Procter & Gamble employees, do you have a reasonable degree of control over your work and the strategic direction of your Company?
Management tells me Procter & Gamble employees have a “significant influence” on Company practices. They have ample opportunity to share perspectives with each other, managers, and the Board. Specifically, they cite the P&G Survey, conducted annually, as “a meaningful way that our employees provide input and indicate what they believe the Company is doing well and what it needs to do differently.”
Employees are one of the largest groups of shareholders at Procter & Gamble (PG). Vanguard and BlackRock hold more shares on behalf of their clients but Procter & Gamble employees own more shares than the third-largest institutional investor, State Street. How does their degree of control compare with that of institutional investors? Do employees have a direct line of communication with the Board for ongoing dialogue? I suspect employee input is more like a modern suggestion box.
Procter & Gamble Employees: Our Shareholder Proposal
My wife and I filed a shareholder proposal to be voted at the next annual shareholder’s meeting. We offered to withdraw the proposal if the Board agreed to any of a number of options to empower employees and report results to shareholders. Some of those options are alluded to in the proposal’s “Whereas” section, such as just appointing a member of the Board to be a liaison with workers.
Another option, not mentioned in the proposal, would be to create a Shadow Board of employees providing input to the Board on strategic issues. As stated above, management tells us current input mechanisms for employees, such as an annual survey, are already more than adequate. Negotiations have reached an impasse.
Below is the entire text of our proposal. We are interested in hearing from employees, shareholders, and other interested parties.
Increase Diversity of Director Nominees
Resolved: Procter & Gamble Company (‘PG” or ‘Company’) shareholders urge our board to adopt a policy (‘Policy’) of promoting significant representation of employee perspectives among corporate decision-makers by requiring the initial list of candidates from which new director nominees are chosen (‘Initial List’) by the Governance and Public Responsibility Committee include (but need not be limited to) current or past PG non-management employees. The Policy should provide that any third-party consultant asked to furnish an Initial List will be requested to include such candidates.
Whereas: There is growing consensus that employees on corporate boards can contribute to long-term corporate sustainability. Policymakers note, having companies run exclusively to benefit shareholders contributes to “stagnant wages, runaway executive compensation, and underinvestment in research and innovation.” The Business Roundtable asks corporations to align with stakeholder interests, including employees.
Employee representation grows long-term value of companies in several ways. According to the National Bureau of Economic Research, giving workers formal control rights increases female board representation and raises capital formation. Employees are also often more diverse than boards in terms of race, gender, and wealth. The German “co-determination” model of shared governance provides a check against short-term capital allocation practices and other benefits.
The 2018 UK Corporate Governance Code encourages boards to establish a method for gathering workforce views. Options include a director appointed from the workforce, a formal workforce advisory panel or designating a director to liaise with workers.
Senators Baldwin and Warren introduced legislation codifying employee representation on corporate boards, noting that modern corporate governance needs to be accountable wider interests, notably employees. Polling demonstrates bipartisan public support (over 53%) for employee representation.
Anticipated benefits include reduced turnover as employees are more empowered to influence firm-specific investments, better-informed decision-making because employees have specialized knowledge, better monitoring of management with increased information channels, and reduced myopia since employees often take a longer-term view.
While our Board satisfies independence requirements and strives for a culture of participation, it lacks formal representation from non-management employees, who bring a different understanding of operations than typical directors. Additionally, PG’s CEO was reportedly one of the 100 most overpaid CEOs.
The Policy we propose resembles the Rooney Rule, which requires teams to interview minority candidates for head coaching and senior operations openings. By adopting the Rooney Rule, National Football League teams increased diversity and set a precedent for other industries. Policies similar to the Rooney Rule have been adopted by Amazon, Costco, Home Depot, Activision Blizzard, Dover, Expedia, Fastenal, Hilton Worldwide Holdings, L Bands, Robert Half International, Ross Stores, and others.
Increase Long-Term Shareholder Value
Vote to Increase Diversity of Director Nominees
https://rooseveltinstitute.org/wp-content/uploads/2020/07/RI_Policies-for-Worker-Representation-on-Corporate-Boards-Working-Paper-201910.pdf and https://ssrn.com/abstract=3684690
More Detail on the Proposal
Shareholder proposals are limited to 500 words and can be excluded if they ask a company to take action related to “ordinary business,” such as what products to make, how to pay or communicate with employees.
SEC Rule 14a-8(i)(7), the “ordinary business” exception, permits a company to exclude a proposal that “deals with a matter relating to the company’s ordinary business operations.” The purpose of the exception is “to confine the resolution of ordinary business problems to management and the board of directors since it is impracticable for shareholders to decide how to solve such problems at an annual shareholders meeting.”
Board composition, including issues such as board diversity, director qualifications, and employee representation clearly fall outside the ordinary business exclusion. Our proposal seeks to increases the chances that a current or past Procter & Gamble non-management employee will be appointed/elected to the Board.
