Proxy adviser ISS says company would gain by having activist investor on its board
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 30, 2017).
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Less than two weeks before the largest proxy vote in history, activist Nelson Peltz got a key boost in his high-profile fight against Procter & Gamble Co.
Institutional Shareholder Services Inc., the largest proxy-adviser firm, recommended on Friday that P&G shareholders put the 75-year-old investor on the board over the company's protests. Another proxy adviser, Glass Lewis & Co., came out in favor of Mr. Peltz last week.
"There are several signs that the board could benefit from additional shareholder perspective and outside" consumer-products experience, ISS wrote in its 25-page report, which helps guide mutual funds and other institutional investors on how to cast their votes.
The two sides have traded barbs for weeks about whether Mr. Peltz deserves a seat on the consumer-products giant's board. Mr. Peltz's Trian Fund Management, which is one of the company's biggest shareholders with a 1.5% stake valued at $3.5 billion, has been amassing support.
The activist has been amassing support in recent weeks. Another top shareholder, Yacktman Asset Management, which owns about 15 million shares of P&G, or a 0.6% stake, said earlier this month it is backing Mr. Peltz. Five former board members of H.J. Heinz Co. wrote a letter to P&G's board in support of Mr. Peltz, who won a seat on the ketchup-maker's board in 2006 after a proxy fight.
ISS's recommendation was largely a criticism of P&G's current board, which is stacked with current and former leaders of blue chips like American Express Co., Home Depot Inc., Hewlett-Packard and Boeing Co.
While noting positive results since Chief Executive David Taylor took over P&G nearly two years ago, ISS blamed directors for ill-advised acquisitions and CEO turnover in recent years. It criticized the company for failing to consider outside candidates following the troubled tenure of Mr. Taylor's predecessor.
"The board's handling of CEO succession during the better part of a decade left a lot to be desired, and subjected the company, and shareholders, to years of underperformance," the proxy firm said.
ISS said the fact that all but one of P&G's 10 nonexecutive directors lacked previous consumer-products experience may have contributed to P&G's inability to spot key trends. "Considering Peltz's extensive background with consumer companies, particularly his directorships at Heinz and Mondelez, many shareholders might not readily agree with the board's dismissiveness of his potential contribution as a director," ISS said.
P&G has argued that Mr. Peltz's experience with food and beverage companies doesn't equate to expertise with consumer-packaged goods like paper towels and razors.
On Friday, P&G said its case against Mr. Peltz is bolstered by ISS observations that the company has produced positive results amid efforts to shrink its product portfolio and streamline management. "We believe ISS set too low a standard for adding an activist investor to a board," P&G said in a statement. "Change is not warranted when a highly engaged board is overseeing a plan that is working."
ISS and Glass Lewis can influence how institutional shareholders vote, though their recommendations aren't seen as insurmountable to the losing side.
Both firms sided with Mr. Peltz in his failed attempt in 2015 to win a seat on the DuPont Co. board. In that contest, the three largest shareholders -- index-fund managers Vanguard Group, BlackRock Inc. and State Street Corp. -- all voted in favor of the company, despite the proxy advisers' recommendations. The three firms are also the largest holders of P&G stock. They didn't immediately respond Friday to requests for comment.
A survey of 70 institutional investors conducted in September by Sanford C. Bernstein & Co. showed strong support for Mr. Peltz, with nearly three-quarters of respondents saying the activist should win a seat on the board.
"Even this level of support from active managers alone may not be enough to win the vote," Bernstein analyst Ali Dibadj wrote in the note. "Support would need to come from other constituents as well."
Likely working against Trian is the fact that P&G is the largest company to face a proxy fight and among the most widely held stocks, with 2.55 billion shares outstanding. An estimated 40% of those shares are held by individual, retail investors who are more likely to favor the company.
P&G's 10 biggest shareholders hold about 28% of the company's shares, while the top 10 investors in S&P 500 companies on average control 45% of those companies on average, according to data from S&P Global Market Intelligence.
P&G has rejected Mr. Peltz's attempt to get a board seat, saying his ideas are either ill-informed or retreads of work that is already under way. Its executives have warned that adding the outsider to the board could disrupt the company's progress.
Trian has said the company should organize itself into just three business units, down from 10, by combining businesses, such as beauty, grooming and health care. The units, Trian said, would operate autonomously and have total control over sales, marketing, manufacturing and other major functions.
Shareholders are set to vote on Oct. 10.
Joann S. Lublin contributed to this article.
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September 30, 2017 02:47 ET (06:47 GMT)