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P&G: The Rise of the Activist Shareholder

Friday, May. 24, 2013

In an unexpected turn of events, Proctor and Gamble CEO, Robert A. McDonald, announced his resignation Thursday. Proctor and Gamble has faced a great deal of scrutiny from Pershing Square Capital’s hedge fund manager William A. Ackman, who faults Mr. McDonald for not addressing the company’s widespread inefficiency and excessive marketing costs. In a meeting in September, Mr. Ackman urged the board to replace Mr. McDonald, and again in a presentation this month where he argued that Mr. McDonald has been distracted by external commitments, among them serving on the boards of other companies. Mr. Ackman’s open battle versus Proctor and Gamble and its board leadership is hardly an isolated incident. Activist investors are becoming more prominent and outspoken: ranging from Mr. Einhorn calling for dividends at Apple; Mr. Loeb for splitting up Sony; to Mr. Ackman’s role in J.C. Penney’s failed transition. Activist investors are on the rise, and they are using tactics which some argue do damage to the company. Should the investing public welcome the rise of the activist investor? Or seek to limit their ability to make trouble?

  Kirk: The rise of hedge funds and other accumulations of capital has allowed some large investors to manipulate short-term stock prices to serve their own self-interest while damaging the well being of long-term investors. They act more like day traders than those investors in it for the long haul. Their objective is often just to raise the stock price long enough for them to get out. The rise of social media and other new media help their game. Management and long term investors must stiffer their backbones to resist such tactics.

  Patrick: I share Kirk’s concerns, but I think there’s an upside for everyday investors here. The current framework for communication between shareholders is fragmented and ineffective, making coordinated action difficult: probably intentionally. Prominent investors have the power to “round up the troops” and work toward collective shareholder goals. In response, companies will have to facilitate better communication between investors in order to check the power of individual activist investors. That way, companies will be insulated from rogue investors and shareholders get their voice heard.

Abruptly, P.&G. Chief Ends Career of 33 Years

A Framework for Thinking Ethically



Comments Comments

Joe Schmid said on May 26, 2013
P&G while doing well was underperforming its competitors. Ackman was not alone in criticizing; and he did not malign P&G or its potential, he endorsed it - so no harm. Looking at Ackman's Pershing obligations (holding a 1% interest in P&G a reported 20% of the Pershing portfolio) I wouldn't expect anything less. Considering McDonald's obligations to P&G and reportedly sitting on 20 some other corporate boards, without a doubt he had an ethical dilemma which he resolved by resigning. So called "activist hedge fund" mangers are a different breed; and an order of magnitude better than the generic hedge fund players using "manufactured derivatives" and manipulation veiled as "risk management". "Activists" buy significant stake in companies and engage management collaboratively (usually behind the scene) to find ways to improve performance to the benefit of all shareholders. Activist hedge funds are the antithesis of day trading; they are long term oriented not a scorched earth approach and take the gains and run. So in both Ackman and McDonald's case, they both acted appropriately and ethically. - Like - 2 people like this.
Patrick said on May 27, 2013
Thanks for the post, Joe. I'd agree both Ackman and McDonald made the right move here. In terms of the dilemma being brought forth, I'd say it's more about the power for big name activist investors to shake things up, rather than whether they are in the wrong in doing so. Better, but less timely, examples from Ackman are his selling short of Herbalife, then accusing the company of being a ponzi scheme (which may very well be justified), and his role in J.C. Penny's failed turnaround. By the way, "For the Right Reasons" post coming soon! - Like
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