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CEO of Unilever Paul Polman: ‘Capitalism is in crisis and increasingly social cohesion will be the biggest challenge. Unfortunately, the Occupy Wall Street movement represented frustration without solution, but we have to take the signs seriously. We cannot run away from them.’ (Kevin Van Paassen/The Globe and Mail)
CEO of Unilever Paul Polman: ‘Capitalism is in crisis and increasingly social cohesion will be the biggest challenge. Unfortunately, the Occupy Wall Street movement represented frustration without solution, but we have to take the signs seriously. We cannot run away from them.’ (Kevin Van Paassen/The Globe and Mail)

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Paul Polman: Rebuilding capitalism from the basics Add to ...

Paul Polman might be accused of biting the hand that feeds him. The chief executive officer of consumer products giant Unilever NV is tilting at the tenets of modern capitalism – by ending quarterly earnings reporting, trimming hedge funds from the investor base, and treating thousands of small tea farmers with the same regard as shareholders.

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Since taking over Unilever in early 2009, the soft-spoken executive has also overseen a share-price doubling by the Anglo-Dutch giant, which generates $68-billion in annual revenues, and owns such bellwether brands as Dove, Hellmann’s, Becel and Lipton Tea.

The 56-year-old, Dutch-born Mr. Polman insists he is not a revolutionary but a counter-revolutionary who wants to restore the concept of long-term, sustainable value. He was in Toronto recently to give the Thomas J. Bata Lecture on Responsible Capitalism hosted by York University.

Aren’t you trying to destroy capitalism from the inside?

Not at all, it is going back to what capitalism is supposed to be. If you go back to Adam Smith, his thoughts were that capitalism was intended for the greater good. When our generation grew up after the Second World War, our parents wanted the same kind of thing; they wanted us to go to university and have a better life. Most of them were working for the greater good of society.

So what went wrong?

We’ve had enormous growth in world population and the re-balancing of the wealth economies – and that’s put huge pressure on our planetary boundaries. And we’ve also been fooling ourselves in what value creation is.

As a CEO, haven’t you prospered from this value creation?

Certainly, capitalism has done positive things – since the 1970s, it has lifted 600 to 700 million people out of poverty and it has given us education, health care, and opportunity for me to be sitting here [as CEO]. But in 2008, we found the way we were doing it – high levels of public and private debt and over-consumerism – is not sustainable. And the financial sector has got out of hand. For example, the real estate value of New York is more than total value of all U.S. manufacturing assets. There is something wrong there. You have to put the financial world at the service of real economy again.

What went wrong with capitalism?

In the 1980s, Milton Friedman came out with theory that said the purpose of business is business and created a very narrow definition of shareholder value creation. And people like Chrysler’s Lee Iacocca, Coca-Cola’s Roberto Goizueta and General Electric’s Jack Welch were exemplifying that idea.

What is different now?

We see the challenges now. When everything was fine and stock markets went up 15 per cent a year, no one asked the questions. But we are in a time when the boundaries are more transparent [between business conduct and share performance]. If you do not do something about [a lapse], the consumer will reject you. Look at the significant market capitalization wiped out from the [BP] oil spill in the Gulf of Mexico, just because of the desire to save costs – to the horsemeat scandal created from a desire to meet short-term numbers. Or manipulating Libor rates to hit profit numbers.

Aren’t you acting like the classic European – top-down, and not shareholder-driven?

I don’t know what the classic European is because there are 550 million of us. The point is if you are single-mindedly focused on any one value driver, you will not be successful. If you only focus on being sustainable, it would be wrong; if you focused just on on shareholder value maximization, that would be wrong. The challenge in this new world is to balance it all.

How did you create change at Unilever?

When I arrived, the company had come down for 10 years and had become very internally focused. I needed a way to be accepted – as the first CEO from outside [he had worked at Nestlé and Procter & Gamble]. And I needed a more successful business model. It happened at the height of the 2008 crisis which was a great moment to galvanize change, and we said let’s get back to our roots. After all, [people at Unilever] were founders of the sustainable agriculture initiative – marine stewardship for a sustainable fishery, the roundtable for sustainable palm oil, this company is full of that. But somehow we had missed the connection to driving the business in a sustainable way, which can mean sustainable profit.

Was there one defining moment?

