Strong environmental and social credentials are not a deterrent for shareholder activism, especially when combined with poor financial performance and weak corporate governance.

Danone, one of the European leaders in sustainability, is facing pressure from activist investors Bluebell Capital Partners and Artisan Partners to improve operational performance and corporate governance.

Bluebell and Artisan are not the only shareholders dissatisfied with Danone. According to an investor survey performed by AllianceBernstein analysts in October 2020, only 10% of the 31 respondents with $6.1 trillion in assets were happy with the current management, and 83% of them believed the current portfolio geared towards water and dairy “requires significant change.”

Good E and S, bad G

Danone became the first listed company in France to adopt the so-called “Entreprise à Mission” model in 2020, essentially legalizing its status as a company that puts environmental and social goals first. Indeed, CEO Emmanuel Faber said in an interview with The Economist in 2018 that the “purpose of [Danone] is not to create shareholder value,” but rather to get healthy food to as many people as possible.

If Faber thought that was enough to keep activists at bay, he might have been wrong. “Environmental and social ambitions are obviously appreciated, but not at the sacrifice of financial results,” Laura Parisot, an analyst at independent research firm AlphaValue, told Activist Insight Online.

Artisan said it applauds Danone’s steps towards becoming a “more environmentally sustainable, socially responsible business,” but noted the same cannot be said about “corporate governance.”

Danone is one of the few companies in Europe that has the CEO and chairman roles combined. According to AlphaValue, only 18.2% of companies in its European coverage of 476 companies have a combined chairman and CEO profile. “[A dual leadership role] is indeed one of the first disqualifying criteria for many investors,” Parisot said.

Both Bluebell and Artisan called on Faber to relinquish the chairman title, deeming the step simple and “uncontroversial.” Bluebell went a step further, calling for the replacement of Faber as CEO, who it said has had enough time to prove himself over the past six years at the helm. “We haven’t heard anyone against the separation of the CEO/chairman roles, and the appointment of a truly independent chairman. And in general, we found broad dissatisfaction with the job Faber has done over the last few years,” Bluebell’s Marco Taricco said in an interview with Activist Insight Online.

“We value constructive dialogue with all our shareholders. The leadership team of Danone is highly focused on delivering long-term sustainable value for our shareholders,” Danone said in a statement.

Weak performance

Danone, with its three divisions spanning dairy, water, and infant nutrition present in over 130 countries, has been suffering from both low organic growth rates and declining margins for years. The COVID-19 pandemic has delivered a further blow to dairy and water, while infant nutrition, the division with the highest growth rate and margins, is facing uncertainty as its key Chinese market is moving toward local alternatives. Some Danone acquisitions, including U.S.-based WhiteWave for $12.5 billion, have been described as expensive by analysts and Bluebell.

Instead of investing in its core brands, Danone has been cutting costs to improve margins, a strategy that has backfired as sales growth has remained sluggish.

At an investor update on November 23, Danone announced plans to cut 1 billion euros in costs by 2023 and 2,000 jobs, as well as change its organizational model along geographical lines instead of product lines to emphasize its “local first” strategy. Such an approach, however, has been tested before.

“Danone is doubling down on a strategy that hasn’t worked for the last five years,” Bernstein analyst Bruno Monteyne said in a report at the time. Monteyne is worried that a focus on cost savings will lead to lack of innovation and market share losses, a concern shared by Artisan, which said the company suffered from “underinvestment in innovation, product development and product support.”

Follow your peers

To please shareholders, Danone has to move with more urgency in reshaping its portfolio of brands, similar to other consumer staples companies. Nestlé successfully executed a turnaround under a new CEO starting in 2017 by selling off the less profitable brands, under pressure from Third Point Partners, which took a stake in 2017.

Campbell Soup also has restructured its portfolio following a proxy contest with Third Point Partners. Under pressure from Jana Partners, Conagra Brands has done the same portfolio reshuffling.

These changes have led to improved stock returns, with all three outperforming Danone over the past two years. Over the past five years, Danone outperformed only Campbell Soup.

Third time lucky?

Danone itself is familiar with activists. In 2017, Corvex Management reportedly took a large stake, although the activist never advanced a public demand. In 2012, Trian Partners launched a campaign for cost cuts and share repurchases but exited after three years.

Artisan hired Jan?Bennink to help it devise a new plan to improve the company’s operations. Bennink, a former executive at Danone in the dairy unit, is a highly regarded turnaround expert who has worked with Third Point in its campaign at Nestlé. Bluebell, which welcomed Artisan’s campaign, said it has the “utmost” respect for Bennink.

With Bluebell and Artisan having shareholder and analyst support, CEO Faber’s job is at risk. At the very least, Faber will have to relinquish the dual leadership roles, but a more radical outcome of the campaign could be a CEO change.

If this happens, it will show that sustainability cannot act as a poison pill.