* P&G board includes CEOs of Boeing, Amex, HP
* Investors concerned there was no clear succession plan
* Governance experts wonder about time pressure on outside
* Still unclear what triggered McDonald's retirement
By Ross Kerber and Nadia Damouni and Jessica Wohl
May 29 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
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
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.
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,
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
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