<UPDATE> P&G vs Trian Partners - the Largest Proxy Fight in History

UPDATED: 11 OCTOBER 2017

Preliminary results show that Nelson Peltz lost his proxy contest against P&G. At the conclusion of the AGM, the company announced the election to the board of all 11 of its nominees. Peltz is not yet admitting defeat, stating that the vote results are” too close to call” (within a 1% margin), and has called for P&G to appoint him on the board regardless the vote count. Following the news, P&G’s stock price dropped by 2.7% to USD 89.86, closing, however, at USD 91.62.

Original Article

On 10 October 2017 at Procter & Gamble’s (P&G) AGM, investors will witness the culmination of the largest proxy fight in history. Activist investor Trian Partners (Trian) is lobbying to appoint its co-founder and CEO Nelson Peltz to the board and ultimately shake up the company’s structure and strategy. With an estimated combined spend of $60 million on the table, the question is: Will Peltz succeed?

P&G and Trian’s corporate election campaign

After several unsuccessful attempts by Peltz to convince P&G CEO David Taylor to appoint him as director, Trian responded with a proxy contest. This marked the beginning of a concerted campaign with the two parties engaged in a display of tactics reminiscent of political campaigns. Both parties invested in traditional media, social media, mass mailing and even robocalls to win the support of as many shareholders as possible.

Trian is criticizing P&G’s total shareholder return of 67% in the last five years, arguing it is lagging behind other S&P 500 companies which had an average return of 102%. They also argue that organic sales are stagnating with an average increase of 2% per year during the same period. To address these issues, Trian release a 93-page white paper in September outlining its proposal to split the company into three autonomous segments: beauty/healthcare, home care and feminine/baby care. Other recommendations include: focusing on local brands, expanding its digital strategy, hiring executives with outside experience and better linking pay with performance.

P&G responded that Trian is misinformed regarding the company’s business and that since Taylor assumed the role of CEO in November 2015, P&G’s shareholder returns were at 28%, consistently higher than the 12% average registered by the peers Trian selected in its whitepaper.

In more recent developments, the two largest proxy advisory companies, Institutional Investor Services (ISS) and Glass Lewis, have already touted their support for Peltz’ election, citing, among others, his industry expertise and Trian’s previous performance.

How the costs add up

The management of the USD 230 billion Cincinnati-based global consumer goods giant has spent USD 35 million on a campaign to reach out to the millions of retail investors in its unusually widespread ownership base. These expenditures by P&G far outstrip both the median USD 1 million and the maximum USD 5.9 million spent by US public firms on proxy contests in 2016. Beyond the USD 2.5 million in fees to proxy solicitors, which themselves appear to have devoted a record number of staff to the campaign, P&G’s costs stem from the rather mundane task of distributing information and proxy cards to its 2.9 million shareholders, either directly or indirectly through custodian banks.

Trian is P&G’s fifth-largest shareholder with a 1.4% stake worth USD 3.5 billion. The company estimates that it will spend USD 25 million in total on the contest. These costs are also mainly logistical, as it bears the responsibility and cost of distributing its alternative proxy card to shareholders. Trian is proposing only one nominee, its co-founder and CEO Nelson Peltz, who it wishes to add to P&G’s 11-member board. However, P&G has classified this election as contested, which under its bylaws and given P&G’s unwillingness to increase the board size, triggers the plurality voting standard. Accordingly, shareholders who want to vote for Peltz must indicate which management nominee they do not wish to elect. Trian has nevertheless stressed that it does not seek to unseat any of the incumbents and that Peltz would seek to reappoint any director displaced by his election. In the same vein, Trian has not specified which director it would like to exclude.

History repeating itself

With P&G, Trian is following a similar script to the ones it used at H.J. Heinz Co. (2006) and DuPont Co. (2015). In both cases, the activist investor made a case for splitting the companies and engaged in proxy fights to appoint new board members. With Heinz, Trian was successful, with two out of its five nominees being elected. Trian’s efforts appear to have benefited considerably from recommendations of proxy advisory companies. Interestingly, in 2015, an old foe seemed to have become a friend when Trian got Heinz’s former CEO William Johnson elected to PepsiCo’s board after threatening to take the fight to a proxy contest.

DuPont was a different story, however, as the hedge fund faced a resounding defeat. Before the AGM, DuPont offered Trian a board seat, provided that Peltz would not personally fill it. The activist investor refused and proposed four nominations who were all defeated.

So will Trian succeed next week or will P&G prevail in the largest proxy fight to date? The support of the major proxy firms will certainly give Trian the edge, but ultimately only time will tell.