Sunday, October 06, 2002

P&G directors keep jobs in perspective

New climate, new demands raise emphasis on oversight

By Cliff Peale
The Cincinnati Enquirer

        They fly into Cincinnati eight times a year to meet at Procter & Gamble Co.'s headquarters.

        They include a former U.S. Cabinet secretary; a former president of Mexico; and titans of aerospace, auto manufacturing and telecommunications.

        They are charged with control of P&G 1/2ndash 3/4 the $40 billion behemoth that makes Tide, Crest and Pampers 1/2ndash 3/4 but they exercise that control with little fanfare.

        And in the wake of scandals at Enron Corp., WorldCom Inc. and other companies, P&G's board of directors is among many taking a new look at their role in managing big companies.

        As the board members travel to Cincinnati this week for the annual shareholders meeting Tuesday, they are under increasing pressure to become watchdogs for the shareholders and supervisors - not observers - of senior management.

        “There's been a lot of pressure, and rightly so, on the issue of independence,” said Domenico DeSole, CEO of Gucci Group and a P&G director since 2001. “I think we have the right priorities here.”

        It's a turning point for corporate boards, which for years have been dotted with friends, business partners and others that had a financial stake in the company's business.

        Experts generally have given P&G's board high marks, noting the diversity of the board and the majority of independent directors. But the business relationships that are receiving increased scrutiny in the post-Enron world still are there.

        For example, P&G this year signed a long-term media deal with Discovery Communications Inc., parent company of Discovery Networks U.S., the former employer of director Johnathan Rodgers. Director Lynn Martin is listed in P&G's proxy statement as an adviser to Deloitte & Touche, which is P&G's independent auditing firm. The company does business with the law firm Thompson Hine, at which director Robert Storey is a partner.

        And P&G chairman A.G. Lafley and General Motors Corp. chairman John Smith are on each other's board of directors. That's just the kind of relationship that has been commonplace in the past, but under the microscope now.

        “Cross-directorship is a conflict,” said Charles Elson, director of the Center for Corporate Governance at the University of Delaware. “That renders the director from GM not independent.”

        No longer, experts said, can directors listen to the CEO describe the company's strategy, collect a big fee and then fly back to their full-time jobs.

        “That day is gone,” said Dan Herron, associate professor of business and legal studies at Miami University's Farmer School of Business. “If you're going to be a board member, you're going to be a player, and you're going to have to be involved.”

        The change is felt throughout industry. Companies are paying more for liability insurance for directors and officers, because there is so much more risk in the post-Enron environment. They also need independence, or boards not dotted with company employees.

        It's a high-stakes game, because a company with a board of directors perceived as weak could suffer in its public perception - and its stock price.

        “The heightened awareness of corporate governance is a good thing for everybody - companies, shareholders and employees,” said local lawyer Jim Cummins of Waite, Schneider, Bayless & Chesley.

        P&G's board includes 13 outsiders and four insiders: Mr. Lafley, who is chairman and CEO; vice chairmen Kerry Clark and Bruce Byrnes; and retired chairman John Pepper.

        Mr. Byrnes and Mr. Clark just joined the board this year, although they each had made plenty of presentations for directors.

        “They really want to make sure we know what we're doing,” Mr. Clark said. “When we have a success or a failure, they really want us to know what's behind that, to learn from it.”

        "The Gucci Guy'

        Outside board members were paid $57,500 last year, with an option to receive the payment in common stock. They also got $45,000 in restricted stock, and an option to buy another 1,866 common shares.

        Each board meeting includes a presentation from one P&G business unit - snacks and beverages are scheduled for the meeting this week - or a geographic market group, such as Latin America.

        They generally hold committee meetings in the morning, then a board meeting of three to four hours in the afternoon. Outside directors meet independently of company management, Mr. Byrnes said.

        Last spring, after a board meeting in Geneva, each director toured a separate country with P&G executives from that country, learning more about the company's operation there.

        And some directors, including Mr. DeSole and Intuit Inc.'s Scott Cook, have been invited to speak to P&G executives on their particular specialties. Inside P&G, Mr. DeSole's talks are headlined “The Gucci Guy.”

        Mr. DeSole said the bulk of the company's initiatives come from Mr. Lafley and management, not new suggestions from board members. One example is the Business Process Sourcing Study, which would move about 5,700 P&G workers and many back-office functions to a third company.

        That has been the subject of discussion at two board meetings, with several more coming.

        “In the end, A.G. (Lafley) is responsible. He runs the company,” Mr. DeSole said. “The board should not run the company. It should be done by management.”

        List of P&G directors
        P&G auditors keep tabs on firm's finances
        Latest P&G innovation is, well, innovation

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