“We Can’t Sell Yogurts and Save the Planet”
The story of Danone, Unilever, and the ongoing battle between purpose driven CEOs and their increasingly powerful activist investors.
For Emmanuel Faber, one of Big Food’s most environmentally activist CEOs, it took an activist of another kind to stop his plans to turn the global yogurt and water giant Danone into a more formidible force for planetary good. In 2021, after holding the CEO job at Danone for nearly 7 years, Faber was ousted from leadership in a coup initiated by activist investors, Bluebell Capital and Artisan Partners, who were highly critical of Faber’s deep focus on sustainability in what they believed was at the expense of creating shareholder value.
“We can’t sell yogurts and at the same time save the planet,” lamented one person who worked closely with Faber. This duality between choosing profits and purpose is a common one in modern day food that many CEOs have had to contend with. And while its not always true that you have to pick one or the other, the incentive structures within large food companies today typically only allow purpose to happen after profits, not the other way around.
In the years that Faber led Danone, he turned the company into an “enterprise à mission,” a B-Corp like entity where purpose is prioritized along with profits. He crafted a “One Planet, One Health,” strategy in pursuit of environmental and human health and even created a carbon adjusted earnings per share metric that measured Danone’s success in relation to its environmental performance.
During Faber’s time as CEO, Danone’s total annual shareholder returns amounted to just under 3% while direct competitors Nestle and Unilever had annual returns of 9% and 7.7% respectively over the same period. While his efforts to clean up Big Food from the inside were commendable, shareholders fixated on what they deemed as lackluster financial performance and stepped in before Faber’s sustainability plans were able to reach their full potential.
In the corporate food world, the success of a company’s sustainability programs is not just about the strength of the teams and activities within those programs, but how well CEOs can appease shareholders long enough for the programs to actually have an impact. There is sadly no pure meritocracy when it comes to corporate sustainability initiatives and their fortunes are often dependent on the core business’s ability to generate profits. Especially in publicly traded food companies, leadership has to effectively “win” the right to have a sustainability program by first being profitable or structuring themselves in a way that activist shareholders can’t hijack the company if it thinks leadership is spending too much time on being green.
Faber is not alone in his plight. A 2017 study of 339 corporations and their CEOs found that when companies are financially successful, investing in corporate social responsibility (CSR) programs decreased the likelihood of CEOs getting fired by their shareholders and board by 53%. Conversely, when companies were not financially successful, investing in CSR increases the likelihood of CEO dismissal by 84%.
Essentially, when things were going good for the company, CEOs with CSR programs were celebrated for being able to walk and chew gum at the same time and had more job security. But if a company was struggling, CSR programs were perceived by shareholders as a source of distraction for do-gooder CEOs and they were more likely to be fired than CEOs of equally struggling companies without CSR programs. Timothy Hubbard, lead author of the study, remarked, “if boards and investors want CEOs to make big investments in corporate social responsibility,” he says, “we need to think about how to protect those CEOs when they make those decisions.” This is what it looks like in business where profits are mandatory but being a good global citizen is optional.
Profits Through Purpose
Financial success isn’t the only way impact-minded CEOs can insulate themselves from Friedman Doctrine fanboy stakeholders who only care about profit. Patagonia’s founder Yvon Chouinard made waves when he sold and restructured his entire company to ensure it would live on as a mission-first organization. Unilever CEO, Paul Polman, declared on his first day as CEO in 2009 that he would do away with quarterly financial reporting and guidance, getting the company out of the Wall Street rat race that so many other public companies have to endure. Unilever stock took an 8% dive the day he announced that, but Polman held steadfast, saying that “the first day they hire you, they're not going to fire you.”
"Why would you invest in a company which is out of synch with the needs of society, that does not take its social compliance in its supply chain seriously, that does not think about the costs of externalities, or of its negative impacts on society?” - Paul Polman
Like Faber, Polman made a name for himself at his company by infusing a strong sense of mission and social impact into the culture. During his 10 year tenure as CEO, he led significant investments in areas such as “sustainable palm oil, paying living wages to suppliers and cutting carbon emissions.” Polman’s Sustainable Living Plan aimed to double product sales while halving the environmental impact of its products. After stepping down from the CEO job on his own accord in 2019, the mission-centric tone he set lived on in his successor, Alan Jope, who doubled down on what Polman started and made it a requirement that all 400 Unilever brands set their own social or environmental purpose.
Polman didn’t meet all of his sustainability goals during his tenure, but by making sure the investors were happy with sufficient business growth, keeping them at bay by removing quarterly reporting, and reducing the percentage of Unilever ownership by hedge funds from 15% to less than 5%, his sustainability programs were allowed to run without significant outside interference from activist shareholders. While he may have failed at his sustainability goals, he was able to do so on his own terms and avoided being fired and having his CSR programs killed off.
The ability for a CEO to deftly keep shareholders happy or at arm’s length is a big determinant in how successful their company’s mission can become. CEOs can have ambitious visions for social and environmental impact at their companies but they ultimately answer to shareholders who don’t always share their views. In my research and experience working with clients in Big, Medium, and Small Food, there seem to be three main ways that a leadership team can provide air cover for sustainable, mission-driven initiatives to operate without getting cut short:
The Cash Machine Method: this is the brute force method where the business is so incredibly successful that it consistently generates enough profits and growth that shareholders are satisfied enough to not meddle in the company’s non-profit generating activities. At their best, companies like Google and Amazon have created so much consistent profit that they have the luxury of creating programs like Google’s X or Amazon’s Project Kupier, which aims to launch over 3,000 satellites into space that will provide internet access to underserved areas and will cost Amazon roughly $10 billion in investment.
