There is an ongoing proxy fight between Procter & Gamble (P&G) and Nelson Peltz for a board seat. It is a high-stakes battle that gives us an opportunity to learn some powerful lessons. As I analyzed the proxy fight in an earlier post, I will not revisit that. Instead, I will concentrate on what you can learn from this Proxy Fight. You can take away some very powerful and useful lessons in the art of making an argument.
Mistakes MBAs make
First, let’s look at a classic mistake P&G has made so far in their argument. It reminds me of rookie mistakes I have seen many a business student make.
I have been teaching strategy and strategic thinking to MBAs, executive MBAs, and managers for more than a decade. One of the exercises I ask groups to do is to build a business case and present it. I have seen some fundamental mistakes made by people over and over again.
The error goes as follows: The group would come up with a well-designed and analyzed business plan. Their presentation would go quite well in the beginning. But when I start probing their core arguments, their case often begins to fall apart.
At this stage, the team often starts dancing from argument to argument to prove their business case. The more they dance, the weaker their case becomes. I design that Q&A session to teach my students a critical lesson in argument dilution.
Understanding The Core Structure of an argument
To understand this mistake better, let us examine the structure of an argument.
An argument is a global claim backed up by a logical reason that is backed up with empirical evidence.
Evidence To Support the Reasons
For example, if I say, “let’s make this acquisition,” the structure of the argument could be as follows:
Make the Acquisition (Global Case)
a. It is a growing business (Reason 1)
i. Growth of > 15% pa (Evidence )
b. It will improve our financial position (Reason 2)
i. It profits and revenues are growing faster than ours (Evidence)
c. Absorbing it will be easy (Reason 3)
i. Salesforce synergies will lead to 20% reduction in headcount (Evidence 1)
ii. Back office synergies will result in $ 80mm reduction (Evidence 2)
iii. We have done similar acquisitions six times before (Evidence 3)
A case is only as strong as the logic and evidence that supports it. Weak logic can dilute the case quickly, and inadequate evidence can pose questions about the soundness of the reasoning. The more logical reasons you use, the more likely you will make a mistake in using a weak logic or poor evidence. So you do not want to add a weak link to your case. The key to a winning argument is a tight argument with few but strong reasons and compelling evidence.
But if you are on the other side and want to refute someone’s global case, you have two paths:
1. You can reframe the overall case: For example, the street thinks we have made too many acquisitions and this one will kill our stock.
2. You can attack the logic or the evidence supporting the global claim. For example, you can point to the fact that the 15% growth took place over a 20% decline in revenue in the previous year. This significantly weakens the argument.
Difference Between An Adept and A Non-Adept Debater
Other than making a solid case, good debaters differ from the rest in one other way: It is what they do when their case faces immense scrutiny? When questioned, a less adept argument maker will try to create alternate versions of the global claim or add many more logical reasons to support the case. You won’t believe how many times I have heard “yes, but we will also have an online business to reach a bigger audience”. This approach often dilutes the core argument and does immense harm.
A person who is adept at arguing a case does something different. The skilled debater adds more evidence to support the reasons or clarifies the reasons and does not change the argument’s structure. This strategy further strengthens the overall case.
With this background, we can examine how P&G and Nelson Peltz have made their respective arguments so far.
The Core Arguments from P&G and Nelson Peltz
Let’s take a moment to review the background and the core arguments in the proxy battle.
The Background Situation
P&G has delivered a sub-par total shareholder return (TSR) since 2005. I calculated the historical TSR data in an earlier post to demonstrate this.
Nelson Peltz acquired a stake in the company and wants a board seat. A board seat would help him bring fifty years of consumer goods experience to help P&G.
P&G management has refused him the board seat. They say they do not think Peltz can help them and they are already working on the problem. In response, Peltz has asked the shareholders to vote on the board seat issue. The next step is a shareholder vote in October.
In response, P&G initiated a media barrage against Peltz.
Since the management works for the shareholders, it needs to convince the shareholders to vote for its case and against the case made by Nelson Peltz.
How has P&G made its case so far?
P&G’s strategy against Peltz can be best described as a “kitchen sink” approach, in which you throw everything you have against an opponent in the hope that something will stick. Here is a brief history of how this strategy has worked so far.
June 2017: We will learn and do better
Initially, P&G communicated that it was in constructive talks with Peltz. They will learn and do better.
July 2017: P&G’s Tone Changes
During July, it seemed that the talks started to fail and both parties knew there would be a proxy fight. At that time P&G began to modify its tone and message. It came out with the following message:
- We know we need to do more.
- Peltz has yet to offer a plan.
- We are delivering right now and don’t need someone new on the board.
- We don’t want your help.
P&G began with a polite and moderate tone.
August 2017: The Kitchen Sink Approach
By the beginning of August, P&G took the gloves off, and the fight became heated and personal. It was in August that P&G demonstrated that it had no communication strategy to deal with Peltz. P&G began a massive media blitz and overtly spent an enormous amount on this campaign ($35 million as per David Taylor).
In August, P&G made too many arguments, as can be seen below:
- Peltz’s motives are questionable: He is working for his investors only.
- Peltz will move P&G from Cincinnati
- Peltz’s involvement will derail the existing plan.
- Peltz will break up P&G
- Peltz is not entitled to a board seat.
- Peltz’s data is old data and based on former CFO Clayt’s knowledge who left ten years ago. You can also read Clayt’s perspective from an interview he gave.
September: More Kitchen Sink
The same pattern of breaking the rules on how to make good arguments has continued to date. The arguments have evolved as follows:
- Peltz’s proposals are very dangerous.
