P&G
E.J.
Wunsch
Assistant
Secretary
and Associate General
Counsel
Legal Division
The Procter
& Gamble Company
299 East Sixth
Street
Cincinnati,
Ohio 45202-3315
(513) 983-4370
phone
(513)
983-2611 fax
(513) 602-7234
mobile
wunsch.ej@pg.com
www.pg.com
Via EDGAR
and
Facsimile
No. (202) 772-9368
October 2,
2008
Division
of Corporation Finance
Securities
and Exchange Commission
100 F
Street, N.E.
Washington,
D.C. 20549
Attention:
Mr. John Cash, Accounting Branch Chief
Dear Mr.
Cash:
Set forth
below are The Procter & Gamble Company’s (“Procter & Gamble” or the
“Company”) responses to the comments of the staff (the “Staff”) of the Division
of Corporation Finance of the Securities and Exchange Commission (the
“Commission”) contained in the letter addressed to Clayton C. Daley, Jr., Chief
Financial Officer of the Company, dated September 18, 2008, relating to the
Company’s Definitive Proxy Statement filed on Schedule 14A on August 29, 2008
(the “Proxy Statement”).
For
convenience of reference, the text of the comments in the Staff’s letter have
been reproduced in italicized type.
Business
Growth Program (BGP) Three-Year Incentive, page 27
1. We
note that on page 28 you disclose that the operating TSR is an internal
“proprietary metric”. Based on your disclosures, it appears that the
operating TSR is a material factor in determining the total BGP Award
amount. Please provide us with your analysis as to why disclosure of
the particular target would cause you competitive harm. Please see
Instruction 4 to Item 402(b) of Regulation S-K dealing with the standard used
for determining whether disclosure would cause you competitive
harm. For additional guidance, please refer to our Compliance and
Disclosure Interpretations found in the Division of Corporation Finance page of
our website, in particular, the answer to Question 118.04, and the materials
found in the “Staff Observations in the Review of Executive
Compensation.”
Response:
We
respectfully submit that our Operating Total Shareholder Return measure
(“Operating TSR”), including the target and actual levels of such measure for
our three-year Business Growth Program (“BGP”), constitute confidential
commercial or financial information of significant competitive
value. We believe that disclosure of the Operating TSR target would
cause substantial competitive harm to Procter & Gamble and, for this reason,
that such target is not required to be disclosed.
Relevant
Legal Standard
Instruction
4 to Item 402(b) of Regulation S-K states that registrants are not required to
disclose target levels with respect to specific quantitative performance-related
factors considered by the compensation committee, the disclosure of which would
result in competitive harm for the registrant. Instruction 4 goes on
to state that the standard to use when determining whether disclosure would
cause competitive harm for the registrant is the same standard that would apply
when a registrant requests confidential treatment of confidential trade secrets
or confidential commercial or financial information pursuant to Securities Act
Rule 406 and Exchange Act Rule 24b-2, each of which incorporates the criteria
for non-disclosure when relying upon Exemption 4 of the Freedom of Information
Act (“FOIA”) and Rule 80(b)(4) thereunder.
Exemption
4 of the FOIA exempts from the class of material which public agencies must
disclose “[t]rade secrets and commercial or financial information obtained from
a person and privileged or confidential.” The standards for
determining what constitutes confidential commercial or financial information,
the disclosure of which would cause competitive harm, have largely been
addressed in case law, including National
Parks and Conservation Association v. Morton, 498 F.2d 765 (D.C. Cir.
1974) (“Morton”); National
Parks and Conservation Association v. Kleppe, 547 F.2d 673 (D.C. Cir.
1976); and Critical
Mass Energy Project v. NRC, 931 F.2d 939 (D.C. Cir. 1991), vacated
& reh'g en banc granted, 942 F.2d 799 (D.C. Cir. 1991), grant
of summary judgment to agency aff'd en banc, 975 F.2d 871 (D.C. Cir.
