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How Unilever won over shareholders with its long-term approach

Jennifer Riel is an adjunct professor at the Rotman School of Management, University of Toronto. Roger Martin is a professor and former dean of the Rotman School.

Paul Polman joined Unilever in 2009, just as the global economy was entering the darkest days of the financial crisis. In that disruption, he saw an opportunity. "I've always been a little bit concerned about that dominance of the financial industry," Mr. Polman explains. "It was very clear, to me at least, that the system that we were operating under had run its course – had done well for many people, there's no question about it – but it had run its course. We needed a different business model." Mr. Polman set out to create that new model.

Mr. Polman had long been worried about the negative effect of short-term investing on the long-term health of companies. It is hard to overstate how short-term the capital markets have become over the past decade. As of 2015, the annual turnover rate for U.S. stocks was slightly more than 300 per cent. That amounts to an average holding period of only seventeen weeks. Exchange-traded funds – baskets of securities that trade like common stocks on an exchange – go even faster, with an estimated holding period of only twenty-nine days. It wasn't always thus. According to Mr.Polman, "the average holding of a Unilever share in 1960 was 12 years; 15 years ago, it was about five years."

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This shift to the short term means, by and large, that we aren't so much investing as speculating. Vanguard's Jack Bogle has pointed out that this practice is bad for investors. Mr. Polman saw that it was also bad for business. Rather than grow the fundamentals of a business, CEOs are incentivized to boost the company's stock price over the short run. This is a matter of increasing expectations rather than real returns, talking up the stock rather than improving the company.

Mr. Polman was determined to change the short-term focus at Unilever: "One of the things I had to do was to move the business to a longer-term plan," he says. "We had become victims of chasing our own tail, cutting our internal spending in capital, R&D, or IT to reach the market expectations. We were developing our brand spends on a quarterly basis and not doing the right things, simply because the business was not performing. We were catering to the shorter-term shareholders. So I said, 'We will stop quarterly reporting, and we will stop giving guidance.'"

When Mr. Polman announced Unilever's new policies in 2009, the company's shares dropped 8 per cent. Yet he remained steadfast in his message to shareholders. "I explained to them we were going to run the business for the longer term. We were going to invest in capital spending. We were going to invest in training and development. We were going to invest in new IT systems. And we were going to invest back in our brand spending." These investments would take time to pay off, and they had the potential to skew quarterly numbers dramatically. So Mr. Polman asked his shareholders to take a longer-term view, too.

Some shareholders were willing to take the leap with Mr. Polman; those who weren't, sold their shares, an action that was fine with Mr. Polman. Instead of catering to the whims of an established base of short-term shareholders, Mr. Polman was focused on getting the shareholder base he wanted – attracting the long termers who valued growing real returns over inflating expectations. And the policy has worked: Unilever's top fifty shareholders now have an average holding period of seven or more years.

Back when he was working out the plan, Mr. Polman was torn between wanting to take a long-term perspective and needing to adapt to the short-term focus on the capital markets. He saw that, by and large, a long-term focus is great for the business and the world; it provides room to invest, incorporates externalities and spurs innovation. But a short-term focus is what the capital markets demand, including mandated quarterly reporting, in the name of discipline and accountability. A short-term focus has the potential to produce happier shareholders, too, because satisfying shareholders becomes the primary objective of the company.

Mr. Polman wanted the deliriously happy shareholders from the short-term model as well as the real, sustainable growth from the long-term model. But he couldn't get both by acting as most CEOs do and simply accepting the trade-offs. As he explains, his solution depended on being very clear and unapologetic about the game plan: "Transparency builds trust . . . We spent a disproportionate amount of time explaining why a more socially responsible business model is actually also a better model for the shareholders longer term – if you are a long-term shareholder. We made it very clear to shareholders that this model would give them consistency of delivery, where every year we would grow faster than the market, where we would improve stability." Mr. Polman was open about the fact that Unilever's approach might not deliver the highest profitability every year, but he promised it would deliver consistently, year after year. And so it has.

Mr. Polman argues that his new business model was a relatively simple matter: "I've never actually believed in that trade-off [between the short term and the long term]," he says. He knew a better answer – better for Unilever and for the world – was required, and he set out to create it. Pressed on how he was able to overcome the trade-off while many of his peers have not, Mr. Polman is charmingly blunt: "I think it is a cop-out. Any CEO can decide that he shouldn't get paid too much. Any CEO can decide to think long term. . . I think it is courageous leadership that is missing. The excuse is that the market won't let you… we have a license that is much broader than any of the CEOs claim." In other words, Mr. Polman sees it as his job to create a great choice. And he argues that the task is well within his capabilities.

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Based on Creating Great Choices: A Leader's Guide to Integrative Thinking , published by Harvard Business Review Press, 2017.

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