Unilever and PG - Roger Martin

7/27/2019 Unilever and PG - Roger Martin

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LEADERSHIP | 1/11/2013 @ 9:48AM | 13,733 views

Is Everyone Nuts? P&G Now ADog? And Unilever AStar?

On the face of it, shareholder value is the

dumbest idea in the world.

Jack Welch, 2009

What on earth is going on with Procter & Gamble [PG]

and Unilever [UL]? In the period 2000-2009, during

which A.G.Lafley was CEO, P&G was universally

perceived as a winner and Lafley was regarded as one of

the very best performing CEOs of his generation. His

successor at P&G in 2009, Bob McDonald, was appointed

from within P&G, in order to continue the strong track record of success. By

contrast, in that period, the performance of P&G s competitor, Unilever, was

widely regarded as poor: its board was forced to look outside the firm for a

new CEO and eventually found one in 2009 with a somewhat surprising

pedigree: long-time rival P&G.

Yet in recent months, perceptions in the business press have suddenly

reversed. Both The Economist and Fortune have both published scathing

articles about P&Gs performance, suggesting that P&G management is

failing, while making unfavorable comparisons to Unilever. Unilever is now

being hailed as a winner and P&G is now being depicted as a dog.

Hedge fund activist, William Ackman of Pershing Square Capital

Management purchased $1.8 billion in P&G shares, and reportedly asked for

McDonalds resignation. P&Gs CEO Bob McDonald now finds himself under

siege: recently the Board felt it necessary to issue a public statement in his

support.

How did P&G go so swiftly from being a winner to being a loser? How did

Bob McDonald become a dunce so quickly, while Paul Polman, CEO of

Unilever, has abruptly become a star? To try to make sense of all this, I

consulted Roger Martin, Dean of the Rotman School of Management at the

University of Toronto and the guru of customer capitalism, to find out what

on earth is going on.

SD: Roger, are you in a position to shed some light what s going on with the

topsy-turvy evaluations of P&G and Unilever and their CEOs?

Steve Denning, Contributor

I write about radical management, leadership, innovation & narrative

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ROGER MARTIN: I know both companies and both CEOs well. I have

consulted to P&G leadership for the past 27 years. Paul Polman came from

P&G. He and I worked intensively together on strategy at P&G in the 1990s

during his formative years there as a general manager. And I also worked lots

with Bob McDonald in that period and I advise him today. I have praised

Pauls work at Unilever in myrecent article in BusinessWeek: basically I love

what he is doing there.

SD: So what do you make of the current discussion of the performance ofP&G and Unilever and their CEOs?

ROGER MARTIN: Frankly, the current narrative in the capital markets

about Paul Polman versus Bob McDonald drives me nuts. I admit I have low

expectations of Wall Street analysis to begin with, but the thinking and logic

here are so lame that they surprise even me. The overwhelming narrative now

is that Paul is a genius and Bob is a dummy, based on the fabulous stock

performance of Unilever and the terrible performance of P&G under their

respective leadership.

SD: So whats really going on?

ROGER MARTIN: Lets look the data behind the story. You may recall we

had a little problem in 2008 with a bit of a stock market meltdown. And that

was preceded with a big run up in stock values. This was ubiquitous and

influenced most all big companies. The S&P 500 hit its all-time high of

1561.80 on October 12, 2007 and then cratered to 43% of its high when it

bottomed at 676.53 on March 9, 2009. Then it gradually worked its way up to

1472.12 as of close of trading yesterday, 94% of its all-time high and 218% of

the bottom.

Both P&G and Unilever experienced the same wild ride at almost the exact

same times. P&G hit its all-time high of $74.40 a couple of months after the

S&P on December 13, 2007 and then cratered to 59% of its high when it

bottomed at $44.18 on March 1, 2009 (a week away from the S&P bottom)

and then worked its way up to yesterdays closing of $69.27, which is 93% ofits all-time high and 157% of the bottom.

Unilever hit its all-time high of $37.95 two weeks after P&G on December 28,

2007 and then cratered to 59% of its high when it bottomed at $17.04 on

March 9, 2009 (same day as the S&P bottom) and then worked its way up to

yesterdays closing of $38.73, 102% of its all-time high and 227% of the

bottom.

