The Capital Note

Stirring the Pot: Yogurt, ESG, and Investor Return

Danone products displayed before the French food group’s 2019 annual results presentation in Paris, France, February 26, 2020. (Christian Hartmann/Reuters)

Welcome to the Capital Note, a newsletter about business, finance, and economics. On the menu today: priorities, priorities, and Danone’s management change, priorities, priorities, genocide and climate change, earmarks, bubble watch, and price to story ratios. To sign up for the Capital Note, follow this link.

Faber Unmade – The Toppling of a Stakeholder Capitalist

Investors really, really care about ESG, they said. Shareholder primacy was so half a century ago they said.

And Danone, a French food-products group, has been talking that talk for a long time.

Its (former, we’ll get to that “former” thing in a minute) CEO, Emmanuel Faber, an “ascetic who eats little meat” was, in the words of a recent Financial Times report, “one of the most visible advocates in global business for a more responsible capitalism in which companies do not only serve shareholders but also protect the environment, their employees and suppliers.”

“Responsible”? Never change, Financial Times.

And, to be fair, as the FT’s Leila Abboud explained:

Danone has espoused a more human, “multi-stakeholder” model of business going back to the 1960s under the leadership of Antoine Riboud, and Faber continued in that tradition.

“More human.”


When Danone shareholders approved a change in the company’s legal status last year to enshrine its social mission, Faber declared they had “toppled the statue of Milton Friedman”. Danone became the first big listed French company to become a so-called enterprise à mission, or purpose-driven company.

Faber also championed the growing environmental, social and governance [ESG] movement among investors in other ways, such as when the group began reporting “climate adjusted” earnings per share last year and invested heavily in reducing plastic use.

Faber’s claim that the statue of Milton Friedman had been toppled is, of course, a reference (in particular) to the 1970 article in which Friedman took aim at those business leaders who extolled the virtues of corporate social responsibility:

What does it mean to say that the corporate executive has a “social responsibility” in his capacity as businessman? If this statement is not pure rhetoric, it must mean that he is to act in some way that is not in the interest of his employers. For example, that he is to refrain from increasing the price of the product in order to contribute to the social objective of preventing inflation, even though a price increase would be in the best interests of the corporation. Or that he is to make expenditures on reducing pollution beyond the amount that is in the best interests of the corporation or that is required by law in order to contribute to the social objective of improving the environment. Or that, at the expense of corporate profits, he is to hire “hard core” unemployed instead of better qualified available workmen to contribute to the social objective of reducing poverty.

Friedman described such actions as a tax, most notably on shareholders, and he also focused on the political consequences of undermining shareholders’ ownership rights in this way:

The whole justification for permitting the corporate executive to be selected by the stockholders is that the executive is an agent serving the interests of his principal. This justification disappears when the corporate executive imposes taxes and spends the proceeds for “social” purposes. He becomes in effect a public employee, a civil servant, even though he remains in name an employee of private enterprise. On grounds of political principle, it is intolerable that such civil servants—insofar as their actions in the name of social responsibility are real and not just window‐dressing—should be selected as they are now. If they are to be civil servants, then they must be selected through a political process. If they are to impose taxes and make expenditures to foster “social” objectives, then political machinery must be set up to guide the assessment of taxes and to determine through a political process the objectives to be served.

I have written a bit about these issues before, such as here, here, here, and here (Possibly just a little obsessed? Maybe), and in this piece I made the argument that Friedman’s argument was, to use that presumptuous adjective, rather more “human” than often portrayed.

I quoted this passage from Friedman:

In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to their basic rules of the society, both those embodied in law and those embodied in ethical custom.

And then I added:

Friedman’s critics tend to “forget” those last six words.

A properly-run firm will, of course, pay attention to the needs of its customers, its workers, and the community in which it does business (three examples of stakeholders . . .) out of simple self-interest. Indeed, it’s behavior entirely compatible with Friedman’s views.

No matter. To Faber, Friedman was an idol that had to be toppled.

What complicates matters considerably in the Danone case is that in 2020 the shareholders themselves had overwhelmingly voted to transform the company into an enterprise à mission.

From the FT at the time:

After 99 per cent of shareholders voted for the change, Danone will turn into a so-called enterprise à mission, or purpose driven company. The legal status requires Danone not only to generate profit for its shareholders, but do so in a way that it says will benefit its customers’ health and the planet.