I went back into the origins of Unilever, to discover that [founder] Lord [William] Lever invented the bar soap in Victorian Britain because cholera was such a problem. One of two babies did not make it beyond year one. The problem he tried to solve involved hygiene. In the origins of many companies, people were working in the interests of society, not in the interests of shareholders alone. Focusing only on shareholder value is a very destructive concept.

But why end quarterly reporting of profits?

We don’t make our investment decisions on a quarterly basis. and I personally don’t think it is useful that I have to explain that Easter was a little early this year or Ramadan a little later, or it was a cold month for us so we didn’t sell as much ice cream. I don’t think many of our investors want to know that.

We do revenue reporting quarterly, but we report earnings at mid-year and at the end of the year. As a result, our discussions have become more mature. Our shareholder base has changed and we see less volatility in the stock.

Are you successful in banishing hedge funds?

When I joined Unilever, hedge funds were 10 per cent of the shareholder base, and I said that was probably not a good fit with our strategy. Now they are less than 5 per cent. [These statements] were the first things I did; I figured if I did it the first day I was hired, they were not going to fire me. Some people said there was something I had to hide or the new CEO just wanted to set a lower base line. You have to sit through that kind of [criticism]. Now our business communication has become more strategic.

In this volatile environment, the average tenure of a CEO is three to three-and-a-half years, and there is a disproportionate effort by CEOs to satisfy current shareholders. But who are they? You can easily become [distracted] if you listen to all of them, so you have to spend far more time selecting the right shareholders.

What’s wrong with hedge funds?

Everyone has a purpose in society, and there are long-term hedge funds – but you have to find shareholders who fit the philosophy of your company. Look to the Far East where we have 60 per cent of our business. The family companies there take a long-term perspective, and they aim for higher invested capital and continuous growth. I made the same kind of decisions – to double capital spending, and increase R&D, and did it at the height of a recession when everyone was talking cuts, cuts, cuts. You cannot save your way to prosperity.

So you are not trying to destroy capitalism?

I’m trying to make it work. What will happen with the 50 to 60 per cent of youth unemployed in Spain or Greece – or with your children or my children who don’t get a job? What will they think of society? What will they think of capitalism? Capitalism is in crisis and increasingly social cohesion will be the biggest challenge. Unfortunately, the Occupy Wall Street movement represented frustration without solution, but we have to take the signs seriously. We cannot run away from them.

You have worked for three big brand machines – Unilever, P&G and Nestlé. How can you flood the world with ads and still call for ‘mindful consumption,’ particularly in emerging markets?

It is always in the eye of beholder. I travel the whole world, and I see over and over that when brands can compete freely, choice is created and consumers are better off … I often hear that if we are consuming so much, why are we selling cars to poor people in Africa, and why should the Chinese drive? That is about the most arrogant argument I’ve heard.

Consumers will self-select companies that provide responsible products and operate responsibly. Consumers want to know how you treat people in the whole value chain, or if the products are sustainably sourced. With the help of technology, consumers can see these things right away, and bad behaviour gets punished more quickly.

But don’t customers buy on the basis of price and value?

That is absolutely not true. Certainly, it is Economics 101 at the entry point. If Lipton tea doesn’t taste good or is too expensive, you are not going to buy it. But after that, other factors start kicking in – such as the fact we have carbon-neutral tea plantations, and we treat people fairly.

We have, for example, 75,000 smallhold tea farmers who work for us. Finally their children can go to school, rather than work in the tea business, and we give the farmers soil-management training. Their yield is 20- to 40-per-cent higher, and we get a sustainable supply of tea. A lot of people get confused and say at that very high level, that consumers aren’t willing to pay [for these things]. It is a meaningless discussion. What you see is a greater awareness by consumers of what they want to buy.

_____________________

Paul Polman

Title: Chief executive officer, Unilever NV, Amsterdam/London.

Born: The Netherlands, July 11, 1956.

Education:

Bachelor’s degree, University of Groningen, Netherlands.

MA in economics and MBA, University of Cincinnati.

Career highlights:

Began career at Procter & Gamble Co. in 1979, holding many senior executive positions.

Moved to Nestlé SA in 2005, where he was chief financial officer and executive vice-president, the Americas.

Became Unilever CEO on Jan. 1, 2009.

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