Outgoing Unilever boss Polman looked at money-making refreshingly differently

Most people in modern society, I guess, think the interests of consumers, investors and employees are a zero-sum game; any gain by one would result in an equivalent loss by the other two.

A company increases its profit by charging more for its products; that profit is handed over to investors. The result is that investors are happy; consumers less so. Or the company hands over the profit increase to its employees or more likely its managers, with the same result. Put the other way around, it needs to “exploit” its employees, and the more it does so, the more profit it makes. It’s logical, right?

Because this notion is so entrenched in politics around the world, it’s refreshing to meet people such as outgoing Unilever CEO Paul Polman, whose root philosophy was and remains the opposite.

Of course, profit increases do mean more dividends for investors. But the point is that all the inherent levers of action pull not against each other but towards each other. Greater profits come from providing better products for customers, which increases the company’s ability to attract talent, which in turn increases its ability to create better products, which in turn creates greater profits.

Consequently, in this world, the enemy is not “exploitation”, but short-term horizons. Anything that limits a company’s ability to do good for its customers, society or the environment, is the real enemy.

As a result, the Dutch CEO was constantly at odds with money managers seeking a short-term boost and, from their point of view, his approach was dangerously political, freakishly left-wing and verging on irresponsible.

One of his first acts as CEO was to stop publishing quarterly profit updates. Financial Times writer Michael Skapinker was present when Polman made the announcement and he recorded Polman saying: “If you buy into this long-term value-creation model, which is equitable, which is shared, which is sustainable, then come and invest with us. If you don’t buy into this, I respect you as a human being, but don’t put your money in our company.”

Later, he put it more clearly, saying: “I don’t think our fiduciary duty is to put shareholders first. I say the opposite. What we firmly believe is that if we focus our company on improving the lives of the world’s citizens and come up with genuinely sustainable solutions, we are more in synch with consumers and society and ultimately this will result in good shareholder returns.”

I met Polman at a school in Alexandra where he was demonstrating his ideas. Unilever produces a range of personal products, one of which is Lifebuoy soap. It was sponsoring a hand-washing exercise, using (surprise!) Lifebuoy soap. The intention was to demonstrate the cyclical link between product, health and hygiene, sustainability and ultimately shareholder value. His general knowledge was just enormous and his philosophy was absolutely genuine.

That was eight years ago and Polman has recently retired after being CEO for 10 years in December. The big question is, did it work?

The answer is tricky, but I think it more or less did. At the very least, Polman did not hurt shareholder returns.

In absolute terms, turnover increased from €40.5bn to €52.3bn and profit at all levels, earnings per share and all the other measures increased roughly in line with that under his watch. That doesn’t seem great shakes, but it is such a huge international company that moving the needle in any meaningful way would probably have involved taking on huge levels of risk.

By comparative measures, its performance has been in the frame, but no better. On a diluted earnings per share basis, it is performing a bit worse than Proctor and Gamble but better than Mondelez.

On an enterprise value over earnings before tax, interest, depreciation and amortisation (Ebitda) basis — the full value of the firm as a proportion of its earnings before the accounting funnies kick in — it is doing a bit worse than its aforementioned rivals and substantially worse than Kraft-Heinz.

But on a pure share price basis, the performance has been stellar; when Polman began his campaign the share was valued at £15 and it’s now trading at €43. Compared to the FTSE 100’s rise of 56% over that time, Unilever is up almost 200%. This is much better than Proctor and Gamble (up 56%) and Nestlé (up 100%) over the same period. It’s also better than Coke and Pepsi, neither of which have been laggards.

The share price measure is, however, a bit suspect because the price got a huge boost from the aborted bid by Kraft-Heinz, but it turns out Polman was right to resist the bid since Kraft-Heinz’s share price has dwindled recently.

Polman set all kinds of other targets for the company, some of which it hit and some not.