Such a Board member could connect better with the world views of Procter & Gamble employees and customers. According to the Summary Compensation Table in the 2020 proxy, our CEO/Board Chair David Taylor “earned” $23M. No, that was not in a lifetime; that $23M was earned in one year, up from $20M the year before.
Non-employee directors averaged $327,000. This is for a part-time job that requires attendance at 6 Board meetings plus committee meetings. Interestingly, “Directors were entitled to bring a guest so long as the Director used the Company aircraft to attend the meeting and the guest’s attendance did not result in any incremental aircraft costs.”
People that fly Company aircraft to attend meetings live in a rarefied bubble. Most of us have seen it, but only in movies. My wife and I believe current or past PG non-management employees would bring a more down-to-earth perspective to the Board.
After talking to management, my guess is that Procter & Gamble employees have a degree of control between steps 1 and 2 in the table below. I would love to hear from employees. Is my assumption correct?
Procter & Gamble Employees: Share Performance
Many Procter & Gamble employees have a substantial portion of retirement savings invested in our Company. If employees had a substantial voice on the Board, stock performance would improve.
While we are delighted that Procter & Gamble employees are incentivized at work because their retirement income depends on stock performance, we are concerned that you may be sacrificing too much, especially compared to our CEO or Board members. The charts below compare PG performance (blue line) with the S&P 500 (green line) over the latest 1, 2, and 3 year time periods.
Employee and Shareholder Synergies
We believe employees and shareholders have unexplored synergies. Giving employees more of a voice would facilitate our ability to explore those. For example, at the 2020 annual meeting, shareholders requested that PG “issue a report assessing if and how it could increase the scale, pace, and rigor of its efforts to eliminate deforestation and the degradation of intact forests in its supply chains.”
Why did the Board oppose such a proposal in the first place? We thought our Company was committed to sustainability. According to the proposal, which won 67.7% of the vote, PG’s peers have adopted and implemented stronger forest sourcing policies:
- Kimberly-Clark, one of the world’s largest buyers of market pulp, has committed to halving its sourcing from natural forests, dramatically increasing the use of alternative and environmentally preferred fibers. Kimberly-Clark regularly reports progress and appears on track to meet its targets.
- Unilever has committed to zero-net deforestation by 2020 in its supply chains and will sustainably source 95 percent of 12 key crops—including palm oil and paper/board—by the end of 2020.
“P&G’s USD 41 billion reputation risk, equal to 14 percent of its equity value, dwarfs the cost of solutions,” according to Chain Reaction Research. We understand proponents have resubmitted the proposal and are still negotiating with management on implementation. We hope they can reach a resolution.
As can be seen from the chart below, Climate Action 100+ did not rate P&G highly.
I would bet that most employees would like to work for a company with all ratings checked green, instead of red or orange. Compare with the rating on the same dimensions for Unilever. Of course, there is room for all companies to improve. That will happen quicker if employees are more involved.
Even the Wall Street Journal includes Let Employees Take the Lead on ESG. Are we wrong to believe Procter & Gamble employees want to be in the lead on this and other ESG issues? We think most companies, including Procter & Gamble, could learn a thing or two from cooperatives about leadership, motivation and values alignment. Read McKinsey on Cooperatives.
Stakeholder capitalism: Moving Forward from Mere Happy Talk
In an article published under the above title, Michael O’Leary and Warren Valdmanis write the following:
Certain companies are recognising that there is power in orienting a company around a social or environmental purpose beyond profit. The French food giant Danone has taken the extraordinary step of putting purpose into its corporate charter, committing the company to “bring health through food to as many people as possible.”
Market fundamentalists — those Milton Friedman acolytes hewing to the more traditional ideology that companies must always and only maximise profits, trusting the invisible hand to deal with the rest — complain that such purpose must come at the cost of shareholder return.
But today, most value — even shareholder value — is driven by people. In 1975, 83% of the market value of the S&P 500 in the US was made up of tangible assets. Today, that ratio has flipped. Only 10% of the market value of our largest corporations is accounted for in tangible assets on the balance sheet. The rest is intangible, driven by creativity, trust, commitment, and goodwill. Companies seeking to maximise their value are forced to focus on what will best attract, motivate, and retain top talent. For younger generations, that’s often work with a deeper purpose than just profit.
Nonetheless, a global survey of 12,000 white collar workers across a range of industries found that half felt no connection to their company’s mission. This lines up with Gallup’s annual survey on engagement. More than half of American workers don’t feel engaged at work, and more than one in eight is so disengaged that they actually work against the interests of their employers — a half-trillion-dollar drag on the US economy…
Until we can put purpose in a corporation’s charter, hold it accountable to that purpose, and align its business model with its purpose, we’ll get what we’ve got: a thin veneer of stakeholder rhetoric painted over the cracked foundation of shareholder primacy.
If stakeholders, especially employees, can get seats at the table, maybe we can hold boards accountable to the higher purpose we all seek in our own lives. Here is a special shout-out to Robert Reich. Will Procter & Gamble employees lead the way?