France passed a law last year to modify its civil and commercial codes to allow companies to take greater consideration of social and environmental issues. It sought to broaden the idea of what animates companies by rejecting the traditional idea that a company exists primarily to maximise the wealth of its owners, the shareholders.

Danone chief executive Emmanuel Faber was instrumental in building support for the French law, and has long been an advocate for the idea that companies need to act both for economic and social ends. For example, he has pushed Danone to disclose a new financial metric called “carbon-adjusted EPS” to expose the invisible cost of polluting.

I wrote about such new metrics here (in fact, my article includes a reference to Danone), but, as reported in the FT, Faber himself gave a clear example of one way in which they could work:

In addition to traditional profit metrics, Danone also reported a new figure it calls “carbon-adjusted EPS”, which Mr Faber said was intended to expose the now invisible cost of polluting and spark conversations with investors.

We will get to “sparking conversations with investors” later.

The FT (February 2020):

When it applied a theoretical price of €35 per ton of carbon emissions, Danone’s 2019 emissions would have cost it €945m, or about 40 per cent of its annual free cash flow. With more long-term investors such as BlackRock and some banks like JPMorgan calling for action on climate change, Mr Faber said companies must move much faster to incorporate carbon costs into their financial reporting.

“Financial players are talking about climate now, so we wanted to bring some discipline to the matter,” he added. “What we are really talking about is the true cost of doing business once the environmental externalities are accounted for.”

And if you think you can detect a faint whiff of oligarchy about that, you would be right.

And also note this (my emphasis added):

Danone has scaled back its sales growth and profit margin targets for 2020 as the coronavirus dents demand in China, its second-largest market, and it embarks on a €2bn spending plan to reduce its reliance on non-recycled plastic packaging and cut carbon emissions.

Emmanuel Faber, chief executive, defended the decision to abandon the short-term profitability targets, saying that the €2bn spending programme over three years was the “right thing to do for the business” not only to respond to the urgency of climate change, but also to answer consumer demands for action on sustainability issues.

I have to say that, had I been a shareholder, I would have put in a sell order at this point, if not before.

A quick glance at something put out by the company’s investor-relations team would not have eased my fears. After noting a picture of a child staring at a star above a slogan (“One planet. One health.”) that had left the English language behind, I read this:

Danone is committed to the sustainable shared value creation model that has driven its vision of business since it established its dual economic and social project for the first time in 1972.

At the heart of this business model lies the conviction that commitment to all stakeholders creates further value for shareholders.

In this section, you will find complete information & data relating to Danone’s commitments and actions on sustainability. This is notably highlighted through Danone’s 2030 Goals that are aligned with the UN’s Sustainable Development Goals.

But trouble was brewing in paradise. A couple of days ago, the Financial Times reported that

Danone’s board of directors has decided to replace Emmanuel Faber as chief executive and chairman, bowing to pressure from activist investors and blowing up a two-week-old compromise designed to have him remain as chairman.

After a long board meeting on Sunday night, Danone announced Faber’s departure with immediate effect on Monday, confirming earlier reports in the Financial Times and Le Figaro.

To use his own verb, Faber had been toppled.

The FT:

It was a dramatic end to a months-long conflict at the French consumer goods group behind Evian bottled water, Activia yoghurt and Alpro soya milk that has been grappling with a sales slump since the pandemic began. Activist investors attacked Danone for what they cast as its chronic underperformance compared with larger rival Nestlé, and publicly called for Faber’s departure . . .

Although the activists campaigning at Danone were careful not to directly attack its sustainability focus, they did argue that the balance between shareholders’ interests and others had been lost under Faber.

The public campaign carried out since January by activist Bluebell Capital and Artisan Partners, a US fund, put Faber and the board under intense pressure to respond to the criticism. More shareholders had indicated in private that they too supported them.

From another Financial Times report:

It turns out investors, like CEOs, care about environmental, social and governance issues, but not when it affects their bottom line. Faber, who joined the group in 1997, continued its long tradition of espousing responsible capitalism. (Danone began reporting “climate adjusted” earnings per share last year.)

While Bluebell and Artisan were careful not to directly attack Danone’s ESG focus, they did say the balance between shareholders’ interests and others had been lost under Faber, who has become the face of sustainability in corporate France.

If not necessarily of “governance,” the “G” in ESG.

The FT:

Faber had held both the chairman and chief executive roles since 2017, and one-quarter of the board seats are occupied by former executives, including Franck Riboud, the former CEO and son of Danone’s spiritual founder Antoine Riboud.

