UNILEVER: Prophet vs Profit?

Is the recent criticism by shareholders, like Terry Smith, the end of the road for Unilever's leading sustainability ethos? Will it start a revolt by shareholders against companies trying to be more ethical, at a cost to dividends?

Unilever has inspired others, made a difference and even become a magnet to eco Gen Zs as a workplace.

Or is a challenge to shareholders to rethink how they think, as Larry Fink (BlackRock) would probably say. To accept that the path to brands doing good comes at a price in the short term.

The Unilever Sustainable Living Plan, overseen by Paul Polman since 2010, has been an inspiration and roadmap to others. Unilever’s Sustainable Living brands have grown 46% faster than the rest of their business and delivered 70% of their turnover growth and is seen as a working example of how doing good is good for business. But then that all depends on how you define ‘good for business'?

There is no doubt that business needs a reset. The World Economic Forum has been championing Stakeholder Economics (aka Stakeholder Capitalism) for two decades, a fairer, more balanced system that adopts purpose at the core of business not profit. But Milton Friedman dominated economics, which we in the West apply, is preferred by investors because it puts shareholder value above everything else.

Stakeholder Economics focuses on long-term value creation, not merely enhancing short-term shareholder value, which is why purpose is so important – it’s all about the long term. And it looks for great value across a wider range of stakeholders, from staff, suppliers, local communities to investors.

“Putting your company’s purpose at the foundation of your relationships with your stakeholders is critical to long-term success.” Larry Fink, BlackRock

One of the areas around ethics that will become main stage this year is slavery. Much of it is linked to consumerism, just take the tea industry or look at China. What drives exploitation is money and the endless pursuit of profits,

Numerous research shows that consumers are starting to question the ethics and social responsibility of brands. As a result, brands that can display greater social and environmental responsibility have a competitive edge in a highly competitive market.

While many are ticking the green boxes, when it comes to people many brands have little to show. Supply chains are hard to monitor and inspect, so it is no wonder many brands are paranoid about their unintentional involvement with slavery.

A KPMG survey reveal that 71% of consumers would not use a brand again if it was found to have exploited people by putting “profit before people”. This is greater than if a brand was involved in anti-environmental issues.

In the long term, those brands that are seen as exploiting people, or the planet, will fail. Simply put – in most markets good brands outsell bad brands.

But too many heavy investors are like today’s politicians, they are short-term thinkers, looking for a quick return, not a long-term one.

Terry Smith’s investment company Fundsmith (which manages funds worth over £17 billion) has a significant investment in Unilever, about 10%, and has personally slammed them for a going a “purpose too far.”

By contrast, Larry Fink (founder of BlackRock which manages over $9 trillion) believes in purpose and stakeholder capitalism.

“It is capitalism, driven by mutually beneficial relationships between you and the employees, customers, suppliers, and communities your company relies on to prosper.”

He adds, “In today’s globally interconnected world, a company must create value for and be valued by its full range of stakeholders in order to deliver long-term value for its shareholders. It is through effective stakeholder capitalism that capital is efficiently allocated, companies achieve durable profitability, and value is created and sustained over the long-term. Make no mistake, the fair pursuit of profit is still what animates markets; and long-term profitability is the measure by which markets will ultimately determine your company’s success.”

“It’s never been more essential for CEOs to have a consistent voice, a clear purpose, a coherent strategy, and a long-term view. Your company’s purpose is its north star in this tumultuous environment. The stakeholders your company relies upon to deliver profits for shareholders need to hear directly from you – to be engaged and inspired by you. They don’t want to hear us, as CEOs, opine on every issue of the day, but they do need to know where we stand on the societal issues intrinsic to our companies’ long-term success.”

I have no doubt that Fink and Smith sit at different ends of the table. But Fink has a bigger chair.

While Smith may well be a successful investor, he’s no marketer. His trivial comments about Hellman’s being only for “salads and sandwiches,” and not saving the planet, goes to prove that. And while Hellman’s venture into vegan alternatives may be targeting a very small market, it does show a brand that is seeking to be on topic (and ride trends) in a fast changing world.

[Of course while Hellman’s claims about using only free-range eggs sounds good, it ignores the fact that for decades it used eggs from dubious suppliers and it was only when the Co-op and other retailers threatened to delist it did it become more socially responsible. But no one remembers that.]

In a commoditized consumer goods market Hellman’s has tough competition, especially from Heinz (who have aggressively taken on Hellman’s), plus own brands and boutique brands. But despite this, it has maintained a comfortable lead in the marketplace.

But this is a distraction, Unilever is far bigger than mayonnaise and it would be better to concentrate on one of its most successful brands, like Dove, which has been purpose driven for almost 2 decades.

Aside from Smith, Unilever has another investor to worry about, Nelson Peltz (an American billionaire businessman and investor). Peltz has taken a stake in Unilever, a week after its rebuffed £50 billion tilt for GSK’s consumer healthcare business-led investors to dump the shares.

Many of the companies Peltz is associated with are hardly shining lights of sustainability, like DuPont who dumped PFAS into the Ohio River in West Virginia, killing farm animals and poisoning the water of surrounding communities.

It is easy to focus on the negatives while ignoring the positives, especially if your only focus is short-term shareholder value.

The average company’s life cycle today is estimated at 15 years (Forbes) and over 50% of the top 500 companies have gone bust or been absorbed or rescued from near death in the last 20 years, but not Unilever. Given all the pressures and the fact it is a leading player, it has done well. It’s a survivor.

For many big brands, and especially as we go into another recession, survival is as important as growth. Especially in today’s market when boutique and niche brands can take you on using online retailers and D2C. Unilever’s biggest threat isn’t just the other big brands.

Over the last year, Unilever's share price has dropped 17.7% (while the FTSE has risen 14.3%) but it has maintained market share in many areas, and that is something not to be underestimated. As Churchill once said, “We may not be winning the war yet, but we certainly aren't losing it.” And it’s war out there for big brands, it’s never been tougher.

And while pre-tax profits have been declining, like many others, turnover has actually increased 4%. In terms of economics, an increase in profits does not always translate into increased share value, it’s only one of many elements that affect the share price.

“It’s not just how much you make but how you make it.” [Larry Fink]

So is doing good translating into good business? Yes if you look at turnover, no if you look at shareholder value only.

Which is more relevant and beneficial to society? It’s not an easy answer, investors can be pension funds for example. Increased profits can also lead to investment in new areas, greater employment, more money going into the supply chain into the economy.

Many investors are putting money into companies with a good ESG (Environmental, Social and Governance ) story to tell, with assets hitting $50 trillion. Bloomberg estimates this will reach $140 trillion by 2025. So there is no doubt that while some investors are happy to throw the baby out with the eco bathwater, many are not.

The key issue here is that while Unilever’s management team have a moral compass, some large investors may not.

It's all about getting the balance right and building a business with a genuine, authentic moral compass costs money. So let's hope profit for shareholders doesn't become the only purpose for brands, or the planet and society is done for.

....................................................................................................................................Chris Arnold is a Dr of Business and a leading expert in the area of ethical marketing and brand purpose. He has advised many top 100 brands.

He is author of Ethical Marketing & The New Consumer and was Brand Republic’s blogger on ethical marketing for almost a decade.

He is the founder of several agencies specialising in ethics, including Creative Orchestra and CONNECT2.

#unilever #isba #ipa #dma #adage #campaignlive