Danone’s Dilemma: The Heat of Markets Wilts Regenerative Innovation

By Franz van Duns — Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=71283048

The ousting of Danone’s Chair and CEO, Emmanuel Faber, illustrates a painful lesson — likely to be repeated — on the dangers of established corporations getting out in front and walking the talk on sustainability and regeneration. When actions are not clearly contributing to today’s bottom line, they and their proponents are in danger of being rolled back.

Of course, Danone is not the first company to experience headwinds. The history of Unilever under Paul Polman was frequently punctuated by demands of shareholders focused on shorter term gains as Polman pushed for longer term value generation. Similar concerns seem to have hit Faber who was taken to the mat by perceived under performance and successive cuts to profit forecasts. Activist shareholders didn’t seem to appreciate the gains, on balance, generated by Danone’s widely heralded sustainability and regeneration initiatives. The vanquishing of Milton Friedman’s dictum that the only responsibility of business is to increase profits seems to have been premature.

While Unilever has fared better than Danone as shown in the accompanying graphic, returns to other brands which have hedged their bets with sustainability initiatives and their support of “stakeholder capitalism” while not sticking their necks out too far, seem to have performed better. Who would know what value Danone or Unilever created without markets or commensurate sales to reward the effort? So far, this is business as usual: markets and shareholders rewarding or punishing corporate performance.

It is worth noting that although this dynamic is much more visible at the multinational level, similar forces are at work at all levels across virtually all firms and markets. This includes local startup ventures and everything in between in search of capital. It is a reason why alternate markets and approaches to capital are growing and why the assetization of natural and social capital are moving apace. Today’s markets and regulatory frameworks are simply not up to the job of valuing complex dynamics and outcomes that are increasingly sought by entrepreneurs and demanded societally.

Even if we could assign a value to everything, as many actors are trying to do, the patterns of development driven by existing market and regulatory structures still leave much to be desired. Societal values and the structures we create need to guide markets, not the other way around.

Of particular concern to everyone the emerging space that ranges from sustainable to regenerative to synergistic are two things: first, the availability and cost of capital and the valuation of efforts undertaken by firms, and second, the regulatory environment in which these firms exist.

Societal values and the structures we create need to guide markets, not the other way around.

In the first case, the capital equation for companies in their regenerative forays is dependent on their traditional profit-making, M&A, and arbitrage strategies. Even with emerging metrics that do fuller accounting such as the SEEA Ecosystem Accounting recently concluded by the UN, and amazing companies like GIST, there are few market mechanisms that reward initiatives that do the long term work to offset current “bads” and build additional public and private “goods” into in the here and now, short of “brand glow.”

This has led to many new initiatives in markets themselves, from self-funding, to cooperatives, to social impact bonds, to new currencies, to venture funders, to SPACs and more. However, these are not all created equal and many of the emerging forms apply existing market expectations in an environment in which a significant proportion of the value generated is not recognized. This area of emerging finance, particularly the concept of regenerative or sustainable finance deserves much greater attention.

The working assumption has been that “free” markets have been the best we could do, but this is a conceit of theory over practice.

This is partly the result of a second challenge: the enabling environment. Both corporate governance and government regulatory environments are important factors in promoting and valuing the kind of investment environment upon which innovators in the regenerative space must rely. So far the working assumption has been that “free” markets have been the best we could do, but this is a conceit of theory over practice. It has been known for a long time that “free” never turns out that way in regulation or consumer services.

Creative efforts to align good behavior and corporate performance are being done in the corporate governance realm with initiatives such as the B Corporation movement and tools like the Common Good Balance Sheet, but as Danone illustrates, the value of such undertakings can easily fall to short term market demands.

It is time for a changed government role, not to pick winners but to ensure vigorous new markets and access to finance that rewards innovation in these areas that are not yet rewarded by markets, but are sorely needed societally to soften the cascading effects already underway as a result of climate-related environmental degradation and resource overuse.

It is time for a changed government role, not to pick winners but to ensure vigorous new markets and access to finance that rewards innovation in these areas that are not yet rewarded by markets

Changing government behavior and the ways that it sets conditions for markets and corporate governance are long-term, gargantuan challenges. Nonetheless they are being chipped away by wide-ranging initiatives. While the national and international level initiatives appear to be ambitious but forever mired in conflict, smaller bodies such as municipalities are able to take action. One benefit of acting at this level is that environmental and social realities are in much closer proximity. The catch is that we cannot live with just local regeneration: cross border and international cooperation is still essential to manage commons issues.

Initiatives like Doughnut Economics Action Lab (DEAL) and numerous municipal level projects, spawned from Kate Raworth’s Doughnut Economics are helping to turn municipalities into active change laboratories. New ideas and initiatives like those advocated by Radical Markets authors Posner and Weyl have the potential to deliver the power of markets, greater efficiency in resource allocation, and greater equity into common usage. Such mechanisms must be explored, advanced, and sustained with both public and private investments.

It is tempting to leave these pillars of the business environment to the experts who know best, but it is time to recognize that if we are rooting for these new efforts to succeed that Danone’s problem is our problem too and the success of initiatives from small to large that seek to generate essential value to our communities must be societal priorities that play out in changed rules of the game.

Working with pioneering firms, policymakers, and civil society actors to cultivate social, environmental, and economic synergy toward a 3rd Horizon world.

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