What should responsible investors consider with M&A?

Responsible investment, if it is about anything, concerns long-term value delivered by sustainable businesses. To that end, the bitter take-over battles at Unilever and AkzoNobel are instructive.

Both companies, separately, have developed a strong positioning around ‘shared value’, the concept that shareholders will do well if society, the environment and communities also do well. They have placed at their heart a compelling and resilient ethos of responsible capitalism.

Strong resistance by Unilever saw its smaller US rival Kraft-Heinz seen off. A strategic part of its defence was around culture and values; that Unilever delivers far more in toto than simply short-term returns for shareholders.

A similar perhaps far more bitter battle is now raging over Dutch chemicals company AkzoNobel (owner of Bank Holiday perennial, Dulux) in its defiant resistance to an activist investor in support of overtures by US chemicals group, PPG.

AkzoNobel, sharing Unilever’s Dutch origins, has declined to talk to PPG on grounds that the culture and values of each group are materially at odds; that AkzoNobel is about delivering long-term sustainable returns, whereas the likes of PPG (and Kraft-Heinz) would seek to sweat the assets to enhance short-term shareholder value.

These two cases play out against a vital debate about the future of capitalism itself and the type of capitalism that is beneficial for society – including shareholders. It is undeniable that activist shareholders have merit. They have been able to turnaround poorly performing companies, release value in under-performing assets and motivate or replace poor management.

They can also, through a narrow focus on the short-term, destroy businesses crafted through many cycles, with longevity and thoughtful evolution on their side. Activist investors are useful where there is a problem to fix; it is doubtful this could be applied to a behemoth such as Unilever (the UK’s third largest company) or AkzoNobel the world’s second largest specialist chemicals and coatings company.

Whilst Unilever might not be thought of as the most cutthroat and nimble of corporates, it is rightly lauded and respected for placing the long-term at its heart. The company’s success is wholly predicated on what it needs to do to survive by understanding the evolving needs of consumers and then delivering this in an environmentally and socially responsible way.

A company that does this attentively, as Unilever has, delivered a return of just under 14 per cent per annum for the past decade – by any standards this is excellent news for shareholders. Over 10 years Unilever has delivered a total return of 267 per cent compared to 69 per cent for the FTSE 100 over the same period.

The company works intensively with 600,000 farmers to improve their husbandry, key to improving yield, delivering more in value to Unilever (and its shareholders) and more in economic empowerment for developing world farmers. Using its core branding in soap, the company is carrying a health message across the developing world which is helping to cut infant mortality. This is responsible and sustainable business in operation; it parts company dramatically from a narrow, short-term economic focus demanded by activists by stressing that a broader values system can deliver competitive advantage.

At EdenTree we of course want our companies to perform well, but as responsible investors we are excited too by business models that have the vision – like Unilever and AkzoNobel – to grasp and embrace the shared value model; by delivering sustainable profits for shareholders they also deliver social progress and build consumer loyalty. Surely this is the type of capitalism we can – and should – be embracing. For us, this is the definition of the purposeful company.

Neville White is head of SRI policy and research at EdenTree Investment Management