Stakeholder capitalism on trial at Danone
Activist hedge funds target sustainable companies
22 Mar 2021 | Denise Young

The news that Danone had evicted Emmanuel Faber, former CEO and poster boy for sustainable capitalism, from its board earlier this month after a Sunday night crisis vote came as a bombshell to both fans and foes of ESG and could turn out to be a defining test case for stakeholder capitalism.

Faber, who had lost his CEO role just two weeks earlier following an attack by two hedge funds that together held just 3% of Danone's shares, will be replaced by 62-year-old Gilles Schnepp, former CEO of industrial group Legrand.

Faber is well known on the global stage as being a visionary leader of sustainable capitalism, one of a handful of such leaders, alongside Paul Polman, former CEO of Unilever.

London-based Bluebell Capital and US fund Artisan Partners held Faber responsible for lagging rivals like Nestlé and Unilever on financial performance. The news of his rout sent the share price up nearly 5%.

French media reporting on Faber’s demise portrayed the events as a victory of economic realism in a battle that pitted purpose against performance. Some of the blame for his demise was pinned on governance, notably a Faber pet project called "Local First", which sought to re-organize around countries instead of brands, had ruffled feathers internally.

His departure triggered impassioned and emotional responses worldwide. A hashtag appeared on social media for people to express solidarity with Faber and mobilize support for a boycott of Danone products. Celebrities, impact funds and environmentalists had joined forces in the weeks leading up to his ousting. One discussion group on the live audio social platform Clubhouse even mooted the idea of creating a Gamestop-style operation to boost Danone's share price.

How sustainable is Danone?

To get beyond the optics of Faber's reputation as an exemplary planetary steward, it's worth asking how sustainable Danone is. It is a B Corp-certified company, but it is focused on dairy, bottled water and nutrition, and the first two are not aligned with the consumer preferences of younger generations.

Triodos Bank, one of the world's leading sustainable banks, published a case study last year explaining why they had chosen Danone over Nestlé for inclusion in their Global Equities Impact Fund. In essence, Danone meets a minimum threshold as defined by their strict exclusionary criteria. It provides positive transition elements, but it is far from being perfect as a model of sustainable business.

Compared to Nestlé, however, Danone is a more sustainable bet because of Nestlé’s association with controversies that "range from child labour, price-fixing and unethical behaviour to promoting unhealthy food and mislabelling".

Was Faber’s eviction a victory for Danone shareholders?

There is evidence to suggest that Danone shareholders do not emerge as winners in the medium-term. A study conducted by researchers at Pennsylvania State University’s Smeal College of Business and HEC Paris found that activist campaigns actually lead to poorer financial performance over a five-year period.

The study looked at 1,300 companies in the US targeted by activist funds from 2000 to 2016 and found an initial 7.7% increase in the value of companies within the first 12 months of being targeted. Four years later, the value of these companies had dropped by 4.9%.

Compared with a group of similar companies that had not been targeted by activists, corporate social responsibility efforts went down following hedge fund activism, leading to a 25% reduction in environmental, social and governance (ESG) performance within five years.

The authors also found that companies that have sought to hard-wire sustainability into their strategy and operations, such as Unilever and Danone, are more likely to attract hedge fund attacks.

What the study points to is that the longer-term impact of a hedge fund attack is lose-lose for both shareholders and stakeholders.

Activist hedge funds target sustainable companies

Academic research also shows that activist hedge funds, which control more than US$146 billion in assets, often target their attacks on companies that are sustainable because they tend to view corporate social responsibility as a sign that a company is wasting money rather than focusing on shareholder returns.

The study, conducted by Pennsylvania State University’s Mark DesJardine, Erasmus University’s Emilio Marti and HEC Paris business school’s Rodolphe Durand, looked at some 500 US-based activist campaigns between 2000 and 2016 and found that companies whose corporate social responsibility ratings were above the industry average had a 5% chance of being subject to hedge fund activism. That compares with a 3% likelihood for the industry average.

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