listing is cited, Colgate-Palmolive Co up 74 percent and Clorox Co gained 60 percent. The Standard & Poor's 500 advanced 75 percent in that period.

The debate over the suitability of outside CEOs for boards dates back decades, but reviews on their effectiveness are mixed. A 2011 review of research by Stanford University academics found that while in theory CEOs should bring the leadership qualities and expertise that boards need, no research had found they are in fact better board members.

Some investors also questioned why the P&G board had to turn to a retired CEO to return to the helm, and didn't have a more robust CEO succession policy in place. Bringing back Lafley "highlights poor succession planning by the board," said Jason Tauber, a research analyst with the Large Cap Disciplined Growth team at Neuberger Berman, which holds 8.7 million P&G shares.

DEPLETED RANKS

One of the problems was that a previously deep bench in management ranks at P&G has been depleted since McDonald became CEO in 2009.

When a new CEO takes over, some departures of other top executives are often inevitable as they go elsewhere to fulfill their ambitions of running a company but in P&G's case the losses were perhaps more significant. They included razor business leader Chip Bergh, who left to take over Levi Strauss & Co in 2011, and vice chairman Ed Shirley, who became CEO at Bacardi Ltd in 2012.

When he announced McDonald had been named to the top job in 2009, McNerney described him as "the most broadly and globally experienced CEO in P&G history" and said he got the position after "a rigorous, disciplined and multi-year succession process led by the Board."

The decision to bring back Lafley was applauded by investors who pushed P&G's share price up 4 percent on Friday, though they slipped back slightly on Tuesday to close at $80.86. The stock rose initially because Lafley was seen as a known quantity, investors said.

However, some of the company's current problems started to come to light towards the end of his time as CEO, some analysts said. Lafley left P&G with a bloated organization after leading several acquisitions, most notably the $57 billion purchase of Gillette in 2005, and P&G also was widely seen as slow in expanding in fast-growing emerging markets and introducing products to appeal to more frugal consumers in developed markets.

Ashar said it was striking P&G would turn back to Lafley, the architect of many past successes but also a force behind McDonald's installation. "What it tells me is that the current 'All Star' board of P&G really has delegated the responsibility of sense-making back to Lafley."

(Reporting By Ross Kerber in Boston, Nadia Damouni in New York and Jessica Wohl in Chicago; Editing by Martin Howell and Tim Dobbyn)