1992).
Under the
case law’s established criteria, commercial or financial information will be
deemed “confidential” if disclosure thereof would be likely “to cause
substantial harm to the competitive position of the person from whom the
information was obtained.” See
e.g., Morton. Another test of whether information is
confidential is whether the information is of the type that would not
customarily be released to the public by the person from whom it was obtained.
Sterling
Drug, Inc. v. Federal Trade Commission, 450 F.2d 698, 709 (D.C. Cir.
1971).
Over the years, courts have frequently characterized information relating to
business, commerce or trade as confidential.
For the
reasons set forth below, we do not believe the Operating TSR target is required
to be disclosed.
Analysis
As
described on page 28 of our Proxy Statement, Operating TSR is an
“internal, proprietary metric” that is “based on the Company’s
on-going EPS growth goal of 10% and our free cash flow productivity goal of 90%
or greater.” The Proxy Statement further explains that the Operating
TSR measure is a “cash flow return-on-investment (CFROI) model that measures
sales
growth, earnings
growth and cash
flow generation to determine the rate
of return that a business earns.” (emphasis
added) Although other companies use measures called “total
shareholder return,” Procter & Gamble’s Operating TSR is a non-standard,
non-GAAP performance measure calculated using a complex financial model that
incorporates multiple inputs.
As a
threshold matter, the Operating TSR measure and target clearly constitute
“commercial or financial information” within the meaning of Exemption 4 of the
FOIA, as the metric is determined using Company financial inputs to measure the
overall rate of return of the Company and each of its business
units.
Further,
we believe the Operating TSR measure and target constitute “confidential”
information within the meaning of Exemption 4 of the FOIA, because the Operating
TSR measure and targets provide the Company with a significant competitive
advantage, and because disclosure of the measure and targets would cause
substantial harm to the Company’s competitive position. Our reasons
supporting this position are set forth below.
(i) Operating
TSR is a Unique and Proprietary Metric, and Procter & Gamble Would be
Competitively Harmed if the Operating TSR Targets Were Disclosed
Operating
TSR is a unique and proprietary metric primarily used throughout our
organization by management as a way to plan, drive and accomplish the creation
of shareholder value in each of our businesses. As noted above,
Operating TSR is a customized performance measure calculated using a complex
financial model that incorporates multiple inputs. This model has
been used by Procter & Gamble as a management tool for approximately 15
years, and Operating TSR is embedded into key business planning and management
systems.
After
years of use as a management tool, in an effort to further align compensation
programs with the business goals driving our managers, the Compensation &
Leadership Development Committee decided to utilize Operating TSR as a
performance measure for the Company’s three-year long-term incentive growth
program, BGP.
During
the period of time over which Operating TSR has been used for business
management purposes and as a performance measure for compensation, neither the
methodology of calculating Operating TSR, nor the Operating TSR targets or
actual results, have been publicly disclosed by the Company. Senior
management and the Board of Directors have consistently viewed the measure and
related targets as proprietary and confidential information, and the Company has
protected the confidentiality of this information.
The
reason the Company has steadfastly protected the confidentiality of the
Operating TSR measure and target levels is because more detailed disclosure of
the Operating TSR measure, including disclosure of the targets, would give
Procter & Gamble’s competitors substantially greater insight into what the
Company views as a fundamental competitive advantage — how it thinks about and
drives good business behaviors that ultimately produce strong overall
shareholder returns. The composition and workings of the Operating
TSR measure, including the target levels, represent a valuable management tool
for Procter & Gamble; disclosure of this information would allow others to
unfairly compete against Procter & Gamble by “looking under the hood” and
seeing how Procter & Gamble structures its internal management and
compensation plans to align behaviors with effective performance
within its organization. By better understanding how Procter &
Gamble does this, competitors would more easily be able to adapt similar
techniques for their own organizations, thereby diminishing what Procter &
Gamble believes is a significant competitive
advantage.
