Bloomberg News

Unilever Wants Short Showers and Long-Term Investors

July 05, 2012

Unilever Plc. Chief Executive Officer Paul Polman

Paul Polman, chief executive officer of Unilever Plc. Photographer: Jock Fistick/Bloomberg

In the 1890s, William Lever remarked that his new product, Sunlight Soap, might “make cleanliness commonplace” and improve health throughout soot-covered Victorian England. Today, Paul Polman, head of the company Lever created, has even grander aspirations for Unilever, the maker of Dove soaps, Lipton tea and Hellmann’s mayonnaise.

Polman, in his fourth year as chief executive officer, wants to improve the hygiene habits of more than a billion people by 2020 by encouraging handwashing and providing safe, affordable drinking water in developing countries. Those goals are part of a sustainability strategy than says can double Unilever’s sales while halving its environmental footprint.

“It was clear to me that we could not go on borrowing resources from future generations,” Polman said in e-mailed responses to questions about the program. “It is a clear business imperative.”

Like executives from Nike Inc., Dow Chemical Co. and Intel Corp., the 55-year-old Dutchman knows that global companies are now expected to take ownership of business impacts traditionally external to their core operations. To do that, they need relationships with nongovernmental organizations, governments, institutional investors, consumers, media and their own employees. Sometimes companies seek active partnerships. Sometimes they just want respect.

Driving Growth

Unilever is betting that sustainable business practices can actually drive growth. Altruism and public relations aren’t the goals of a leading sustainability programs. Rather, they are considered the fringe benefits of selling healthy, necessary goods and services that satisfy the world’s rapidly growing middle class and improve the lives of the poor.

It won't be easy. The company’s Sustainable Living Plan looks like an epic to-do list: its 60 or so goals will require culture change among Unilever’s 171,000 employees, reconfiguring the supply-chain, and a rethinking of crucial disciplines such as product development and marketing.

Most difficult may be changing the habits of the 2 billion consumers who use Unilever’s products every day -- and who are responsible for two-thirds of the company’s environmental footprint.

Some mainstream investors remain skeptical that sustainability goals can be fully compatible with traditional notions of maximizing shareholder value, said Martin Deboo, an analyst at Investec in London.

Reputational Risk

Until it’s clear that Unilever’s sustainability program won’t hurt shareholder value creation, Polman’s plan “will remain a sideshow for investors,” Deboo said.

Polman’s response to such critics: “If you don’t like it, go somewhere else.”

Yet even supporters of sustainability programs say there’s a reputational risk to Unilever if the company’s increased transparency turns up protracted environmental or labor issues. Amanda Young examines companies’ environmental records for Newton Investment Management, a London subsidiary of The Bank of New York Mellon Corp. whose funds own Unilever shares.

“If you’ve got a significant part of who you are and what you do tied into sustainability, you have to make sure you’re squeaky clean,” Young said. “The more you put yourself out there, the more that can go wrong.”

Consider sustainability leader Nestle, which is the world's biggest food maker and also Paul Polman’s previous employer. Last week the company disclosed that the independent investigation it commissioned to look at its chocolate supply chain found serious child labor issues. The maker of KitKat chocolate bars needs to improve internal monitoring to fight the practice as four-fifths of its cocoa comes from channels for which information on labor is opaque, according to the Fair Labor Association. The FLA made headlines earlier this year for its report on labor and safety violations at Foxconn Technology Group, a maker of Apple Inc. iPads.

Harvard Business School Professor Michael Porter has described sustainability as a company “creating shared value” for itself and stakeholders in its success. However, it opens businesses to a complicated web of relationships and can also create vulnerability along the way. Lee Scott, the former CEO of retail giant Wal-Mart Stores Inc., once displayed leadership on this issue, but Wal-Mart's commitment has wavered since he left. General Electric CEO Jeff Immelt, meanwhile, regretted stepping out in front. "If I had one thing to do over again I would not have talked so much about green," Immelt said in May 2011.

How is Unilever doing? It has made great progress in reducing waste, water consumption and greenhouse gas emissions at its factories. But most of the company’s carbon footprint comes from heating water for the showers where customers use its soaps and shampoos.

Persuading people to take shorter or colder showers is difficult. “This is by far our biggest challenge and as yet we do not have a viable solution,” the company said in its April progress report.

They do have one asset that competitors don’t: Paul Polman is to corporate rhetoric about sustainability what Chicago Bulls legend Michael Jordan was to basketball.

