In Search of the Good Business

In Search of the Good Business, The Economist, August 9th

This article features our biggest and longest standing client Unilever and describes, in a generally complimentary way, their well-publicised initiative to make environmental sustainability the leading edge of their long term strategy.   The author makes the point that the man who has driven this approach – Paul Polman, their CEO since 2009 – is in some ways turning the clock back to the early days of the company when the founder William Lever had a similar goal, based on ‘responsible capitalism’.

Polman made an early impression on the financial community by abolishing quarterly reporting and making it clear that he wanted shareholders who were in it for the long term.  He argued that the measures of shareholder value used by Analysts were too narrow and that the social and environmental impact had to be taken into account.

There is however a questionable assumption in the article, that the excellent performance of Unilever’s shares between 2009 and 2013 – both absolute and compared to competitors - was due to this policy, rather than the multiplicity of factors that must have been involved.  In any case the correlation seems to have fallen down during the last year when the share price has gone into reverse.

The quotation from an investment banker who studies Unilever is interesting and confirms something that we feared when we first heard of the new approach; it suggests that Unilever has only found a ‘niche’ position with investors who favour the environmental focus but that the ‘mainstream investors’ only see a marginal benefit.  This does not tie in with the earlier statement in the article, that the new strategy has received ‘rave reviews’.

Where this article is better than others we have seen on the same topic, is that it shows examples of how Unilever is to achieve its aim of halving its environmental footprint, rather than just accepting such an ambitious target.  For instance there is the cutting out of waste being sent to landfills and the reduction of carbon emissions in factories by cleaner technology.  This sounds more impressive than the third example, ‘the creation of a corporate team to spread the word’.

The other impressive feature of Unilever’s initiative which I had not seen so clearly before, is that it is not just about what Unilever does; there are also initiatives to impact the full supply chain by influencing suppliers and customers.  The supplier initiatives have involved investment in innovations to improve sustainability for both large and small suppliers, for instance improving farming practices of tea producers in Kenya in cooperation with the Rainforest Alliance.  Polman has also tried to influence competitors to cooperate in these improvements though, apart from one example in palm-oil plantations, the article does not say how successful this has been.

The initiatives to influence consumers have had mixed success; suggesting shorter showers has apparently not made much difference but hand washing classes in Indian villages and the launch of a dry shampoo have both gone well.  Clearly there is a fine balance between  being a corporate nanny and providing practical help.

This excellent article ends by confirming that such initiatives need time, particularly if the aim is not just to change the perceptions of Unilever but also of the 400 brands which make up its global portfolio.  The real challenge, it is suggested, is to change the short term horizons of investors and persuade them to stick with Unilever even when the share price trend is down.  We will see.

Read the article here