Don’t shed too many tears for Emmanuel Faber

19 march 2021

The lesson from Danone is that purpose must lead to value

There’s weeping and gnashing of teeth amongst supporters of responsible business (amongst whom I count myself) at the defenestration of Emmanuel Faber, Chief Executive of Danone. The first major multinational B CORP™ was being willed by its supporters to succeed, to act as a proof point in favour of a more purposeful approach to capitalism.  

Vindication or defeat for responsibilistas?

The abrupt rupture between the company and its CEO this week is being seen as proof that responsible business is fundamentally inconsistent with shareholder primacy. As long as greedy activists are given free reign to impose their will on companies, we will be condemned to march to the drumbeat of short term profit maximisation. The only solution is to erect more powerful defences for companies against the marauding hordes.

On the other side of the debate, there’s a barely hidden sense of schadenfreude that shareholder value has wrought its revenge on the man who less than a year ago congratulated investors for having “toppled the statue of Milton Friedman”. Friedmanites are taking this as proof that the pursuit of a more purposeful capitalism is misguided. The business of business is business.

Both these reactions miss the point.

Starting with the Friedmanites. One swallow doesn’t make a summer. Danone’s shareholders didn’t have a beef with Faber’s ESG initiatives. They were more concerned with the underperformance compared to competitors such as Unilever and Nestlé, who are also highly focused on responsible business practices. A growing body of evidence shows the importance of purpose and sustainability in supporting long term business success: not just for stakeholders but for shareholders too. Of course, there will be purposeful companies that end up being underperforming companies. But one doesn’t lead to the other. Indeed, it increasingly seems plausible that purposeful companies will on average outperform. And those focussed on material ESG factors have been shown to do so.

What about the Responsibilistas? Blaming activist investors doesn’t cut it. They don’t have magic shares with special voting rights. They needed the support of a critical mass of Danone’s existing investor base in order to bring about change. And these are largely the same investors who supported the change to B CORP® status just last summer. Faber had been given a lot of time. In his 6.5 year tenure, the share price of Danone was almost exactly back where it started, compared with increases of around 50% or more at Nestle, Unilever, and for the French CAC-40 as a whole. There had been concern amongst shareholders for some time about sales, operating performance, and portfolio decisions at the company. They can’t wait forever for performance to come through. 

What can we learn?

So if the Danone case is neither vindication nor defeat for the concept of responsible business, what lessons can we learn?

•  Most important is that purpose can’t protect a CEO from underperformance. And nor should it. Danone’s underperformance of other FMCG peers equated to a value gap of around €20bn. Even if Danone added a lot of stakeholder value, that’s a big bill for the shareholders to pick up, including ordinary people saving for their futures. And creating value, at its core, is nothing more than making more with less over the long term – the engine of progress.

• The second lesson is that making stakeholders happy is relatively easy. Much harder is doing it at the same time as growing revenues and profits. The trick of patting your head and rubbing your tummy is one that not everyone can pull off in the way that, for example, Unilever consistently has over the last decade. This can only be done if a company’s purpose goes to the heart of how it creates value. Otherwise, purpose can be a distraction from the business of business.

• The third is that in a capitalist system, companies will always have to create value for their shareholders. Responsible business advocates place far too much weight on governance reforms like B CORP™ as the solution to all our problems. There’s a danger in insulating companies too much from shareholder scrutiny – and as the Danone case shows, when push comes to shove it’s not effective anyway. The best defence is to be a great company. 

Emmanuel Faber was neither a saint nor a sinner. He was a visionary who just wasn’t quite good enough to pull it all off. But we can thank him for two things. 

He proved that you can get explicit shareholder support for a purpose-led approach to business with sustainability at its heart.

And he reminded us that purpose isn’t enough if you don’t create value.

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