2021-03-27 17:03:04
“You have just knocked down the statue of Milton Friedman”. Last June, Emmanuel Faber, president and CEO of Danone, celebrated with this enthusiasm the change of legal status of the food group to make it a mission-driven company, or company with cause, a new commercial figure created by the French government. With this decision, approved by 99% of the shareholders, Faber took another step in its goal of converting Danone in a company that goes beyond financial results. the mission-driven company they are obliged to seek the benefit of the planet and the health of their customers instead of focusing solely on the profits of their shareholders. This contravened the liberal creed of Milton Friedman, well-known apostle of the Chicago School who in the 70s defended the need for companies to look exclusively for their shareholders. Friedman’s theory has since been widely followed in large corporations. Hence Faber’s joy: he thought he had succeeded in defeating the influential Friedman. He was wrong. This month, Danone’s poor stock market performance has led to Faber’s beheading. First he was fired as CEO and after a few days also as president. Is it possible to reconcile business ambition with environmental and social sustainability?
“Everyone is wondering if he was kicked out because he was a different leader than the others or because his results were not good enough. I think that both things are true – summarizes Bertille Bayart, economic journalist from Le Figaro-. He has been a nuisance to the French corporate world. He was attracting the CEOs of the other companies and it didn’t sit well.” But at the same time, under Faber’s sheepskin hide was a much tougher leader than he might appear, explains Bayart: “Some people claim that he was tough and brutal, and that there were discrepancies between what he preached and what he did”. The trail of dismissals left behind by Faber, who fired many of the company’s top managers, shows that he had an iron fist. His departure has been just as harsh: he was ousted so hastily that the company doesn’t even have a CEO, currently. They are looking for it.
“It was hard and brutal. There were discrepancies between what he preached and what he did”, explain the former president
A lot of people discovered Emmanuel Faber when in 2019 he gave up the 28 million euros he would be entitled to as a pension once he stopped running the yogurt maker. “I didn’t need to collect so much money”, explained Faber afterwards, who called the privileges that corresponded to him “outdated”. Throughout his tenure, the headlines given by Faber were not addressed to shareholders, but to customers, suppliers and, in short, to what is known in English by the acronym ESG: sustainability, the environment and social sensitivity. “The objective of the company is not to maximize the profit of its shareholders. Profits are necessary, we are not an NGO. But we must have a social utility”, he insisted during a visit to Barcelona, when he came to celebrate the centenary of the multinational, originally born in the Catalan capital.
But the economic results (based mainly on the sale of dairy products, but not only) were not satisfactory, or so the company’s shareholders thought, who decided to remove him. Initially, pressure came from two US activist funds with relatively small stakes but who convinced a majority of the board to oust Faber.
“Companies must pursue ESG values, but this cannot be detached from financial sustainability,” explains Marc Garrigasait, manager of the Panda Agriculture & Water Fund. For him, the only way to make a transition to environmental concern is by maintaining good numbers on the income statement. Otherwise, he maintains, the environmental bet “ends up kicking”. “Danone has more than 100,000 workers, imagine how many suppliers it must have! It is a very important firm for France and for the world: many farmers and many people alive. It’s important that it goes well,” he says to demonstrate the value of income statements.
Garrigasait insists: “What is social is that [Danone] financially doing impeccably well. This is how the jobs or the savings that people have invested are maintained.” In fact, this investor remembers that “many people’s savings are in companies like these” and that “many pension funds have their money invested in Danone”. In short, if a company does well and the shares go up, it also has a return to society, he says.
“Faber used sustainability as part of his defense”, explained these days Nicolas Ceron, of Bluebell Capital, one of the activist funds that led the battle against the leader of Danone. “But we have not questioned Danone’s bets on ESG, and these issues worry us a lot… Its competitors such as Nestlé or Unilever also make ESG a priority, but they have better financial results. Our problem with Faber was not ideological but operational”, he added.
