Putting the governance in ESG? Danone splits Chairman and CEO roles

By Katy Askew contact

- Last updated on GMT

Danone Chairman and CEO relinquishes chief executive role / Pic: Danone
Danone Chairman and CEO relinquishes chief executive role / Pic: Danone

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Danone is a company well-known for its commitments to environmental and social sustainability. But the French dairy giant’s structure – combining the CEO and Chairman roles – has raised some concerns about the G in ESG. As the group comes under pressure from activist shareholders, will Emmanuel Faber’s decision to step back from the post of Chief Executive please critics?

Danone’s top executive Emmanuel Faber put a proposal to the company’s board of directors yesterday (1 March) to separate the functions of Chairman and CEO - which he is currently responsible for - ‘in the near future’.

“The separation will be effective upon the appointment of a new CEO. The process to recruit a new CEO has been launched and once complete, Emmanuel Faber will focus on his role as non-executive Chairman,”​ the company said in a statement.

Strengthening governance (or keeping the wolves at bay)

The aim is to tighten the company’s corporate governance structure, which has come under recent fire from investors, such as Artisan Global Value Strategy and Artisan International Value Strategy, as well as activist hedge fund Bluebell Capital Partners.

“The roles of CEO and Chairman should be split to reflect modern-day corporate governance. Governance standards also require that prior leadership leave the board. And logic demands more consumer goods experience on the board of directors,”​ Artisan – which holds 3% of Danone – argued.

Faber standing down as CEO – but continuing as non-executive Chairman – is clearly an attempt to placate such concerns. Or alternately, as Danone put it, to ‘continue strengthening Danone’s governance’.

The company also unveiled other measures it believes will boost governance. It has decided to appoint Gilles Schnepp as Vice-Chairman – alongside former CFO Cécile Cabanis – and to appoint long-time board member Jean-Michel Severino Lead Independent Director and Chairman of the Governance Committee.

Commenting on his new responsibilities, Severino – a ten-year veteran of the Danone boardroom – said he ‘looked forward’ to ‘being in charge of continuing a fruitful dialogue with our shareholders’.

But what impact will this shake-up have on Danone’s strategy?

Change for continuity's sake? 

Activist investors are targeting Danone for one reason – what they characterise as its financial underperformance.

Danone benefits from a strong position in health and wellness foods. It is the owner of leading yogurt brands Activia and Actimel and has a desirable footprint in plant-based products through Alpro in Europe and Silk in the US. Activist investors argue that these strengths are not translating to a superior performance. In a recent open letter, Artisan argued that while Danone ‘has one of the best collections of assets in the global food industry’ on ‘almost every measure’, Danone's performance has ‘lagged’.

Danone failed to achieve targets, set in 2017, for organic sales growth of 4-5% and an operating margin of 16% by 2020. In October, the company unveiled a new strategic plan with somewhat less ambitious goals. A month later, the group revealed 2,000 job cuts and the adoption of a local regional structure in an effort to generate cost savings of €1bn - an initiative Danone has dubbed Local First.

This initiative, International CEO Véronique Penchienati-Bosetta told FoodNavigator, is all about growth.

“The Local First project is a growth project. Of course, it will generate savings because [we are] de-layering the organisation, going more local. But it is to be able to invest more in our brands and fast-growing trends, while at the same time leveraging our scale and assets for superior execution across categories,”she insisted in a recent interview​. 

Not everyone is convinced by this logic. “Growth, the lifeblood of the sector, has been drained from Danone,”​ Bernstein analyst Bruno Monteyne wrote in a recent investor note. “Being in structurally challenged markets with poor execution leaves sustainable growth at just 2.5%, below the 3-5% target. But what do you expect with brand support ('selling expense') down -320 bps?” ​he asked after the company's full-year results were released last month. 

In this context, Monteyne argues, ‘a strategy that is focussed on cost cutting, with its fruits dropping to the bottom line rather than nurturing brands’ will only serve to ‘compound’ the company’s problems.

But Faber’s exit from the CEO position seems unlikely to translate to a departure from Local First. Indeed, Faber himself put the boardroom shuffle in the context of the Local First journey.

“I am pleased we took the governance arrangements that will allow us to anticipate the next phase of development of the truly unique company Danone is, as we open, with our Local First plan, a new step towards the company’s reinvention,”​ the French executive commented.

Powerhouse or puppet, what awaits the new CEO? 

Nevertheless, Stifel analyst Alain-Sebastian Oberhuber believes the change could prove a catalyst for a new strategic direction, in particular sharpening focus on brands that deliver higher returns. “We find the step positive for Danone, as we think that there will be a stronger focus on profitable activities in the future,”​ he said.

“Apart from Emmanuel Faber’s decision to step down as CEO, it is also worth mentioning that he will take a non-executive chairman role. Thus, the new CEO will have a lot of power.”

Bernstein’s Monteyne has a decidedly different take, observing this morning, ‘this is not a clean break’.

“It leads to one of two options: (1) either a CEO-in-name-only who executes the Chairman's plans, or (2) a repeat of this tense stand-off with shareholders a few years from now. If there was a doubt in the mind of the prospective CEO, the title of the press release says it well: ‘Danone's Board of Directors confirms unanimous support for Emmanuel Faber’.”

Monteyne pointed to the fact that any incoming CEO will face a situation where the wheels have already been put in motion on some significant decisions with long-term implications. 

Not only has the company already embarked on Local First, a major organisational change that is both ‘irreversible and seriously contested’; Danone announced this week that it plans to ‘sell the family silver’ in China with the disposal of its stake in Mengniu. It also unveiled a share buyback programme using the proceeds ‘despite having the highest leverage in the sector’, Bernstein noted.

"Wouldn't the new CEO want to have a say?"

Perhaps most tellingly, Monteyne continued, any incoming CEO will face a Chairman who is ‘backed up by a Vice Chairman who is the very recent ex-CFO, which seems to ensure the plans stay exactly as they were before’.

Perhaps, for Danone, change at the top should be viewed more as a tool to maintain strategic continuity.

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