The misfortunes of Emmanuel Faber or the revenge of Milton Friedman

There’s more to this decision than meets the eye! Admittedly, Emmanuel Faber retained his position as Chairman of Danone after three hours of deliberation by the group’s Board of Directors, which met yesterday for the second time in less than ten days. He will have to cohabit as quickly as possible with a CEO in charge of operational management. The investment funds, which were calling for governance reform, have therefore won their case on the main point. The Board endorsed their analysis that, before being focused on its social and environmental responsibility, a company listed on the CAC 40 must be profitable enough to increase its share price and do at least as well in this area as its main competitors, Nestlé and Unilever in this case.

However, a year ago, the French food giant seemed to have the wind in its sails. At the beginning of the health crisis, the Group’s charismatic CEO, Emmanuel Faber, came to France Inter to guarantee that he would save jobs and maintain the salaries of all the Group’s employees worldwide.

What’s more, on June 26, 2020, the company adopted the status of Entreprise à Mission and thus became the first listed company in France to adopt this legal framework introduced by the PACTE law in 2019. It is still the only one in the CAC 40.

At its Shareholders’ Meeting, the Group stated its purpose in its bylaws (“Bringing health through food to as many people as possible”) and set itself social and environmental objectives: improving health, preserving the planet, building the future with its teams and promoting inclusive growth.

This transformation was approved by 99.42% of the shareholders at the Shareholders’ Meeting and therefore by all the investment funds that have just obtained its change of position. With such momentum, the CEO, Emmanuel Faber, thought he could declare: “You’ve just unbolted the statue of Milton Friedman! ». An economist from the Chicago School of Economics, Milton Friedman assured in the ninety-sixties that the only social responsibility of a company was to generate profit for its shareholders. The French Civil Code, from Napoleon to the PACTE law, did not say otherwise. The exact opposite of an Entreprise à Mission, which asks to a company to put on the same level profit-making and societal and environmental goals.

Emmanuel Faber, who was propelled to the head of Danone by Franck Riboud in 2014, revealed himself to the general public in 2016 during a speech to HEC students in which he stated, “Without social justice, there will be no economy”. This position was in line with the orientations of Antoine Riboud, founder of Danone, who stated more than forty years ago in front of the CNPF, the predecessor of the Medef, that he wanted to build a “dual economic and social project”.

Since then, even Franck Riboud had distanced himself from the CEO and no longer hesitated to attack his former protégé, accusing him of being more concerned about the future of the planet than the company. Other voices were being raised against the boss of Danone. The founder of Bluebell Capital Partners, in a highly exposed interview published in the edition of Le Monde from February 27, had called for the CEO to be “100% focused on the management of the company“.  The Artisan Partners fund, advised by Jan Bennink, a former Danone executive, called for a significant shift in strategy and asked for the departure of Emmanuel Faber, who was accused of being too involved in social and environmental issues and not enough in the operational and financial performance of his company. The long-term vision must not make us forget the requirements of short-term profitability.

Admittedly, the actions taken by certain shareholders dissatisfied with their performance against the managers of their companies are commonplace within listed companies; they have even increased in recent years with the development of activist funds (Amber Capital at Lagardère, Muddy Waters at Casino or Elliott Management at Pernod-Ricard). But Emmanuel Faber’s misfortunes lead to two conclusions.

The first is that the status of Entreprise à Mission is probably not appropriate for large listed companies, especially when their capital is widely diluted, which has long been the case for Danone. Moreover, apart from Danone, few listed companies have so far crossed the Rubicon. Among large companies, it seems to be reserved for mutual companies, such as MAIF, one of the pioneers in France, which has made it an essential element of its strategy, supported with conviction and strength by its CEO Pascal Demurger, or for companies owned by families or their managers, such as Yves Rocher or Meridiam, which do not have to worry about any potential reluctance from their shareholders. For the others, the status of Entreprise à Mission seems to weaken rather than strengthen them, especially in times of crisis, opening the door to the murderous criticism that “they’d better take care of their operating account”.

The second is not new but is strongly recalled by the misfortunes of Emmanuel Faber. Jean-Marie Messier, former CEO of Vivendi, had had the hard experience of it before him: it is not recommended for business leaders to expose themselves too much in front of the media or to set themselves up as models. The backlash is violent as soon as the results deteriorate. Emmanuel Faber was criticized, including internally, for being more concerned about his image than his company margins.  Only the Danone unions spoke up to defend their president. This is all the more remarkable since, in the hope of appeasing his opponents, he had just announced a plan to reduce the workforce, despite his commitments made the spring before. But it is true that they fear that the governance reform is the prelude to a sale by lots of the group!

Beyond the person of Emmanuel Faber, it is therefore the future of Danone that is at stake and the decision of Danone’s Board of Directors yesterday shows that in the management of large listed groups, the short term has a long future.