(ii) The
Complexity of the Operating TSR Measure Makes it Impractical to Disclose More
Details, Including the Targets
Because
of the non-standard and complex nature of the Operating TSR measure, we believe
any public disclosure of the Operating TSR targets would likely need to be
accompanied by some discussion of the component parts of the measure, their
relative weightings, the method of calculating the measure, and other material
information about the measure, so that the target levels are disclosed in an
appropriate context to permit investors to understand the
target. However, for the reasons stated above, disclosing the
composition and inner workings of the Operating TSR measure, including the
target levels, would give competitors an unfair advantage against Procter &
Gamble by allowing them to see how Procter & Gamble structures its internal
management and compensation plans to drive good behaviors within its
organization.
Operating
TSR is quite complex - it is not an “off-the-shelf” metric and cannot be
compared to GAAP performance measures or other, more standardized non-GAAP
performance measures used by other companies, such as, for example, EBITDA or
free cash flow. We have spent extensive time and effort over the
years to develop this proprietary measure and educate our management about its
key elements and use. We believe that our successful development of
customized training, implementation tools, and management systems for Operating
TSR is unique in our industry and a significant competitive advantage to
us. If our competitors were to gain a better understanding of the
composition and workings of the Operating TSR measure, including through public
disclosure of the specific targets used with such measure, they may be able to
replicate our model and gain an unfair competitive advantage against
us.
(iii) The
Existing Disclosure in the Proxy Statement is Sufficient
We
believe the information disclosed in the Compensation Discussion and Analysis
portion of our Proxy Statement is sufficient to enable shareholders and
potential investors to reasonably evaluate the Company’s long-term incentive
program and overall compensation, as well as the Company’s overall executive
compensation programs and decisions. We explain that Operating TSR is
a cash flow return on investment model that is based on our externally reported
EPS growth goal of 10% and free cash flow productivity goal of 90% or
greater. Further, we provide information in our Proxy Statement as to
how we performed relative to target—in our 2007 proxy statement we reported that
our Operating TSR Result was “above target” and in our 2008 proxy statement we
disclosed that the Operating TSR Result was “slightly below
target.” We also state in the Proxy Statement that the Operating TSR
target is “demanding” and that it “represent[s] industry-leading
performance.” Collectively, we believe these qualitative
descriptions provide useful information for investors regarding the relative
performance against the target in each year.
We do not
believe investors’ understanding would be appreciably improved by disclosing the
target level and actual results. Further, we believe that the
qualitative descriptions about the target level and actual results in the Proxy
Statement, coupled with our exclusion of the specific target level, strikes the
appropriate balance between the interests of the Company and the public, and
that disclosure of the actual target is not necessary to assure adequate public
information about our compensation programs, philosophies and
decisions. As described above, such disclosure may in fact be
detrimental to the interests of the shareholders and prospective investors since
the disclosure of this information could cause us competitive harm.
For the
reasons stated above, the Company believes that its Operating TSR target is
confidential and should not be disclosed in its Compensation Discussion and
Analysis.
Payments
upon Termination or Change-in-Control, page 48
2. In
accordance with Item 402(b)(1)(xi) of Regulation S-K, in future filings please
provide the rationale for providing a single trigger for payments in the event
of a change in control.
Response:
The
Company acknowledges the Staff’s comment and will provide the requested
rationale in future filings.
*********
Procter
& Gamble acknowledges:
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its
responsibility for the adequacy and accuracy of the disclosure contained
in its filings with the Commission;
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that
Staff comments or changes to disclosure in response to Staff comments do
not foreclose the Commission from taking any action with respect to the
filing; and
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that
the Company may not assert Staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
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Please
direct any questions you may have regarding this letter to the undersigned at
(513) 983-4370.
Respectfully
submitted,
/s/ E.J.
Wunsch
E.J.
Wunsch
Assistant
Secretary and
Associate
General Counsel