By Stephen Winstanley and Paige Morrow
The 2017 season for corporate annual reports and general meetings is in full swing. And the overarching question for companies is how to reconcile dueling visions of corporate purpose: sustainable long-termism versus short-term shareholder value maximization.
Unilever CEO Paul Polman recently gave some insight into his company's investment roadmap in an interview with CNBC. "In the end, our strategy ... in investing is Warren [Buffet's] strategy. And my returns have been higher in the last eight years than Warren's returns. So I think it's better if he leaves us with what we know how to do well."
Polman’s words came in the aftermath of Unilever’s dual annual general meeting sessions in Amsterdam and London on April 26 and 27. The company sharpened focus on its long-term strategy as executives and directors faced shareholders after defending the company from the massive $143 billion takeover bid launched by Kraft Heinz in February.
Statements from corporate leadership indicate that Unilever’s board is united behind the company’s long-term approach championing sustainability. The divergent cultures of the two companies factored into considerations of the takeover bid’s merit.
Board Chair Marijn Dekker, attending his first AGM in this role, added that the takeover company’s model is “unsustainable in the long-term," highlighting that it is based on “deep cost reductions; a highly leveraged balance sheet; and a relatively low investment level in brands and R&D.” The Kraft Heinz/3G vision, based on the depictions by Polman and Dekker, is quite the opposite to the vision shared by Unilever’s leadership.
There are lessons here for both companies and regulators about how to protect sustainable and long-term oriented companies against takeovers:
Strong alignment is needed between the Board and Executive Leadership on vision. As demonstrated by Unilever’s statements in the annual report and AGM, the board is strongly aligned with the CEO and the company’s long-term sustainability strategy.
The leadership has doubled-down that this strategy is a core driver of profit margin improvements promised to shareholders after defeating the takeover bid. Corporate communications affirm this strategy, tweeting: “We’re committed to our long-term, sustainable growth model - driving growth, cost savings, and de-risking supply."
It helps to have an established corporate culture and reputation based on long-termism and sustainability, with a mature integration of ESG principles across the business. Unilever ranks highly on benchmarks measuring corporate responsibility and environmental, social and governance (ESG) performance. In the newly-piloted Corporate Human Rights Benchmark, which “assesses 98 of the largest publicly traded companies in the world on 100 human rights indicators," Unilever performed in the top three companies in its sector and top-6 overall.
Financial performance matters. Unilever has delivered consistent growth since Polman took over as CEO in 2009, in terms of revenue, market share, and share price. These factors will have been considered by the Board in deciding to support continuity of the company’s direction and rejecting the takeover bid, as an exercise of their fiduciary duty to shareholders.
Takeover rules influence behavior. Unilever is dual-listed on the London Stock Exchange and Euronext. The U.K. is generally perceived to be the most takeover-friendly jurisdiction in the world whereas the rules in the Netherlands give more leeway to boards that seek to defend their company against a bid. The U.K.-listed companies that we have spoken to suggest that the omnipresent threat of a takeover if share prices drop tends to force companies to put undue focus on short-term results so that they are not left open to a takeover.
Unilever has built itself around a long-term value strategy and has until now successfully conveyed this strategy to investors. It has been rewarded by the willingness of its institutional investors such as Dutch fund APG to stay the course and to give their public support to Unilever against Kraft Heinz. Companies should follow this example, and clearly articulate their long-term value proposition to investors in a proactive and ongoing manner. It has been said that companies attract the shareholders they deserve. Companies that are communicating to the capital markets their long-term orientation are more likely to attract investors that will stay for the long haul.
Image credit: World Economic Forum via Wikimedia Commons
Stephen Winstanley is an independent advisor on corporate responsibility and responsible investment strategy, policy, and practice at: www.stephenwinstanley.com.
Paige Morrow is head of Brussels Operations at Frank Bold, a purpose-driven law firm. The firm leads the Purpose of the Corporation Project, which invites businesses, academics, policymakers, and civil society to debate the future of publicly traded companies. Paige Morrow is head of Brussels Operations at Frank Bold, a purpose-driven law firm. The firm leads the Purpose of the Corporation Project, which invites businesses, academics, policymakers, and civil society to debate the future of publicly traded companies.