SD: How does this relate to CEO performance at the respective companies?




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ROGER MARTIN: Both Paul and Bob took over their current positions in

close proximity to the bottom of the S&P and both of their stocks Paul on

January 1, 2009 and Bob on July 1, 2009. I think it is fair to say that neither

one of them had a thing to do with the fact that the global capital markets had

tanked nor that their respective stocks were right there with it. And it is hard

to argue that there would have be a whit of difference had they switched start

dates. Basically, they both inherited a company near the bottom of a stock

market and economic crisis and both have had 3-4 years to work on their way

out of that mess.

SD: What conclusions should an analyst draw?

ROGER MARTIN: First, there is no escape from the expectations market

for a single company. P&G and Unilever peaked with the bull market and

crashed with the bear market and recovered from the trough with the market.

Expectations swung wildly for everyone involved.

Second, the biggest difference between the stock market performances of Paul

and Bob over this boom-bust-recovery period between late 2007 and the end

of 2012 is that Unilever crashed as much as the market (S&P down to 43%

of peak Unilever 45%) and P&G managed to crash a lot less (59% of peak).

This makes Unilevers recovery from the trough (227%) much moreimpressive than P&Gs (157%) and since P&G dropped less than the S&P, P&G

looks like it lags the S&P (218%).

Third, if you ask how these two men fared in restoring their stock prices to

their previous glory the pre-crash high there isnt much of a story. By the

end of 2012, the S&P was back to 94% of its pre-crash high. P&G, despite its

terrible performance, was also at 93%. Unilever was 102%.

So what does it come down to? Paul is a genius and Bob is a dummy because

of those nine percentage points in the markets expectations about the future

of Unilever versus P&G? Nine percentage points in stock price appreciation

defines the range between genius and dummy? So if the stock price of

Unilever would be $34.53 rather than $38.73, Paul would be a dummy. And ifP&G would be $75.89 rather than $69.27, Bob would be a genius.

SD: Are the markets saying that Paul did a better job than Bob in digging

Unilever out of a deeper stock price trough?

ROGER MARTIN: Thats the kind of classically lame argument that often

comes out of capital markets. The depth of the trough is a function of

expectations, not reality. Investors put themselves into and out of troughs of

their own volition.

SD: So how should we evaluate the performance of the two firms and their

CEOs?

ROGER MARTIN

: For me the most compelling argument is the following.Who was in charge of P&G when it hit its all-time high? It was A.G. Lafley,

who is rightly lauded as one of the worlds best CEOs of his generation. By the

mid-2000s, he had turned around P&G and had it humming on literally all its

cylinders.

How about Unilever? Well the board was sufficiently displeased with the

performance of the company and its existing management team that it found

it necessary to go outside for the first time in history to appoint a CEO Paul

Polman. I think that accounts more than anything else for the relatively




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This article is available online at:

http://www.forbes.com/sites/stevedenning/2013/01/11/pg-now-a-dog-unilever-a-star-are-

they-nuts/

modest 11-point difference in relative expectation from pre-crash peak to

current for these two companies.

SD: So why are capital market heavyweights now calling for Bob McDonalds

ouster?

ROGER MARTIN: Apparently they want to enforce the following rule on

public companies: We will bid up the price of your stock to whatever in our

wildest expectation fantasies we imagine that it is worth and then hold youaccountable for earning a sparkling return on that value, and if you dont do it

immediately we will savage you and the stock price and get somebody else to

bring it back up to where it was when we started haranguing you.And we

wonder why Americas economy seems terminally screwed up!

And read also:

The Dumbest Idea In The World: Maximizing Shareholder Value

Q&A With Roger Martin: Fighting The Kool-Aid Of Stock-Based

Compensation

How Do You Fix Bad Habits?

Solving the innovation enigma

Bureaucracy, anarchy and innovation amnesia

____________

Steve Dennings most recent book is: The Leaders Guide to Radical

Management (Jossey-Bass, 2010).

FollowSteve Denning on Twitter @stevedenning


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Unilever and PG - Roger Martin