Danone: a visionary C.E.O. defeated by financial realism

On Sunday, March 14, 2021, the board of directors of Danone decided that Emmanuel Faber would step down as chairman and C.E.O. with immediate effect. His strategy was challenged by a group of shareholders.

Emmanuel Faber, 57, and C.E.O-chairman was ousted only 2 weeks after the board unanimously agreed to separate his position into 2 distinctive functions. He was supposed to remain the non-executive chairman until a new executive officer was found. But this situation didn’t last long. Gilles Schnepp became the new chairman with immediate effect.

The weekend was the latest development of a long turmoil among the highest profiles of the company. Emmanuel Faber’s relation with Danone ends in a tumultuous divorce between societal values and business performances.

Emmanuel Faber at the HEC graduation ceremony
Emmanuel Faber at the HEC graduation ceremony in 2016

A forward-thinking leader

Danone is a leading food-product company with 100,000 employees operating in more than 120 markets. Mr. Faber first joined the organization in 1997 and became its chief executive officer in 2014. He succeeded Franck Riboud, son of Antoine Riboud, and co-founder of BSN-Gervais Danone.

Emmanuel Faber was known for his awareness of environmental and societal challenges as a business leader.

He delivered an unconventional speech in 2016 during a graduation ceremony at HEC, a top-listed business school. In the video, which has more than 1.7 million views on YouTube, the company’s chief executive explained how his brother’s schizophrenia, diagnosed while he was a student at HEC, impacted his perception of life.

In his talk, he claimed that “after all these years of growth, what is at stake in the economy and globalization is social justice”. And he told the aspiring business managers that they would need to “overcome 3 diseases: power, money, and glory”.

Gilles Schnepp
Gilles Schneep, the new chairman of Danone

A purpose facing a difficult economic reality

This glamorous ideal seemed to resonate in the company, too.

In June 2020, the shareholders massively approved that Danone became a purpose-driven” organization, or “entreprise à mission”. It is a specific status created by French law in 2019, in which the company adds social and environmental considerations to its mission of “bringing health through food to as many people as possible“.

Nevertheless, in that same year, Danone faced disappointing economic performances.

The former C.E.O. had told during the annual shareholders’ meeting that “the pyramid organization of large international companies [was] not the model of a living enterprise of tomorrow”. It proved to be a hint of the upcoming managerial changes he wanted to apply.

In October 2020, Mr. Faber disclosed a restructuring plan to restore growth. The plan aimed at saving €1 billion by 2023, which would ultimately lead to 2,000 job cuts. He justified the “Local First” reorganization with the fact that “profitability [was] fundamental for any company. It is the basis of tomorrow’s investment”.

But all of a sudden, the C.E.O.’s inspirational words seemed to fall short in light of the company’s economic viability.

The organization struggled during the pandemic.

Water glass in a restaurant
Restaurants is an important market for bottled water

Profitability concerns from activist funds

In 2020, sales revenue decreased by 6.6% compared to 2019. The global net recurring income shrank from €2.62 billion to €2.26 billion.

The water business, a vertical accounting for only 15% of the company’s revenue, lost €1 billion in a year and was responsible for more than half of the company’s sales decline. Bottled water demand sharply dropped with the restrictions around mobility (e.g. travel), and leisure (e.g. eat-in restaurants).

Ironically, selling bottled water is highly criticized for its negative environmental impact, most notably for its use of non-reusable plastic.  Danone’s mission is to convert to rPET, or recycled plastic, bottles. Such bottles are 15% more expensive to produce.

And Danone’s downstream profitability has been the first source of concern for some investors, which led to recurrent agitation at the top of the company over the last few months.

Danone’s share value plunged into deep waters last year.

In September 2019, Danone’s share transacted at €82 at the CAC 40 stock market, the highest  point in its history. Still, in October 2020, before the reorganization plan was announced, Danone’s share was at €47, its lowest price since 2012. It happened when Emmanuel Faber wasn’t granted the leadership yet.

Danone’s stock is also highly diluted among various shareholders, which can make the company accessible to large or volatile financial incomers. The two highest known shareholders, the Americans MFS Investment and Blackrock, owned respectively 7.4% and 5.7% of the company in March 2020. Although Danone headquarters are based in France, a third of the company is owned by institutional investors from the U.S., the organization’s largest market.

The fund Artisan Partners claims to have bought 3% of the company’s stock value over the course of the year. It would directly position it as the 3rd largest shareholder. And it quickly became vocal about its doubts about the leadership decisions and the performances in comparison to its closest competitors, Nestlé and Unilever.

More interest in the planet’s future than the company’s success?

The hedge fund publicly criticized Emmanuel Faber’s decisions in a letter sent in February to Gilles Schnepp. Mr. Schnepp, the former executive of an electrical equipment group, was at the time a lead independent board member after a strategic board game at the end of 2020.

The financial performance of Danone is not consistent with the quality of its assets. On almost every measure, Danone’s performance has lagged.[…] We applaud the steps the company has taken towards becoming a more environmentally sustainable, socially responsible business. But while its efforts in this regard are leading edge, it is to Danone’s detriment that the same cannot be said about its corporate governance.

Shortly after, another asset management firm joined the call.

Causeway Capital Management, which owned approximately 0.2% of Danone in December, expected the board to “look out for minority shareholders”. A portfolio manager told Bloomberg that “a single chairman-C.E.O., in most cases, is not enhancing corporate governance”, referring to a structure rarely adopted in the U.S. but more common in French companies.

Artisan Partners kept pressuring the board of directors for a leadership change, assisted by Jan Bennink, a former senior vice president at Danone and current non-executive director of Coca-Cola European Partners.

Phistrust, another investment firm expressed skepticism in Artisan Partners, one of the only shareholders that voted against the purpose-driven status, and Mr. Benning’s intentions.

Emmanuel Faber during WSJ interview
Emmanuel Faber in a WSJ interview, YouTube

Lack of connection between realism and idealism

BlueBell Capital, a British activist investment fund, was also at the forefront of the rebellion. The organization, that modestly invested in late 2020, considered Danone performances to be poor compared to its competitors during Emmanuel Faber’s tenure.

Francesco Trapani, the fund chairman and alleged friend of Franck Riboud, Danone’s honorary chairman who was said to act more distant with the successor he had chosen, publicly asked for Emmanuel Faber’s replacement. In an interview in Le Monde, Mr. Trapani positioned Mr. Schnepp as a better profile for the role of chairman. Artisan Partners also backed the recommendation. And the latter was in fact appointed as a chairman with immediate effect 15 days later.

In a Wall Street Journal interview in 2016, at the question “what is the one trait that won’t get [someone] hired?“, Emmanuel Faber answered the “lack of connection between realism and idealism”.

Which is what has probably made him fired.

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