Thursday, September 27, 2012

Who should lead Procter & Gamble out of the crisis?

Procter & Gamble (P&G) has had poor financial results as of late, and the Wall Street Journal is reporting that its CEO Robert McDonald is under pressure from hedge fund manager William Ackman. Ackman is convinced that Mr. McDonald is not the right person to lead P&G because of apparent inaction in the face of a three-year run of profit declines. I have earlier argued that it is simplistic to just argue for CEO replacement when things go poorly, and I could make the same case here: P&G has a high-quality, high-price position in many markets, which means it will temporarily suffer when the economy is doing poorly. In the long run it may do better by holding firm and waiting for the recovery than by changing its position.

However, the Wall Street Journal on P&G also documents clear mistakes that cast doubt on their current leadership. They may need to rethink their strategy. Is Mr. McDonald the right person to do that? Recent research by Adam Kleinbaum in Administrative Science Quarterly suggests that we can know the answer by looking at Mr. McDonald’s career. Mr. McDonald was a Tide brand manager before becoming a laundry business manager, then had stints in the Philippines and Japan before taking over regional responsibilities in Northeast Asia. His last functional job before COO and CEO was (surprise!) Fabric Care. In other words, Mr. McDonald was a laundry manager in a company that gets a large bulk of its revenue from laundry products. I don’t know for sure what a typical P&G managerial career looks like, but his seems pretty typical.

Adam Kleinbaum’s point is that managers with typical career paths get narrow interpersonal networks with limited opportunities to connect people (broker) across different areas of the organization. This matters because brokerage across different areas of the organization lets the manager contact friends who have different types of information than their immediate reports and learn about ideas and opinions that they would not otherwise have known. Such ideas from separate parts of the information, in turn, can be assembled like pieces of a puzzle to form new initiatives and renew the strategy. The usual tools for making new strategies, like working groups and committees, are often more political than such networks of friends and can be less frank. It is reported that they have been pure talking shops during Mr. McDonald's time.

There is a good chance that William Ackman wants to force renewal of P&G by replacing Mr. McDonald with someone from outside the organization. Given the size and complexity of P&G, it would probably be difficult to find anyone who could take on that job and be effective right away, so that would likely be a mistake. On the other hand, if my guess about Robert McDonald’s career path is correct, he is not a likely source of renewal for P&G either. The upside is that a large organization such as P&G should have a large pool of the type of manager that Adam Kleinbaum calls “organizational misfits”: people whose experiences have been so unusual that they have much better connections across the organization than the average P&G manager. Maybe the P&G board of directors should be looking for a few good misfits from within its ranks?

Glazer, Emily, Ellen Byron, Dennis K. Berman and Joann S. Lublin. 2012. P&G’s Stumbles Put CEO on Hot Seat. Wall Street Journal, Sep 27 2012.
Kleinbaum, Adam M. 2012. Organizational Misfits and the Origins of Brokerage in Intrafirm Networks. Administrative Science Quarterly, 57.
Wikipedia. “Robert A. McDonald.” Accessed Sep. 27 2012.