Kraft Heinz and Unilever are fundamentally different businesses operating in the same space. The former believes that value creation depends on debt-fuelled take-over, asset stripping and aggressive cost reduction. Long-term value is created by repeating this model over and over again. Unilever believes long-term value comes from a focus on all stakeholders, the planet and society in general. It values sustainability and social responsibility over short-term profit maximisation. The result is two companies with different governance priorities and a very different corporate culture.
As costs had been squeezed as far as they could go, the Kraft Heinz model was running out of steam and it was time for a fresh injection. Unilever turned out to be the next target. The bid failed – at least this time round. Why?
Part of the explanation certainly lies in Unilever’s clever and robust handling of the unwelcome bid. But does the failure also say something about the zeitgeist? Are we moving into an era where a focus on creating sustainable value for all stakeholders and for our environment is considered a more desirable approach than a focus on short-term profit maximisation? It is too soon to say.
There seems to be little doubt that corporate raiders are no longer seen as swashbuckling heroes admired for liberating unrealised shareholder value. Rather they are starting to be seen as contributors to growing anti-business sentiment and resentment of a “corporate elite” whose only interest is to enrich the already wealthy at the expense of everyone else. Or, as the Financial Times suggests in the article “Kraft Heinz/Unilever: nowhere men”, investors with a short-term profit maximisation focus have come to epitomise the “citizens of nowhere” style of capitalism that has helped trigger populist revolts across the globe. Reflecting the public mood, governments may no longer be willing to tolerate the loss of jobs and expertise to enrich shareholders in the short-term. The UK government made it clear that it was unlikely to support the Kraft Heinz bid.
But this bid was but one skirmish in a long battle. It is far from clear whether it is the Unilever or the Kraft Heinz business model that will be successful in the long-term.
The takeover bid has already focused attention on the fact that Unilever’s margins are lower than those of its peers. Pressure may start to mount on the company to improve its capital efficiency and increase value for existing shareholders. For Unilever this raises uncomfortable questions. To what extent can it improve short-term performance without compromising its view of long-term value creation? Seeing as the creation of sustainable social and environmental value is a much vaguer and less easily quantifiable (though arguably more important) benefit than the delivery of short-term financial value, can it, and must it, do better at making the non-financial value it is delivering more visible, more understandable and more appealing to shareholders? And even if it manages to do that, is there a bid price at which its shareholders will yield to a raider irrespective of the social consequences?
And here it is worthwhile asking whether there is a role that government must play. Both the Netherlands and the UK are focusing attention on improving corporate governance. Both are exploring ways of encouraging companies to balance short-term shareholder returns with increased social and environmental responsibility and long-term value creation. However, as the recent paper ‘’Beyond governance: towards a market economy that works for everyone” by Radix, a London-based think tank, points out, there is little point in encouraging better governance standards “if companies that build such businesses are then subject to takeover by companies that have a different philosophy and may be based offshore. Decades of work might be undone in a matter of months.” The paper recommends that corporate governance standards should be part of a public interest test for foreign takeovers.
The culture war between short-term profit maximisation and long-term societal value creation has only just started. It is not clear which way the bulk of investors will eventually go. The Kraft Heinz – Unilever skirmish should remind us that business and political leaders with an interest in long-term value creation have more work to do if their perspective is to prevail.
This post co-written by Martin Hazell and Ron Soonieus, Managing Partner of Camunico and Executive-in-Residence at the INSEAD Social Innovation Centre
Further discussion of this topic can be found at Should the Unilever Model of Capitalism Be Protected? by Ron Soonieus, INSEAD, 23 February 2017