P&G gambles on A.G. delivering the goods

In the many months that Bob McDonald was under intense pressure from critics, he never entirely accepted the premise of their complaints about Procter & Gamble's listless performance.

P&G would not comment on what prompted its chief executive's "personal decision" to retire on Thursday, and it continued to insist that the company was making "steady progress" in improving sales and profitability.

Dissenters, however, say the world's largest consumer goods maker by sales has lost its way.

Investors and employees who are unhappy with the company's performance will want to know whether his surprise replacement - his predecessor AG Lafley - will bring a radically different assessment of how P&G is doing and what it has done wrong.

On a brief three-minute call with analysts on Friday morning, Jon Moeller, P&G's chief financial officer, downplayed the possibility of upheaval.

Mr McDonald's departure was "not indicative of any bigger problem or financial issue," he said. "This won't result in a dramatic change in our strategy or priorities."

Still, as P&G shares rose in early Friday trading, Lauren Lieberman, analyst at Barclays, said in a research note: "The market has been frustrated with P&G's false starts at a turnaround over the past three years, so the potential for a 'return to the future' with the beloved Mr Lafley at the helm should be favourably received."

Mr Lafley, who turns 66 next month, did not particularly want to return as chief executive, people familiar with the company said. But he felt pressured to return to a company he loved after it was clear Mr McDonald's departure would leave a leadership vacuum.

Mr McDonald had not developed viable internal candidates to succeed him, these people said, and the company proud of its promote-from-within culture was not interested in bringing in someone from the outside.

Mr McDonald's most vocal critic has been Bill Ackman, the activist head of the Pershing Square hedge fund, who bought 1 per cent of the company last year and has been agitating for change.

But in a Q&A memo to employees about Mr McDonald's departure, the answer P&G gave to a question on whether it resulted from pressure from Mr Ackman was: "No."

In answer to the question "Was Mr McDonald fired?" it repeated a statement that he "has chosen to retire from Procter & Gamble after 33 years of service" and that "the board appreciates his contributions and notes the company's improving business performance".

Mr Ackman told CNBC on Thursday: "AG Lafley is one of the greatest CEOs and we're delighted to have him back."

At a conference earlier in May, Mr Ackman had made his position clear saying that P&G - whose brands include Crest toothpaste, Olay skin cream and Head & Shoulders shampoo - was "vastly under-earning relative to its intrinsic earnings power".

In each of the past four quarters, its sales growth had been worse than peers such as Unilever, Colgate-Palmolive and L'Oreal, he said.

He blamed its "underwhelming" performance on a bloated cost base, low manufacturing productivity, less than effective marketing and an inefficient organisational structure.

Mr Ackman also said Mr McDonald had been distracted by outside directorships that he estimated took up 25 per cent of his time.

In the same presentation, he displayed a quote from Mr Lafley pulled from P&G's 2007 annual report in which he said P&G's then gross profit margin - 52 per cent - could and should be higher.

In another presentation slide, Mr Ackman said: "If P&G's current CEO cannot demonstrate a sustainable turnround in the near term, we believe the board will do the right thing and put in place new leadership."

In an unusual move in September, Jim McNerney, P&G's lead director and the chief executive of Boeing, issued a statement saying that he and the entire board supported Mr McDonald. Two months earlier Bloomberg had reported that Mr McNerney was unhappy with Mr McDonald's performance.

A person close to P&G said the board had not played a role in Mr McDonald's decision to step down either.

In January when the Financial Times pressed Mr McDonald on whether recent criticism had affected his own confidence, he said "no", then paused before asking "Should it?", and laughed.

Mr McDonald had made some concessions to the critics. In February 2012 he pledged to cut 5,700 jobs and $10bn in costs over the next four years.

Then in June, he vowed to tighten P&G's focus on its biggest markets and admitted missteps: a lack of radical product innovation, poor communication, excessively high pricing and low productivity.

But while that helped its shares to track a wider nine-month rally in the stock market, the gains came to a juddering halt in April. P&G released quarterly results that disappointed investors but were presented by Mr McDonald as a sign that the group's performance was improving and "on track".

On Thursday, P&G said: "Bob has made a personal decision to retire. The company has made steady progress under his leadership, particularly in recent quarters. The board felt that given Bob's desire to retire, AG was uniquely qualified to return to the company to continue the progress the company was making."

Additional reporting by David Gelles

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