Unilever’s Investor Backlash Illustrates the Need for Responsible Capitalism

The conglomerate is playing the long game for everyone rather than focusing on short-term profit-making

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One of Unilever’s largest investors recently broke rank, publishing a letter that expressed strong dissatisfaction at the Purposeful Brands strategy Unilever has been spearheading since establishing the Unilever Sustainable Living Plan (USLP) back in 2010.

In the letter, Terry Smith, the founder of Fundsmith—a top-10 shareholder in the FMCG giant—poked fun at the company’s “ludicrous” attempt to bring meaning and mission to its well-known Hellmann’s mayonnaise brand, helpfully highlighting that the purpose of mayonnaise is “salads and sandwiches.”

The problem with this argument, of course, is that Tesco’s own brand of mayonnaise is also pretty decent in a potato salad. And at 2.5 times the price, Hellmann’s is going to have to significantly up its sandwich game to win that race. In a commoditized consumer goods market with aggressive retailers and squeezed margins, brand differentiation is (sustainably sourced) liquid gold.

This explains why Unilever has repeatedly found that its purposeful brands outperform the rest of its portfolio. What’s more, in 54 out of 75 markets, sustainability is listed as the number one reason why top talent decided to join the company. For consumers and employees alike, the business case for purpose is so strong that in January 2020 Unilever confirmed it would be doubling down on its investment in the space.

The business case

While turnover increased by 4% year-over-year during the third quarter of 2021, pre-tax profits have been declining since 2018 and shares in the company have dropped 17.7% over the past year. An increase in sales has not translated into an increase in shareholder value and the fat cats are starting to wonder where all their cream has gone.

This isn’t especially surprising, to be honest. Often the narrative around “Purpose and Profit” is one of the strange bedfellows—two headstrong protagonists in a feel-good romcom, starkly opposite and inexplicably drawn together.

But real life is never quite like the movies. The reality is that building a business with a genuine, authentic moral compass costs money.

Unilever’s current plastic packaging footprint is 690,000 tonnes and the company has committed to half the amount of virgin plastic it uses by 2025. But recycled plastic costs an extra $77 (57 pounds) per tonne.

The reality is that building a business with a genuine, authentic moral compass costs money. 

Amy Williams, CEO of Good-Loop

Ben & Jerry’s loses out on sales every single day due to a refusal to sell ice cream in the West Bank. KFC’s subscription to the Better Chicken Commitment is estimated to increase zinger meal production costs by 18%. Meanwhile, on a mission to close the gender gap in STEM, P&G brand Olay has made a public commitment to take $10 million out of its own coffers and donate it to women in STEM over the next 10 years.

All of these initiatives represent important social or environmental steps forwards. All of these initiatives help establish brand credibility, building love and loyalty among key stakeholders. All of these initiatives would directly result in lower profits and a short-term reduction in shareholder return.

The pressure of purpose

American economist Milton Friedman would turn in his grave if he knew. His traditional economic model states that in a free market, the “purpose” of a business is, quite simply, to make as much money as possible. Otherwise known as the “salads and sandwiches” argument.

This means that CEOs, like Unilever’s Alan Jope, are under intense pressure from shareholders to extract value from society, rather than enrich it. If they don’t, their superfluously moral decisions can be, and have been, weaponized against them.

Emmanuel Faber was Danone’s chief executive from 2014. Up until his forced departure early last year, he was a vocal advocate for responsible capitalism.

Ironically, one of Faber’s biggest achievements before his shareholders ousted him was to make Danone the first publicly listed company to adopt the “Entreprise à Mission” legal status. This change, written directly into the Articles of Association, requires Danone not only to generate profit for its shareholders but do so in a way that also benefits customers and the planet. In spite of this, investor activists claimed Faber had neglected shareholder interests, using environmental and social issues as a smokescreen for underperformance.

What Faber was driving towards is an exciting new model for modern business, which considers a broader and more inclusive set of corporate responsibilities. The B Corporation movement follows a simpler path.

Just as a business that doesn’t invest in innovation gets left behind, an unsustainable business is a ticking time bomb.

It’s not that socially responsible decisions are bad business decisions but they also, by design, cannot be focused on short-term profit.

If you do a good deed, but it costs you nothing, can it really be classed as a moral act? Isn’t there some prerequisite for sacrifice in order for good deeds to have an impact, even if there may be potential upside in the long run?

If Olay had said it stood for supporting women in STEM, but it had made no financial commitment to actually fund women in STEM, would anyone believe it? Would anyone even care? Would anyone be more loyal to or more engaged with a brand offering such empty promises?

Even if we remove social impact from the conversation, sometimes short-term profitability is not the best business strategy. Take Amazon, for example. Despite colossal sales, Amazon is notorious for making very little profit. The vast majority of the money it earns is invested straight back into new innovations and new ideas, thereby securing the long-term future of the business.

Investing in a future for all

Just as a business that doesn’t invest in innovation gets left behind, an unsustainable business is a ticking time bomb, running on borrowed time. So how can we give our corporate leaders the power, and permission, to stop making money just long enough to disable the device?

When Vodafone transitioned to 100% renewable energy that decision would have been very costly in the short term. But now, not only have they helped to secure the future of the planet they operate on, but as Europe’s largest network running on 100% renewables, this sustainable investment has turned into a valuable competitive advantage.

Unilever’s investors are frustrated that a fixation on climate and social justice considerations has come at the expense of short-term profit. This may be just further evidence that Unilever continues to be a true leader in this space, with a brave leadership team that isn’t afraid to make difficult decisions and challenge the traditional business paradigms that got us into this mess. “Purpose” may not always mean immediate profit, but Unilever, Danone and other purpose-focused businesses are investing in a future for all of us.

No singular condiment can save our souls, but this Hellmann’s debate highlights some of the uncomfortable trade-offs that this new “responsible capitalism” calls for. Because at the end of the day, you have to crack a few eggs to make mayonnaise.