It was always going to be a difficult deal to pull off, and because the story leaked out before talks had taken place, it meant the protagonists were on the back foot, facing a prolonged and bitter fight, rather than working through the key issues in private. Jorge Paolo Lemann and Warren Buffett, two of the wealthiest and most experienced deal-makers in the business world today, knew it was better to drop it and move on.
So would a merger of these two companies have worked? And what is the bigger-picture story here? Many observers said the two companies have very different cultures and strategies, which is true. But I would go further. I think the bid was actually a contest between two different models of capitalism. And it is good news– for the sake of capitalism as a whole –that there was no outright winner, and that Kraft Heinz and Unilever continue to do things their own way.
Kraft Heinz is managed with ruthless efficiency by a team of mostly Brazilian executives installed by 3G Capital. Plants have been closed, corporate jets sold, everyone now flies economy class. According to Fortune Magazine, overhead costs in the company dropped from 18.1% to 11.1% in the last two years.
The corporate ethos is meritocratic: people are held accountable for their actions, high-performers are well rewarded with bonuses and share plans, long hours are expected, non-performers are let go. They have essentially transplanted the performance culture of an investment bank to the world of fast-moving consumer goods. Perhaps surprisingly, 3G Capital is not playing a short term game of asset stripping and unbundling: it is happy to hold its assets for the long term, and it makes investments accordingly. But make no mistake, the goal is profit growth: the raison d’etre of the corporation is to create wealth for equity owners.
Unilever represents the other end of the capitalist spectrum – it exemplifies the view of a corporation as a force for good in society. Unilever’s mission is to “make sustainable living commonplace”. CEO Paul Polman has set a long-term goal to double the size of the business while reducing its environmental footprint and increasing the firm’s positive social impact. He has also disavowed the quarterly reporting cycle that the capital markets favour. Look inside and you see a range of policies and initiatives to help deliver on Polman’s ambitious objectives. Unilever is also a meritocracy, but in a more easy-going way. Values such as integrity, impact and partnership are highlighted. High performers don’t earn as much as their peers in Kraft Heinz, but they enjoy a more accommodating and relaxed workplace.
These companies are standard-bearers for their respective ideologies. 3G Capital, which essentially controls Kraft Heinz, has swept all before it over the last fifteen years, and has become the most feared and admired player in the consumer goods sector. And among large, publicly-traded firms, Unilever has pushed the social responsibility or “conscious capitalism” agenda further than any other company I can think of. The bid was shaping up to be a battle between these two ideologies and, even though it isn’t going to happen, it highlights a few important points about the capitalist system in which we work.
First, as many have observed over the years, a basic flaw in the Anglo-American model of governance is that most stakeholders have no seat at the table. Unilever is seeking to create value for employees, communities, the planet, and shareholders, but when Kraft Heinz came knocking at the door, the shareholders had the sole right to decide whether to let them in. Is this really the best model? Many would argue otherwise – indeed, there are plenty of examples of different governance models out there, from cooperatives and trust-held firms, to German-style corporate structures, to the emerging Benefit Corporation model, all of which seek to soften the notion of shareholder primacy.
Second, the approach Unilever has adopted is inherently fragile. While there is no trade-off between ‘making sustainable living commonplace’ and corporate success over the long-term, there are likely to be bumps in the road and setbacks in the short-term. Paul Polman has done a good of building buy-in across Unilever’s various stakeholder groups to this long-term project, but keeping everyone on board is a challenge. If there is an unforeseen downturn, or an opportunity to cash in, there is a risk that self-interest takes over, and for people to fall back on their baser instincts. If Kraft Heinz had offered a 35% premium to Unilever’s shareholders, rather than the 17% on the table last week, the outcome might have been different.
Finally, which is the better model of capitalism? Well, just as a balanced diet includes a variety of foods including baked beans, mac & cheese, flora, magnum ice cream and even marmite, an effective capitalist system needs both the 3G and Unilever models to flourish.
The 3G model keeps bloat and bureaucracy in check – it is a way of keeping companies slim and healthy, holding people to account, and rewarding those who work hard. And because there is an active market for corporate control, their operating model has been widely imitated by other consumer goods companies, who see how bloated their cost structures have become. Unilever is taking the more difficult path of creating something new. It is investing in activities that, almost by definition, do not give a short-term payback, such as community development and sustainable living. It often involves taking one step back to take two steps forward.
Progress depends on the complementary nature of these two models. If we allow either one to dominate, we end up in a bad place – take the 3G model to extremes and people become narrow, short-term oriented and greedy, take the Unilever model to extremes and people become unfocused, comfortable and complacent. It is the ongoing struggle between these two approaches to capitalism, not the inherent benefits of one over the other, that creates a vibrant, fully-functioning capitalist system.