Last month's quickly aborted bid by Kraft Heinz (KHC) to take over Unilever brought into sharp relief the ongoing war between two different philosophies of capitalism. On one side Unilever CEO Paul Polman champions sustainable growth in earnings to raise long-term shareholder value. On the other side KHC and its Brazilian owner 3G advocate maximizing short-term earnings to increase near-term valuation.
Long-term investors' perspective
CEOs of companies aiming for sustainable growth in shareholder value know they must achieve short-term results while they continue to invest in R&D, capital expenditures, global expansion, and people development to sustain their growth. During economic downturns, this can be a difficult balancing act, but nothing less is required.
These long-term value creators use compound growth in revenues, earnings per share, and return on capital invested as measures of longer-term performance. The great value creators of recent decades like Berkshire Hathaway, Johnson & Johnson, and Disney have mastered the ability to achieve these long-term metrics as well as their near-term goals, thereby sustaining growth in shareholder value.
But this doesn't protect them from activist investors seeking immediate returns.
Traders seek immediate gains in stock values to demonstrate above market returns to their investors, with little regard to the long-term future of the companies.
In recent years, fund managers have shifted their focus to cash flow available for shareholder distribution, either through dividends or repurchase of shares, with growing pressure on companies to increase share buybacks. However, there is scant evidence that buybacks produce sustainable increases in shareholder value.
Corporate leaders are thus faced with ongoing tradeoffs between using their cash flow for internal expansion and acquisitions versus increasing dividends and buybacks
Latest battle: Anglo-Dutch Unilever versus Brazilian 3G
Last month's proposed takeover of London-based Unilever by Brazilian private equity firm 3G provided a real-time example of how these conflicting objectives collide.
Unilever's roots date to 1872 with the founding of Margarine Unie and 1885 founding of Lever Brothers. Their 1930 merger as Unilever created the first modern multi-national company with equal roots in Britain and the Netherlands. When Dutchman Paul Polman took the helm in early 2009, he declared bold goals to double Unilever's size from 40 billion Euros to 80 billion by 2020, and generate 70 percent of revenues from emerging markets.