Short-Termism versus Responsible Capitalism

This article was written in collaboration with Ron Soonieus, Managing Partner of Camunico and Executive-in-Residence at the INSEAD Social Innovation Centre

The failed (for now) Kraft Heinz takeover bid for Unilever was no ordinary bid. It was a brief skirmish in what is fast becoming a culture war. A war between two visions of what business should be about: short-term profit maximisation or long-term societal value creation.

Kraft Heinz lies firmly in the former camp. Its business model is based on debt-fuelled take-over, asset stripping and aggressive cost reduction. It believes that long-term value is created by repeating this model over and over again. Unilever under Paul Polman focused on long-term value through a focus on all stakeholders, the planet and society in general. It values sustainability and social responsibility over short-term profit maximisation. The result is two companies with different governance priorities and a very different corporate culture.

The failed bid was a brief flashpoint in the culture war that has been brewing for some time. Many business leaders have professed a belief in the need to move towards the Unilever model – and even to go further than Unilever has gone so far. The governments in Unilever’s home countries – the Netherlands and the UK – have both increased their efforts to focus corporate governance on long term value creation and a more responsible form of capitalism. Both governments opposed the bid.
It is tempting to believe that the failure of the bid represents a defeat for the short-term profit-maximising business model. But that is clearly not the case. Within 24 hours Unilever focused its post-bid communication on how it intended to improve profitability. There is talk that it might be time to start planning for Polman’s successor. The bid may have failed. But will the attempt itself result in the destruction of Unilever’s culture of creating long-term societal value? Will a failed bid represent a crushing defeat for the culture of long-term value creation?

Those who believe in the Unilever model and culture have much work to do. As do governments who profess to support a more inclusive and responsible form of capitalism. What does that work look like?

The first task is to be much more active and much more explicit about the benefits of the long-term value creation model. In our recent paper on corporate governance we argue that an economy focused on short-term shareholder value maximisation inevitably leads to ever rising wealth inequality. Value is not necessarily created but can simply be transferred to shareholders from other stakeholders. This leads to progressive impoverishment of the whole economy. Today we are seeing the economic and political consequences of such a model: the damage it is causing to business and to shareholders themselves and how it has fuelled the rise of insurgent, anti-establishment parties. That is why Jack Welch, legendary former GE CEO called maximising shareholder value ‘the dumbest idea in the world.’

Companies also need to do better at showing the value that they are bringing to society by their long-term focus. They should move beyond what has degenerated into crass marketing of marginal and superficial CSR initiatives to go much deeper into the relationship between their business model and the macro-level benefits to our societies.

Second, Boards must have the courage of their convictions. Boards are failing if, having professed a belief in long-term societal value creation for many years and built a corporate culture based on such a business model, they capitulate at the first sign of challenge and run scared in the opposite direction.

Finally, there is a big role for governments who profess to want to build a culture of long term value creation. As the Unilever-Kraft Heinz bid graphically shows, years or decades of patient work risk disappearing within days or months. If governments are serious about creating a culture of long-term value creation, they need to be much more robust and active than they have been so far. That is why our paper recommends that corporate governance standards should be part of a public interest test for takeovers – and particularly foreign takeovers.

The culture war between short-term profit maximisation and long-term societal value creation has only just started. It is not clear which way it will eventually go. However, if our economies are to prosper rather than wither away, if shareholders themselves are to profit from sustained value creation and if we are to contain or reverse the current political turmoil, then we had all better hope that the longer-term culture will prevail. For that to happen, both business and political leaders have to become much more ambitious than they currently seem to be. Hopefully the Unilever-Kraft Heinz episode might serve as a warning that can galvanise more meaningful action.

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Radix is the radical centre think tank. We welcome all contributions which promote system change, challenge established notions and re-imagine our societies. The views expressed here are those of the individual contributor and not necessarily shared by Radix.

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