Outperforming Market

Polman said he has attracted a new crop of long-term investors hailing from emerging markets where Unilever is growing fast and now makes more than half of its 46 billion euros ($65 billion) in annual sales. Its stock has bested both the FTSE 100 Index and the Stoxx Europe 600 Index since Polman unveiled the Sustainable Living Plan in November 2010. Recent results, like the first quarter, when units sold grew at more than double the rate analysts had expected, have helped.

He isn’t shy about confronting New York and London hedge fund managers whose relatively short-term ownership of shares contributes to what he believes is excessive stock-price volatility. Polman’s November 2010 decision to eliminate quarterly earnings guidance gave the business “breathing space” and “reset investor and analyst sights more toward the long-term model,” he said. “Short-term performance does matter – but not every 90 days.”

New Countries, New Products

Unilever expects its Sustainable Living Plan will help it develop new markets.

A decade ago Unilever’s Lifebuoy soap brand began a campaign to encourage more hand-washing in India. Convincing people to scrub has proven a challenge: Some mothers in rural Africa believe you need to let a child have diarrhea now and again, while hand washing is frowned upon in Senegal as it is believed to remove luck.

Like many of Unilever’s prior commitments, the effort got turbocharged once Polman arrived. By 2015, Unilever wants to convince one billion people in developing countries to regularly wash their hands with soap.

Early efforts, like TV ads, failed as they lacked motivators for behavioral change. Unilever shifted tactics, going right to rural communities. Lifebuoy reps and partners at organizations like UNICEF and Population Services International now encourage mothers to join a ``Good Mom's Club'' (handwashing kids required) and single out one mother per town for extra praise. In Indonesia Lifebuoy trains teachers, who then bring the program to three more schools, spreading the message at a minimal cost. It all comes together once a year at Lifebuoy's Global Handwashing Day, which last year spanned 12 countries and included singer Mandy Moore. So far, Unilever estimates it has reached 48 million people, “behind where we would ideally like to be,” the company reported in April.

Pricing is a challenge in some new markets. Unilever sells Pureit, a home water purifier, in India Mexico, Brazil, Indonesia and Bangladesh. Many rural consumers balked at a 32-euro model, so Unilever now sells a 17-euro model, available with microloans. For the poorest customers in India, Unilever's R&D team has come up with a two-part Pureit sachet, costing just a few rupees. The technology draws impurities to the vessel bottom, leaving clean drinking water at the top that can be filtered or scooped out. ``Still, the biggest challenge is behavior change,” says chief marketing and communications officer Keith Weed. “If you have been boiling water and your Grandma did it too, do you really believe [Pureit] works?''

Securing Safe Supplies

Palm oil, Unilever’s single biggest raw material, is used in everything from ice cream to shampoo. Unilever buys 3 percent of the world’s production, which is centered in Malaysia and Indonesia, and has grown enormously to meet surging demand. Cultivating palms for oil can cause rapid deforestation, which threatens biodiversity and can exacerbate climate change.

Unilever met a goal to sustainably source its palm oil this year, three years early, primarily by paying as much as $10 million a year extra for so-called GreenPalm certificates, which support certified sustainable palm oil producers. Unilever’s chief supply chain officer Pier Luigi Sigismondi wants to be able to trace all the palm oil it uses back to sustainable farms by 2020, and will invest 100 million euros to build a palm oil processing plant in Sumatra to better track its origin.

Along the way, Unilever tore up a $32 million contract with Sinar Mas, one of its biggest suppliers in Indonesia, which was found to be contributing to deforestation. (Nestle kept buying for several months, and paid the price in a devastating social media campaign, featuring bloody orang-utans, levelled against it by activists at Greenpeace.)

Its palm oil commitment could also redefine Unilever's relationship with the Indonesian government, which is pushing a home-grown alternative definition of sustainable palm oil, separate from Unilever's. ``It is becoming a more heated nationalistic debate,'' says Adam Harrison, senior policy officer of the World Wildlife Fund.

The Indonesian government also has a vested interest in keeping the flow of unsustainable palm oil going, says John Elkington, co-founder of SustainAbility, a London think tank and consultancy. ``Those barriers to change can only become more prominent,'' he says. ``Do these CEOs have the political will and stamina to push through all of that?''

Polman, a marathon runner, claims he does. The ambitious sustainability agenda could well help Unilever adapt to megatrends in the global economy: population growth, resource scarcity, and climate change. Asked how he makes the case that sustainability benefits business, Polman fired back, “How do you make the case that not doing it will not damage mankind?”

Visit www.bloomberg.com/sustainability for the latest from Bloomberg News about energy, natural resources and global business.

 


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