But really, how is Danone doing? Why was Faber’s management so allegedly disastrous? At first glance, the data does not indicate anything serious. It is a growing company with little debt. “The company was not a disaster, but it performed below its potential and was in a negative drift”, says Garrigasait. “In recent years, it has not been achieving the goals it was proposing, and the market seems to have lost confidence in it,” adds Xavier Brun, head of European equity at the manager Trea Capital.
Since Faber joined management in 2014, sales have grown by an average of 2% per year and profits by 12%. These are figures that improve those of competitors such as Nestlé and Unilever. But when you dig a little deeper, you start to see some of the things that investors didn’t like: the gross margin (the difference between what a company sells and what it cost to produce that product) was anchored at 48% in 2020, exactly the same number it had when Faber came into office. At Nestlé they are not much better either (51%), but at Unilever they are (57%).
And when looked at in even more detail, another indicator that investors are very interested in is return on invested capital (or ROIC). This shows how much profit a company is able to generate in relation to the money that has been invested in it. A company with a very high ROIC is very profitable, and vice versa. In the last five years, Danone has always been below its competitors in this section (see graph).
“The ROIC shows you if a company is creating value,” Eric Boroian, manager at Montsegur Finance, who has followed Danone for the last decade, defends from Paris. This specialist complains that the company “spent more time trying to prove to investors that they were different than explaining to customers why this is better for them”.
According to Boroian, the share price shows that Danone “wasn’t really up to par”. “In the long run, stocks show the value you’re creating: if you create value, stocks will go up.” The fact is that the shares have risen much less than those of its rivals in the time that Faber has been running the company.
This expert admits that a cultural change as deep as the one Faber was trying to implement may have needed more time, but he defends that “if you want to do things differently, you have to take into account that the improvements are also reflected in traditional metrics”. Otherwise, be warned, you might get scalded. And so it has been.
In 2012 there was already a fund, called Trian, which entered the Danone shareholding and lobbied in the same way that the current funds are asking. According to Trian, Danone had a great future because it offered too lean results considering its enormous potential: it occupied the first place or at least a place on the podium in some of the most important areas of the food sector. Trian pushed to cut costs in some areas and, in return, invest more in R&D and marketing (in the last decade this section has shrunk compared to the industry average). It didn’t work out, and three years later Trian left the group.
From within the company, which in Barcelona has the important number of 2,000 workers, they do not believe that Danone is doing badly. Internal sources acknowledge that Faber has made many organizational changes during his tenure (“Every year and a half or two years he has made one”, they explain), which may have defocused the company. “From the outside they tell us that yes, that we have a very good product portfolio, but that they see too many changes at the top [entre els directius]”, explains a person who asks not to be identified. Among these changes, the most recent is betting Local first, a strategy to decentralize power and give more autonomy to Danone branches, such as the one in Barcelona. These voices assume that some of the changes Faber has made will survive him and that, for example, the commitment to sustainability will remain whoever comes.
Just over half of Danone’s business comes from sales of dairy and plant-based products (alternatives to dairy but of similar appearance and consistency, sold through brands such as Alpro). 30% originates from specialized food (such as baby food), and the remaining 15% consists of the water business. In Catalonia, for example, they own the Font Vella brand, and throughout the world the most well-known brand they have is Evian.
For Xavier Brun, Danone’s Achilles heel has been its strong presence in the dairy market, a type of product “with growth problems”. Even so, it has maintained its market share, and plant-based products are gaining more and more followers. Inside the company they maintain that Danone’s dairy products have even regained market share in France, where it seemed impossible for it to grow further. With specialized food products, on the other hand, there is no doubt: it is one of the company’s mines.
The departure of Emmanuel Faber is celebrated by those who, like Marc Garrigasait, believe that it is very healthy for a board of directors to debate and defend the interests of all shareholders. And not only from the majorities, as usually happens in Catalonia and Spain, where the councils are usually subjugated, the independent councilors are not and the minorities have no one to defend them. But his departure is mourned by those who believed that another way of managing a large multinational was possible.
Faber himself acknowledged in a letter to employees after being fired: “We still don’t know how to make it work completely” of being a multinational with a cause, a mission-driven company. “But this is the price that must be paid for innovation. You are the pioneers”.
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