By Rob Cox
NEW YORK (Reuters Breakingviews) - Procter & Gamble is counting on a variation of America’s electoral arithmetic as its best hope for keeping Nelson Peltz off the board of directors. There’s no particularly good reason for shareholders to deny the pushy investor, whose hedge fund Trian Partners owns 1.5 percent of the $235 billion diapers-to-shampoo conglomerate, a seat at the table. Yet as at the ballot box, a combination of voter apathy and arcane rules is likely to leave three investors holding all the cards at next Tuesday’s annual meeting.
It is an irony of the way American public equity markets have developed that the most important deciders on the P&G saga – as in many other proxy battles involving the world’s most valuable companies – are so-called passive index-fund managers led by Vanguard, BlackRock and State Street. To further the imperfect political analogy, they play roles similar to the ones Ohio, Wisconsin and Pennsylvania did in helping put Donald Trump into the Oval Office, even though his rival Hillary Clinton achieved more of the popular vote last November.
There are differences, of course. P&G shareholders are not being offered a choice between one chief executive or another. The question of whether to give Peltz, who comes armed with ideas about how P&G can improve its performance and more experience in the sector than most if not all of the company’s sitting directors, is far from existential. He would be one of about a dozen people helping set strategy, compensation and the like. Handing him a board seat is pretty much a no-lose option on bettering the maker of Tide and Pampers.
The insular, Cincinnati-based company thinks differently. P&G’s notorious allegiance to internal candidates for nearly every high-level position makes it vulnerable to criticism that it does not like outsiders telling it what to do. That’s a central theme to Peltz’s charges of P&G’s underperformance. For its part, the giant led by David Taylor says it’s already on track to create a “profoundly different, much stronger, and more profitable company” than just a few years ago.
As in previous engagements, Peltz is apt to have won over most of those P&G investors who spend their days thinking about whether to keep the investment in their portfolio. These so-called active managers, a group that in P&G’s case includes hedge funds, mutual funds and some pension funds, tend to agree that corporate boards benefit from having a voice from the investor community in their midst. Since P&G’s board before Peltz jolted it into action had no such representative, they consider his pitch favorably.
“Peltz’s experience in the consumer product space will add value to P&G’s board and his significant stake in the company will bring an owner’s perspective inside the boardroom,” said Anne Sheehan, the director of corporate governance at CalSTRS, on Thursday. “The addition of Mr. Peltz to the board is best for P&G, the CalSTRS fund and ultimately, the teachers of California.”
It’s here where the electoral math starts to matter. P&G has about 2.6 billion shares outstanding. Proxy advisers working either side of the tussle roughly estimate that investors like CalSTRS, Fidelity and Capital Group own about 41 percent of those shares. Assume 90 percent of the active managers live up to their billing and vote. If 80 percent of them tilt in favor of Peltz, that would give Trian about 770 million votes.
Retail investors own about the same amount of P&G, however. They tend to go along with what management has told them to do in the proxy cards that arrive in the post, as Trian learned the hard way when it failed to garner enough support to win seats on the board of DuPont two years ago. Like the American electorate, this group doesn’t tend to vote the way Fidelity and other institutions do. P&G may have an extra edge, though, in that many of its former workers still hold the stock, or received it as part of their retirement.
Yet there may also be folks who own the stock because, say, they love Dawn dishwashing liquid or live in the Cincinnati area and worry that Peltz would move its headquarters to the Bronx. So for arithmetic purposes, assume a slightly higher 60 percent of retail shareholders vote, and 80 percent of them cast their ballot against Peltz. That would give P&G 515 million votes.
That’s obviously not enough, and explains the significance of Vanguard, BlackRock and State Street. They have been the biggest beneficiaries of a trend toward investing in funds that simply track benchmark indexes like the S&P 500 – and charge lower fees for doing so – at the expense of higher-cost managers. Together, the trio control more than 17 percent of P&G, according to Institutional Shareholder Services, a proxy advisory firm that favors Peltz’s proposal.
To beat back Peltz, P&G needs to make up the difference between the active and retail investors, of some 255 million shares. In this scenario, P&G can only make that happen by bringing all three to its side. Vanguard, with 181 million shares, is the largest. State Street and BlackRock own 115 million and 156 million, respectively, according to ISS. To put it another way, Peltz just has to win one of the three.
Though that sounds like a tall order for P&G, past voting records give it a chance. In votes for directors proposed by shareholders, BlackRock only cast its ballot against management’s wishes 17 percent of the time at U.S. companies in the year to June 30. Nearly half the time, Vanguard sided with board-related proposals put forward by shareholders at U.S. companies. State Street says it cast its ballot in favor of any shareholder proposal, in defiance of management, only about 7 percent of the time in the first half of this year on a global basis.
These are not perfectly comparable statistics. They nevertheless suggest that P&G has a chance, just as Trump clearly did, if it can woo the investment world’s version of Pennsylvania, Ohio and Wisconsin. That also means a weekend trip for Peltz to suburban Malvern in the Keystone State – where Vanguard calls home – is advisable.
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