Life in the cross hairs

Being a good corporate citizen comes with risks. Andrew Black tells the tale of a close escape.

For corporates that have medium-term planning regimes, taking seriously the considerable challenges posed by climate change may require they make swift and specific changes. And those changes may be disruptive to the business-as-usual view frequently broadcast by senior management.

The recently-retired chief executive of Unilever, Paul Polman, is now soliciting the support of other industrialists and business interests to lobby to encourage a broad social acceptance of the need for dramatic action on climate change. And Polman has established a reputation as one seeking to combine business with a broader sense of social and environmental responsibility. This in turn could enable corporate management to reach out to the young and to show that a more ethical and responsive business culture could be successfully combined. The urgency of this has increased since he took over his job in 2009, in the immediate aftermath of the 2008 financial crisis. How far has he been successful?

The figures suggest that shareholders who believed in the Polman message were rewarded for their patience over the past decade or so. Shares substantially outperformed a benchmark FTSE 100 index (figure 1).

“The figures suggest that shareholders who believed in the Polman message were rewarded for their patience over the past decade or so.”

 The story of environmentally friendly policies and actions is typical of the unconventional line taken by so-called Mesos (see box). It appears to have persuaded many investors, and institutional investors, that this was a story worth backing. And as such this might be a model, and an incentive, for other corporations seeking to get ahead: announce good intentions, try to show that steps are being taken to achieve them, and hey presto, share values nearly double over ten years.

Figure 1: shareholders did well with Polman.

Moreover, shareholders were brusquely told that quarterly reporting would be abandoned – much better to concentrate on the more important longer-term issues that being troubled by the tedium of day-to-day results. So is there a downside?

While it is tempting to point to the uplifting vistas of meeting moral goals, those pesky day-to-day factors have a nasty habit of intruding when you least want them to. Take, for example, the unsolicited and hostile takeover bid announced by Kraft Heinz – itself the result of several earlier mergers. Shareholders rallied around to support Polman, and the unwanted intruder was seen off. But not before Unilever had to look much more closely at what it was doing, and to announce new, tougher output and cost targets that would sharpen the company’s competitiveness.

And, having relied on many investors located in the London market, it then had to retract its original plan to give up a stock market listing in London, in favour of one in Rotterdam. The earlier argument being that to do so would reduce costs and increase the company’s anti-takeover poison pills thus making a repetition of Kraft Heinz less likely in the future.

Figure 2: Mixed results under Polman’s stewardship.

Did the buccaneers from Kraft Heinz have a point? A stellar stock market performance notwithstanding, what did those “facts” look like on the ground? Figure 2 shows the development of top-line gross revenues. Over the past four years, output grew by around 10% a year, possibly fuelled by acquisitions. In 2016 and 2018 output fell suggesting that the going is getting tougher.


And some of the reasons for this may be found in the radical changes taking place in the retail and grocery business, the company’s main customers. As they struggle with competition from digital technology-based competitors and the internet, so their own customers are being seduced by online suppliers whose ability to offer low prices is undoubtedly assisted by their not having to pay rents, and effectively avoiding paying taxes to local governments.

Figure 3: Unilever cashflow – not much cash generation.

More seriously perhaps, were investors to pay more attention to the long-term, structural issues in core Unilever markets, their enthusiasm for paying such a high premium for an environmentally-friendly company might dim.

How well has Unilever been able to generate cash – a vital factor in supporting and justifying a relatively high share price? The record is not all that convincing as can be seen in figure 3. With the one off exception of 2016, cash generation has been relatively weak. This is attributable to falls in operational cash flows (cash in) combined with continued high investment (cash out), and dividend payments (cash out). So here too, shifts in the underlying position of the company in some of its core markets is making itself felt more widely.

But, I hear you ask, what about its achievements in being an environmentally-friendly company? Has Polman achieved great wins in this area, justifying the brave words about tackling environmental issues? While acknowledging the difficulties, Polman has had nearly a decade to put some scores on the environmental board. The good news is that the company managed to reduce the amount of manufacturing waste per tonne of production by 98% since 2008, a good achievement.

“Unilever also said that it would halve the use of water associated with the consumers’ use of its products by 2020.”

The record in other areas, despite the claims and hopes, has been less successful. Unilever had promised to halve the environmental impact of its products by 2020. This has now been pushed back to 2030. Unilever also said that it would halve the use of water associated with the consumers’ use of its products by 2020. As of 2017 measured water use had dropped by only 2% since 2010. And this suggests that there is still a long way to go. Further strides will be needed in attending to environmentally-friendly packaging, the use of which may endanger consumer safety and health. And efforts to resolve these issues might then require changes in delivery schedules and in working capital management. All of which would not be “business as usual”.

In Betweeners
Meso refers to the economy between micro (individual) and macro (aggregated indicators). It is concerned with the exercise of economic power by a range of mainly large economic, political and social institutions. Organisations that have influence at the meso level or ‘meso organisations’ have rules of behaviour that do not conform to the stereotypes laid out in most economics textbooks and analytical contributions. Meso corporations, for instance, have substantially longer investment horizons and have accumulated more capital than a traditional firm. Meso corporations, interacting with other meso institutions are better described as power maximizers rather than the usual narrower definition of profit maximization. Hence meso economic outcomes will differ, and be driven by different factors from more narrowly focused market based analysis. See Black & Holland (2018), “Cherchez La Firme”, World Economics Association.

Unilever’s efforts to improve its impact on the wider environment are broadly to be welcomed. To show that many different stakeholders can be kept happier by being a good corporate citizen is also very welcome. The enthusiasm of investors shown in figure 1 is underpinned by attention to paying reasonable dividends. Yet as the cash situation shows, this may not be sustainable in the longer term. The annoying day-to-day realities of selling in virtually static, but ever more competitive markets, may yet undermine the advantages of being a large meso corporation, to the point that positive environmental policies might have to be jettisoned to fend off unwanted bidders such as Kraft Heinz.

Andrew Black

Andrew is a senior research fellow at both the Global Policy Institute in London, and the Brunel Business School, London. He has taught at the Warwick and London Business Schools, …

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