The margins and scale of CPG are not nearly as big as those in tech, so this strategy is harder in food, but the tech industry has clearly demonstrated how ambitious you can be with side projects if you have a core businesses that’s printing seemingly never ending piles of cash. The one caveat here is to make sure your cash generating, core business isn’t causing so much environmental damage that any subsequent sustainability effort isn’t just canceling out problems that the company created in the first place.The Governance Method: if you can’t keep your shareholders at a distance with a wall of cash, then using corporate governance to protect your company’s mission driven activities is an alternative. This ranges from softer tactics like Polman’s elimination of quarterly reporting and reduction of exposure to hedge fund ownership all the way to Patagonia’s hardcore method of restructuring the entire company to ensure that their societal and environmental goals stay at the forefront through thick and thin.
This method can also include converting the company’s corporate structure to a B-Corp or other similar business model, but as we saw with Danone, becoming a B-Corp or an enterprise à mission, wasn’t enough to keep activist investors away. Had Danone been a B-Corp from day 1 of its founding, the B-Corp culture may have had more time to cement itself within the company and attract more holistically focused shareholders, but this was not the case for them.The “Profits Through Purpose” Method: the best way to ensure a company’s purpose stays at the core of what it does is to build products and services that serve the mission as much as the bottom line. Like a snack product that sources its main ingredients from regenerative farms where each season, soil health is improving and next year’s harvest is more plentiful and high quality than the last.
This would create a virtuous circle where the more popular the product gets, the more farms will be incentivized to convert to regenerative methods in order to sell more snacks and further enrich farmland. Farming communities would feel secure as long-term partners with the food company and would be in control about how to best work their land to produce great ingredients and flourishing ecosystems.
Everyone from foodies to farmers to finance bros would cheer this kind of company on because the core product was designed to nourish people, planet, and profits equally. There is no chance for an activist investor to stage a coup because the sustainability initiative and the profit generating activity are one and the same. To stop spending time on “distractions” like sustainability in a company like this is to stop being in business altogether. Companies that are built like this are few and far between, but they suggest a blueprint for how to end the cycle of having to earn profits unsustainably in order to fund a CSR program that offsets the damage caused by the core business.
Who Actually “Lost the Plot?”
While there’s a strong moral and environmental imperative to help people and planet thrive, there isn’t a strong enough financial imperative yet. Sustainability work is still classified as a cost center, not a profit center, in most food companies. CSR programs may look like assets to a Chief Sustainability Officer, but they’re liabilities to a Chief Financial Officer. And when you introduce outside investors who may be many steps removed from the internal culture and mission of a company, it’s far too easy to find yourself in the position of Emmannuel Faber where you get fired for trying to save the planet.
One of the first things Paul Polman did after becoming CEO was take his senior leadership team to a British village called Port Sunlight, where Lord Lever, one of Unilever’s founders, built houses for his factory workers who made the company’s first soap product in 1884. At Port Sunlight, Lord Lever guaranteed good wages and jobs, created a six-hour workday, and introduced pensions to the UK. Smoking and drinking were prohibited at Port Sunlight and life expectancy there was higher than average. Lever believed in shared prosperity and saw his burgeoning soap business as one that could generate profits while improving public health. Polman brought his team there to remind them of Unilever’s roots as a good corporate citizen. This dual focus on profits and purpose is what Polman wanted to reinvest in as their new CEO.
Meanwhile in Barcelona in 1919, 35 years after Lord Lever started selling soap, Issac Carasso started making yogurt to help the many Spanish children who suffered from intestinal infections. Carasso named the company Danone, after the nickname of his son Daniel. Similar to Unilever, Danone was founded as a way to improve public health. Since then, Danone and Unilever have grown to become two of the biggest global food and beverage conglomerates in the world. During that growth progress, their original missions were diluted as more stakeholders entered their orbit and their existence began to be defined by their ability to make shareholders wealthy, not raise public health standards.
Fast forward to 2022, where investment fund manager Terry Smith, whose fund owned £888 of Unilever stock at the time, lashed out at them for being “obsessed with publicly displaying sustainability credentials at the expense of focusing on the fundamentals of the business.” He said that Unilever had “clearly lost the plot.”
But when we live in a world where companies are financially rewarded for growth, but not for being responsible, good global citizens, it’s investors like Terry Smith who have actually lost the plot by continuing to encourage profit maximization above all. CEOs like Faber and Polman who try to turn companies into forces for public good while generating profits, like their original founders intended, represent a growing breed of leaders that view corporations as more than just wealth making machines. We need to continue supporting and celebrating CEOs who think like this and shield them from the Terry Smiths of the world. After all, what’s the point of all that profit if you’re too sick to enjoy it and there’s nowhere on an uninhabitable planet to spend it?
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Footnotes
3 Recent posts from my Substack
3 Highlights from my current reading list
AI Doesn’t Pose an Existential Risk—but Silicon Valley Does by Edward Ongweso Jr. - The Nation
I ate fake chicken breast that the maker of Nuggs squeezed through a showerhead by Justine Calma - The Verge
New "Camera" has no lens, simply detects your location and generates an ai picture of it by Maggie Harrison - Futurism
My email is mike@thefuturemarket.com for questions, comments, consulting, or speaking inquiries.