LONDON (Reuters Breakingviews) - For fans of explicitly ethical stakeholder capitalism, Unilever’s rebuttal of a takeover approach by Kraft Heinz last month was a great moment. On one side, a company that made a big deal about thinking long term and creating good products as well as profit for shareholders. On the other, a business run by some of the harshest corporate cost-cutters around. With little more than a few phone calls, the Anglo-Dutch consumer product giant saw off the much smaller competitor. Virtue triumphs over vice.
Of course, dividing companies into good and bad is too simple. Unilever is far too big, successful and traditional to be a total paragon. It is, after all, in the business of pushing sometimes unhealthy products to sometimes impressionable consumers. Kraft’s owners have a reputation for slashing costs, but then cutting waste and eliminating chronically unsuccessful lines of business can free up resources for better uses.
But Paul Polman, Unilever’s chief executive, has reignited a battle between two philosophies of company ownership. The stakeholder approach says that a company is not really owned by shareholders, or at least not in the same way that an apartment is owned by a landlord. Providers of financial capital have a claim on its gains, but so do providers of labour, land, legal protection and technology. All these parties deserve a fair return – no less, but also no more. The other approach is crude but simple: if companies take care of shareholders, all the rest will fall into place.
Proponents of the stakeholder vision say the sharing approach ought to benefit shareholders in the long term. If a crisis comes around, shareholders will be protected by the good will generated from the company’s earlier willingness to aim at much more than maximal short-term profitability. But companies do not always run into crises. And the payoff from being virtuous might take years, or decades – too long for today’s institutional investors, who often struggle to look past the next quarter, let alone thinking two years ahead.
As Polman stands for the stakeholder, so Jorge Paulo Lemann is a fitting figurehead for the shareholder-value philosophy. He is the billionaire Brazilian investor behind Kraft Heinz, as well as brewer Anheuser-Busch Inbev. Lemann has certainly done well for shareholders, starting with himself. He has exploited the fact that talk of the long term and serving stakeholders can be a mask for being fat and self-serving. His model has been to acquire businesses, promise large cost savings, and deliver even larger ones.
In practice, companies land somewhere in the middle. Unilever is a sponsor of the research and lobby group FCLT – Focusing Capital on the Long Term. But Polman has not endorsed the full version of stakeholder capitalism. He could not afford to even if he is sympathetic, because shareholders are ultimately the ones with the power to turf him out. A genuine stakeholder vision of how a company should be managed would not really be shareholder-friendly.
So Unilever’s victory is not necessarily good for shareholders, even in the long term, and the Kraft Heinz approach is not necessarily bad for society, even in the short term. That results in a conflict. McKinsey has found that most managers of companies in the S&P 500 Index felt the pressure for short-term results has been increasing. And a separate study, also by McKinsey, said that companies that ignored this pressure have done substantially better for shareholders over the last decade.
Unilever’s defence against Kraft Heinz suggests that a long-term corporate orientation, often with a hint of stakeholder thinking, is gaining traction. Dutch paint maker Akzo Nobel seems persuaded. It cited the interests of “stakeholders” as one reason for rejecting two bids from American rival PPG Industries. The latest one, at $24 billion, was a generous-seeming 38 percent premium on Akzo’s undisturbed price. Shareholder value alone would have suggested it was worth a more serious hearing.
On the other side, Lemann is on a roll. He co-invests with Warren Buffett, the ageing guru investor traditionally associated with very long-term thinking. And while Larry Fink, who runs giant investor BlackRock, backs FCLT, most institutional investors have become even more strongly committed to the narrowest and shortest-term sort of shareholder value.
Which side will win? The election of Donald Trump, a businessman who generally ignored every stakeholder but himself, to the presidency of the United States might be a bad omen for the long-term cause. But Theresa May, the British prime minister whose approach to the European Union is as reactionary as the U.S. president’s approach to everything, is a proponent of treating workers as much more than a cost of doing business.
A compromise could bring both sides victory. Let stakeholder enthusiasts admit the danger of entrenching self-serving behaviour, while short-termists and shareholder-only investors and managers lengthen and broaden their perspective. Such a consensus on corporate purpose could be vital. If investors and managers do not find an acceptable way forward, alienated voters may impose an unacceptable solution.