STAGGERED ELECTION OF BOARD MEMBERS: the P&G case.

P&G caught in middle of board-election debate

Company supports three classes, three-year terms

By Lisa Biank Fasig

Cincinnati Business Courier

Updated: 8:00 p.m. ET Oct. 3, 2004

When it comes to its board of directors, Procter & Gamble Co. is finding itself stymied by one of the hottest issues

between companies and their shareholders.

The concern is how directors are elected. Procter uses a staggered-election system that divides the board into three classes and votes them to three-year terms. Shareholders of Procter want it to change the process so that all directors are elected annually.

It is a matter shareholders have put on Procter's annual proxy for more than 15 years. Each time it has failed. But in 2003, 56 percent of the votes cast were in favor of the change -- in a nonbinding proposal.

Now Procter has taken the noteworthy step of putting the measure back on the 2004 proxy, this time as a binding issue. Procter is recommending against the issue, but if shareholders approve it at the Oct. 12 meeting, it will be adopted.

The move amplifies the degree to which board elections have gained shareholder interest. Procter is one of 54 companies that put such a proposal on their proxies in 2004. Of them, 51 recommend a vote for the change. Procter is among three advising against it.

"A classified board is an accountability issue, and many feel they should be up for election each year for accountability," said Alesandra Monaco, deputy director of corporate governance research at the Investor Responsibility Research Center.

Some observers say a vote to change the election system is likely. So much so that Procter has sent an e-mail to as many as 46,000 North American employees advising them to vote against the measure.

In the e-mail, which also was filed with the Securities and Exchange Commission, CEO A.G. Lafley said Procter's stock price has grown faster under a classified board structure. He also reminded employees that they can change their vote if they already cast it in support of the measure.

"Recently, I talked with several of our large institutional investors about the benefits of the classified board structure," Lafley wrote. "They confirmed that the stability, experience and continuity of our classified board have been important factors to P&G's business and financial success." Others agree that a staggered board system promotes stability and better shareholder returns.

"For a company of the size and complexity like Procter & Gamble, one year is not sufficient to be able to take the long range view required for shareholder value. This is particularly true for an institution like P&G where product success is measured in terms of decades," said Dr. Laurence Stybel, vice president of Board Options, Inc. of Boston. "To think that you have to be up for election every year means you are not taking the required time to think about long-term shareholder value."

But Procter also is moving against the trend on this issue, said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. He thinks the company should listen to its shareholders.

"Many boards have declassified, there's no reason that Procter & Gamble should not," he said.

Elson also frowns on Procter mailing letters to employees about the issue. "It creates fear, and I don't think it's justified."

Procter does not often send such vote-related material to its employees, spokeswoman Linda Ulrey said, but it has done so before. Procter employs almost 13,000 people in Cincinnati.

(c) 2004 Cincinnati Business Courier

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