Nestlé defends governance amid pressure from activist investor
Chairman and chief argue their collaborative relationship is more asset than risk
Nestlé’s leadership has defended its governance arrangements against criticism from an influential activist investor, insisting that the collaborative relationship between the chief executive and chairman was not hindering the Swiss food company’s growth plans.
Corporate governance practice in the UK and the US typically frowns upon chief executives becoming board chairman and overseeing their successors. Nestlé has had such an arrangement — which is more common in European countries — for decades.
But such governance at Nestlé has been criticised by Daniel Loeb’s hedge fund Third Point, which in June 2017 made it the largest bet in its portfolio, taking a 1.25 per cent stake now worth $3.4bn.
Third Point has said chairman Paul Bulcke — himself the food and drink group’s chief executive from 2008 to 2016 — “seems too comfortable with the status quo” and argued that it risked “holding up the pace and magnitude of change”.
Speaking in a joint interview with current chief executive Mark Schneider, Mr Bulcke said that he gave the CEO room to work independently and provided support when needed.
Mr Schneider — Nestlé’s first outside leader since 1922 and who is aiming to rebuild sales growth and improve profitability by 2020 — argued that Nestlé had been well served for decades by its long-term mindset and approach to governance.
“Frankly, I am grateful I can turn to someone to give me perspective,” said the 53-year-old German executive who used to head healthcare group Fresenius. “Part of the challenge of being CEO is you deal with a lot of competing interests and there aren’t that many people you can talk to when you have a question.”
Nestle’s board, particularly its independent vice-chairman, acts as a strong check on the pair, Mr Bulcke insisted. He cited Nestle’s recent decision to put up for sale its skin health unit — a reversal of an investment he made during his tenure — as proof he was not out to shield his legacy.
“There is nothing more stupid than holding blindly on to something,” the chairman said.
But some investors have demanded faster change. Two-thirds of respondents polled in an Exane survey in October said they would vote against Mr Bulcke’s reappointment, and 75 per cent would support Third Point if it nominated a board candidate.
A Third Point spokesperson said it had “no present plans” to oppose Mr Bulcke.
The hedge fund recently ended a tough campaign at Campbell Soup with an agreement that will give it two seats on the board and a role in the choice of its next chief executive.
Mr Schneider said: “We are in a very different spot than Campbell’s, just compare the recent performance of both companies.”
Pressure from Third Point also led to the break-up of US aerospace manufacturer United Technologies into three companies. The activist investor said in a letter to clients in May that such a separation of United Technologies would “unlock in excess of $20 billion of value, net of separation costs”, and it also criticised the company’s leadership.
Asked whether Nestlé would consider allowing Third Point on its board, Mr Bulcke declined to answer. “We are open to all ideas and then we judge what is best for the company.”
Konstantin Stoev, an analyst at T Rowe Price, a top 10 shareholder of Nestlé with a 0.36 per cent stake across various funds, believes that board changes would be counterproductive given the steps Nestlé was taking.
“We support what Nestle’s board and senior management are doing, at the pace that they are keeping,” said Mr Stoev.
Third Point has been pushing Nestlé to sell its 23 per cent stake in cosmetics maker L’Oreal and to use the proceeds to buy back shares. Mr Bulcke said it was “something active on the board’s agenda” and that it would “take the right action at the right time”.
Mr Schneider added: “The less we lay out the precise factors and criteria, the better. This is one where you have to trust the governance structure to do its job professionally.”