Procter & Gamble Case

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&G's 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 McDonald's resignation. P&G's 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?

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 Paul's work at Unilever in my recent article in BusinessWeek: basically I love what he is doing there.

SD: So what do you make of the current discussion of the performance of P&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 what's really going on?

ROGER MARTIN: Let's 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 yesterday's closing of $69.27, which is 93% of its 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 yesterday's 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?

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 Unilever's recovery from the trough (227%) much more impressive than P&G's (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 isn't 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 market's 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 if P&G would be $75.89 rather than $69.27,