Procter & Gamble Co. re-instated former president and CEO A.G. Lafley to the firm’s helm, replacing Bob McDonald, with an eye on staying the current strategic course despite pressure from investors for changes to help spur growth.

Some analysts speculate that in addition to Lafley’s return announced May 23, other organizational changes could follow for the marketer of Crest toothpastes, Vicks cough and cold medicines and Pantene hair care products, among other consumer brands.

Lafley, who served as president and CEO of the company from 2000 to 2009, replaces McDonald, a 33-year P&G veteran who led the firm since July 2009. The appointment is effective immediately and McDonald will retire from the firm on June 30 with no severance payments, according to a May 24 Securities & Exchange Commission filing.

A.G. Lafley

Photo courtesy of P&G

Many analysts saw a changeover in leadership as inevitable, with management – and McDonald in particular – taking heat for losses in market share and missed earnings targets.

The length of McDonald’s tenure as CEO suggests the firm’s long-term plans did not include his exit four years after taking the helm. When Lafley departed P&G in 2009, the changeover was consistent with the firm’s tradition of replacing CEOs every 10 years.

However, the Cincinnati-based consumer products giant dismissed speculation that Lafley’s return was influenced by pressure from investors, including Bill Ackman's Pershing Square Capital Management, which purchased a roughly 1% share of P&G in July 2012.

“This announcement is not indicative of any kind of bigger problem or financial issue. We'll continue to focus on maintaining momentum in developing markets and building and targeting our core developed markets business,” P&G Chief Financial Officer Jon Moeller said during a May 24 briefing for analysts and media.

Ackman has expressed disappointment with McDonald's performance and pushed the board to replace the executive ([A#05130520001]).

However, Moeller said the change “very simply reflects” McDonald's decision to retire and the P&G board of directors’ view that “Lafley was currently the best person to replace Bob and build on the momentum that Bob has initiated and led.”

“New Hope” From Old Hand

Lafley has a legendary status with some analysts, and the announcement of his return received an approving response. The change also generated approval in the market as the firm’s shares were up 3.17% to $81.88 a share with heavy volume trading through mid-day May 24.

He is known as a hands-on leader who refocused the business on consumers and led a turnaround strategy after taking the reins of the firm in 2000, replacing Durk Jager. Lafley's work was cut out for him – in the six months prior to his initial appointment, P&G's share price had plummeted 50%.

With his motto “the consumer is boss,” Lafley refocused the business on consumers – a focus that he felt the company had lost in prior years. He even visited consumers' homes to observe how they used P&G products.

Under his leadership, P&G pared product categories and placed resources behind core brands, including hair care and oral care. He also led the firm's $57 billion purchase of Gillette in 2005 Also see "P&G Eyes Expanded Gillette Skin Care And Hair Care Offerings" - Pink Sheet, 10 October, 2005..

Those efforts paid off, with the company doubling its sales and expanding its portfolio of billion-dollar brands from 10 brands to 23. Additionally, the firm's stock price jumped from the low $20s in 2000 to the $70s in late 2007.

At the time of Lafley’s departure in 2009, many analysts expressed disappointment, particularly due to the global economic recession spreading at that time and in light of his record navigating through tough economic periods.

Analysts expect Lafley to accelerate again the company's growth trajectory. Some suggest the firm split or divest businesses to keep up with competition ([A#05130429004]).

In a May 24 report, UBS analyst Nik Modi said Lafley’s return “provides us with new hope.”

“While the details remain fairly scant, we are confident [Lafley] will accelerate P&G's forward progress on making organizational design change which may lead the company to effectively 'break up' internally – going back to a late 1990s version of its operating model,” said Modi.

The analyst said he expects the company will split its business into three parts – beauty care, home care and health care – and give autonomy to the leader of each business. “We may also see Lafley look to de-scale P&G’s sales organization – providing each of the major categories more resources so they can compete more effectively with more focused players.”

Morningstar analyst Erin Lash described Lafley's return as “a little shocking,” but said the appointment “gives credence to our prior concerns that P&G may not have anyone to fill the top spot, since several senior executives have headed for the exits over the past several years.”

Lash anticipates Lafley will remain only until a permanent successor “most likely from outside the organization” is named, she said. Regardless of who heads P&G, Lash says the firm will need “a healthy dose of reinvestment,” including both R&D and marketing to “truly turn the corner.”

Lafley Back At P&G Helm As McDonald’s Tenure Ends At Four Years

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