Corporate-governance enthusiasts generally prefer (for good reason) the roles of CEO and chairman to be held by different people. And the more independent a company’s board the better.

As pointed out above, the activist shareholders were careful when it came to the topic of ESG, a point elaborated upon here:

“Faber was trying to use sustainability as part of his defence,” said Nicolas Ceron of Blue Bell Capital. “But we never called into question Danone’s ESG investments, and we care a lot about these topics . . . Their competitors like Nestlé and Unilever also make ESG a priority, yet have better financial results. Our issue with Faber was not ideological but operational.”


“It is all well and good to topple the statue of Milton Friedman,” said one adviser, referring to Faber’s declaration at the time that the vote was a repudiation of the renowned American economist’s view that the social responsibility companies have is to make profits.

“You can do that when your financial performance is better than competitors and your governance is above reproach, but if they aren’t, then it is going to be a problem,” the adviser added.

This is a reminder that the idea now being peddled by ESG’s Wall Street backers – that a company can do well by doing good (especially when that good is defined in environmental and social terms) – may well be poorly received when the company is (for whatever reason) not doing as well as it should be.

And, at a time when the flow of money into the stocks of “socially responsible” companies is pushing up their valuations (there is clearly a green bubble under way at the moment) it will be (or ought to be) much more difficult for investors to make that argument. Bubbles have a way of bursting.

What’s more, there will be times when companies balk at the cost of signing up to ESG orthodoxies. The FT cited the case of “Orbia, a Mexican conglomerate, [that] recently dismissed its CEO and reversed his plan to make the business more green by selling the vinyls division that drove its profits.”

Orbia had, the paper reported in early March

changed its name from the more solid Mexichem to the trendier Orbia and adopted a mission statement of “to advance life around the world”.

Vinyls and plastics had jarred with that ambition and Orbia’s drive to focus less on chemicals and more on agriculture, water and infrastructure.

But it will take more (much, much more) than the toppling of Faber (or, for that matter, the fall of Orbia’s CEO) to stop what looks like the inexorable rise of stakeholder capitalism and ESG (two deeply interlinked concepts). That was evident in the way that Faber’s opponents appear to have been careful to avoid criticizing these ideas (although Artisan had not supported the transformation of Danone into an enterprise à mission), and also in some of the comments made after his fall.

The FT:

Ioannis Ioannou, who teaches at London Business School and advises asset managers on sustainability issues, said the saga shows the need to develop new ways to assess performance as companies tackle broader goals beyond maximising profits.

So the argument for “new metrics” surfaces again. It is not going away, not least because such fuzzy math throws up targets that are often easier for managements to meet than those that would be required if their role were confined to generating a good return for their shareholders. That fact has not detracted from these metrics’ appeal to the C-suite.

And the institutional backers of ESG, quite a few of which have close ties to government, are not going to give up anytime soon either.

[Faber’s] legendary leadership in promoting stakeholder capitalism and ESG should be remembered among all who supported those philosophies,” tweeted Hiro Mizuno, the former head of Japan’s pension funds who also serves on a Danone oversight committee.

Or flip over to Reuters to check out the debate at Berkshire Hathaway:

Warren Buffett’s Berkshire Hathaway Inc on Monday urged the rejection of shareholder proposals that annual reports be produced about its efforts to address climate change and promote diversity and inclusion . . .

Citing its decentralized model, Berkshire said the climate proposal from the California Public Employees’ Retirement System, Federated Hermes and Caisse de Dépôt et Placement du Québec was unnecessary, and that many businesses’ climate decisions already made “great sense” for the environment.

Both CalPERS and the Caisse de Dépôt et Placement du Québec are, one way or another, creatures of government.

Meanwhile (via the New York Times):

CtW, an adviser to union pensions with more than $250 billion in assets, sent a sharply worded letter to Artisan Partners, the firm that led the revolt over Mr. Faber’s leadership. The twist in the letter, which was reviewed by the DealBook newsletter, is that CtW owns a “substantial” number of Artisan shares — and said that the fund needed the sort of governance shake-up it pushed for at Danone.

While CtW’s criticisms concentrated on Artisan’s compensation practices and the fact that the company’s chairman and CEO were one and the same person, there was also this comment:

Artisan was of one of few shareholders to oppose Danone’s conversion last year to an “Enterprise à Mission,” a move supported by 99.4% of shareholders. Danone’s conversion has been widely heralded as a significant step towards more responsible and sustainable business strategy that should be supported by asset managers concerned with environmental, social and governance issues.