- Peltz is not good enough.
- We have a rigorous process to elect board members, and Peltz is not right for us.
A key takeaway so far is that P&G’s argument structure kept changing. It used too many arguments and some flimsy data which was refutable directly by Peltz.
What is Peltz’s case? The core argument is a simple one: P&G is not doing well, and we want to help turn the company around.
- P&G is not doing well.
- The board is letting the management get away with a sub-par performance; P&G is paying the management handsomely despite the company’s declining performance.
- No one is in charge, and the shareholders are being taken for a ride.
- Let us step in and help bring some more oversight. We will also help turnaround the situation
Also, Peltz denied many of the allegations P&G made against him. He put up on a single page all the things he does not plan to do. These accusations included moving the company out of Cincinnati, breaking up the company, cutting pensions and so on.
Peltz kept the argument and the claims the same; his additional communications provided more evidence to support the claims.
In order to make its case, P&G needed to do just two things. First, make a solid case for being left alone and strengthen that argument over weeks. Second, weaken Peltz’s case by questioning its structure. It failed at both these tasks.
First, P&G didn’t have an argument structure that it could reinforce over time. Instead, it kept bringing new reasons to make a case: “No to Peltz”. One day the company states how great P&G is, the next day how “dangerous” Peltz is. And then, more statements about Peltz not being the right fit for P&G. This led to argument dilution that weakened its own case.
Second, P&G has been throwing disparate data to cast doubts on Peltz. And all it took Peltz was to issue denials on it and make a commitment to what he will not do. Using unverifiable and refutable data points to argue against an opponent further reduces one’s credibility.
As time went by, the overall narrative from P&G boiled down to “Peltz is evil”. The rest of its arguments became muddled and weak due to argument dilution.
A Key Lesson so far
A key lesson here is that one needs to have a well laid out and well-understood argument structure from the very beginning rather than trying to “wing it” as one goes along.
To develop a well laid out argument structure requires a lot of up-front work examining multiple lines of argumentation. It also means thinking ahead to see scenarios in which the argument would fall flat. It also means that one needs to have the discipline to stick with the original argument rather than changing course every few days. Above all, it means the way to hold your ground is by clarification and additional evidence to support the argument structure, not argument dilution.
But What About Politics?
You may remember that you have seen some political campaigns that did not work even when they used well-structured arguments. You may also remember seeing the kitchen sink strategy work well at times. Political opponents sometimes use a mix of negative strategy and the kitchen sink approach to muddy waters so much that they end up winning.
And you may have a valid point in that regard. But to understand why this a different situation, we need to revisit the concept of schooled vs. unschooled mind.
Schooled Vs. Unschooled Mind
Howard Gardner explained in his book Frames of Mind that there is a significant difference between a schooled and an unschooled mind. A five-year-old child thinks in terms of black and white, good and bad. But as the child grows, he or she starts to think using relativism with increasing sophistication. The child begins to see shades of grey. An unschooled mind is swayed by good vs. bad arguments but a schooled mind is not.
People have a schooled mind in their domains of expertise, but in other areas, they often behave as if they have an unschooled mind. They get swayed by good vs. evil message. In politics, voters often use an unschooled mind. This is because political issues are complex and require significant expertise to understand their nuances. Most people do not have the time or inclination to understand those nuances. Thus most voters behave like unschooled minds. This is why simple black and white arguments work well for crowds.
Is it a mistake or a brilliant strategy?
Using a ‘Peltz is bad’ strategy relies on appealing to the unschooled mind. Why would P&G choose a strategy to appeal to the unschooled mind when investors are sophisticated thinkers with schooled minds?
What could explain P&G’s choice? Could there be something behind this seemingly unfortunate strategy based on appealing to unschooled minds?
We know that individual shareholders hold a large percentage of P&G’s stock. P&G issues stock to a large number of employees. It also has a profit-sharing trust (PST) that awards shares to its employees’ 401K accounts. PST was a key prevention mechanism P&G set up during the 1980s to avoid a hostile takeover. As a result, a large number of shares are held in this trust. These shares, awarded to employees at a low cost, incentivizes them to hold on to the stock. By holding the stock, they benefit from a steady dividend and deferred taxes on capital gains. In short, a large number of employees, ex-employees, and indiivudal investors hold P&G stock.
Index fund investors hold the remaining shares. Nasdaq.com shows that institutional investors hold 61% while non-institutional investors hold the rest.
Does this large non-institutional holding explain the communication strategy used by P&G? Is P&G thinking that institutional investors will split the vote between P&G and Peltz leaving individual investors to decide the outcome? Could the thinking be that non-institutional investors will use unschooled minds in this proxy fight and thus they can be swayed by good vs. evil argument?
Irrespective of the outcome of the proxy vote, it is instructive to see how Peltz and P&G have made their cases. Peltz’s arguments have been cogent and well made whereas P&G has been less coherent. At the same time, it is possible that this strategy, which looks weak and incoherent, maybe a brilliant one based on a deeper understanding of the individual shareholders.
In the proxy fight between P&G and Peltz, on the surface, it seems that P&G has made some classic mistakes in making the argument. But there may be a deeper strategy behind this seemingly massive blunder.
It seems that Peltz has made his argument and directed it toward the institutional investors who bring a schooled mind to the table. For the schooled mind, Peltz’s argument seems to be the winner.
But P&G appears to be making a public argument directed at the unschooled mind.
Two key lessons from this battle are 1) the art of making a strong case, and 2) the strategy of audience selection. Let’s look forward to the outcome of this proxy vote and find out whose approach works best.