Step by step, the pressure for a corporatist state continues.

Around the Web

Fighting Genocide or Climate Charge – a Hard Choice, Apparently

President Joe Biden’s White House is trying to reconcile his desire to ratchet up U.S. renewable power generation with his outrage over alleged Chinese human-rights abuses in Xinjiang, a major supplier of a key component in solar panels.

Factories in Xinjiang, a western region of China that’s home to the oppressed Uyghur minority, produce half the global supply of polysilicon, a metal critical for the panels that turn sunlight into electricity.

But Biden has accused China of “genocide” in a campaign to erase the culture of the predominantly Muslim Uyghurs. Hundreds of thousands of the people have been sent to Chinese “re-education” camps, according to the UN and advocacy groups.

The dynamic reveals how easily Biden’s aspirations to remake the U.S. economy and combat global warming can collide with the grimy reality of U.S. foreign policy. The nation’s largest labor organization, the AFL-CIO, demanded that Biden block imports of solar products containing polysilicon from Xinjiang, suggesting that production of the metal in the region may involve forced labor . . .

“Grimy reality”?

Bipartisan Pork

The Hill:

House Republicans passed a resolution during their conference meeting on Wednesday in support of restoring earmarks.

The House GOP’s 102-84 vote comes as Democrats gear up to revive the practice, which allows members to secure federal funding for specific projects.

Republicans in the lower chamber stopped the practice in 2011, citing a number of controversies stemming from earmarks including the so-called Bridge to Nowhere and the Jack Abramoff scandal.

The effort to support their restoration with a number of reforms — including a requirement that they must be publicly disclosed with written justification and members can’t have a financial interest — was led by Rep. Mike Rogers (R-Ala.).

Proponents argue that Congress handed too much power to the executive branch by eliminating earmarks, arguing they are needed to restore the power of the purse . . .

Bubble Watch

The Financial Times:

Blank-cheque companies have already surpassed last year’s fundraising record in the first quarter of 2021, reflecting the insatiable appetite for special purpose acquisition companies among both institutional and retail investors.

Spacs have raised $79.4bn globally since the start of the year, eclipsing the $79.3bn that flooded into vehicles in 2020, according to data provider Refinitiv, as of Tuesday night. So far in 2021, 264 new Spacs have been launched, overtaking last year’s record 256.

The fundraising comes amid a broader effort from European cities such as Amsterdam and Frankfurt to match the boom in listings in the US

Blank-cheque companies, which promise private businesses a quicker route to public markets, have become a staple on Wall Street over the past year, boosted by record-low interest rates and an abundance of cash from investors looking for yield.

Well-known figures ranging from Wall Street veterans Michael Klein and Bill Ackman to sports stars Shaquille O’Neal and Alexander Rodriguez have raised money through Spacs. But the pace of listings, particularly by backers with little financial expertise, has raised concerns that the market is overheated . . .

“Has raised concerns.”


Random Walk

Price to Story Ratios

Sami Karam in Populyst:

The famed investor Seth Klarman relates this story1 in his book Margin of Safety:

“There is an old story about the market craze in sardine trading when the sardines disappeared from their traditional waters in Monterey, California. The commodity traders bid them up and the price of a can of sardines soared. One day a buyer decided to treat himself to an expensive meal and actually opened a can and started eating. He immediately became ill and told the seller the sardines were no good. The seller said, “You don’t understand. These are not eating sardines, they are trading sardines.”

In the new ‘trading sardines’ mode of stock investing, it does not matter whether some companies expect to generate profits or free cash flows in the foreseeable future, so long as they rank highly on the cool factor and/or operate in a sector that is popular with retail investors. These names are being bought not for the “eating” (not for their profits) but for the trading. As such, some common stocks have taken on the characteristics of derivatives and trade like options. To trade is to buy into the optionality of a success that is by no means guaranteed. GameStop is the most visible of these names but not the only one.

Most important in this new method is for a company to have a good story and a well-liked spokesperson. It is better for its market action if such a company has no earnings at all. If it did, it would be easy to measure its value against its earnings and to determine whether it is reasonably valued. No such hassles with a company that has no earnings for the next few years. The market value can then be whatever investors want it to be, with no limitation to the upside. The Price to Story ratio here easily supplants the PE ratio. Because the Story is not quantifiable, the Price can simply be set at “always higher” for as long as market liquidity is supportive.

  1. The sardines story first appeared in the Sequoia Fund’s 1986 Annual Report.


— A.S.

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