CEO Insider

Unilever is rethinking capitalism: why doing good is good for business

It's more than just charity

(Harry Borden/Contour/Getty)

Unilever CEO Paul Polman (Harry Borden/Contour/Getty)

Five years ago a tall Dutchman took the helm of Unilever, the massive Anglo-Dutch soap-and-food conglomerate. On Day 1, Paul Polman banished quarterly reports—“they encourage short-term thinking”—joking that the board couldn’t fire him for actions taken so early in his tenure. That was just the beginning of what has been a radical makeover of the world’s third-largest consumer goods company (Procter & Gamble and Nestlé are Nos. 1 and 2).

Under Polman’s plan, the product lines won’t change dramatically, but Unilever-produced foods will contain an increasing percentage of sustainably grown ingredients, product packaging will be reduced, greenhouse-gas emissions in manufacturing will be cut, business travel curtailed, and higher prices paid to farmers.

Skeptics tend to view such moves by Unilever and other major corporations as a sophisticated form of “greenwashing”—the common term for minor pro-environment measures taken to wash away publicity around the other less praiseworthy choices made by a business.

But Polman has some tough words for those who question his motives, and for business leaders who won’t get with the program he’s articulated. In an address to a conference of young leaders in Johannesburg in early October, he told them their generation had “every right to be angry” at businesses that focus solely on creating wealth for shareholders, urging the youths to “require corporations” to be accountable for their actions.

For large portions of this speech, he sounded like a pro-redistribution firebrand, maybe the head of an NGO, a friend of Bono’s, not the top guy in a balance-sheet-driven business that employs 170,000 and whose products reach two billion consumers a day.

But—and this is what’s fresh and sometimes puzzling here—in the same speech where he laments the 2.5 billion living on less than $2.50 per day, he also says, “I am a capitalist, proud of it. I have nothing to apologize for.” And, indeed, his board can’t grumble too much about the company’s many environmental and social projects. Polman may call for business leaders to oppose “mindless consumption,” but last year, Unilever’s revenues grew by 10.5% to $68 billion. On his watch, the giant’s formerly sluggish sales have increased by 30%, and its stock price has hit historic highs.

One of the conference’s organizers, David Jones, the British head of the global marketing firm Halvas, speaks of Polman as today’s quintessential CEO: “Ten, 15 years ago, you couldn’t get through a meeting without someone mentioning Steve Jobs—now it’s Paul Polman.”

Polman is merely the most conspicuous voice of a new movement, not one clamouring outside the corporate gates, but one making changes—sometimes quietly, sometimes with breast-beating—from within. These companies (there are a few large ones and many small to mid-size ones) seek to incorporate environmental and social motives into the way they do business. They believe that by changing how corporations are structured and operate, capitalism can be retooled into a force for good.

Even better, consumer support for these measures can drive bigger profits. After 10 years of research, former P&G chief marketing officer Jim Stengel developed a list of the world’s 50 fastest-growing brands. Many of those that performed best financially, he concluded, also served a higher purpose—and when aggregated they outperformed the S&P 500 by 400%. It’s an appealing proposition: save the world, and get rich trying.

“You’re seeing it all over—big companies that were traditionally just profit-driven are now adding to their aims, complementing the profit-oriented ones,” says Chris MacDonald, a Ryerson business professor who directs the school’s Jim Pattison Ethical Leadership and Research Program. “And making more money doing so.”

He cites an example that might surprise some: Walmart. The discount store chain offers some expected economic knock-on effects in Canada, such as employing 95,000 people, and paying nearly $17.7 billion to almost 5,000 Canadian suppliers. But in addition to the $185 million given to charity last year, the retailer is pioneering new, larger trucks to reduce the number of deliveries it makes. It’s also attempting to increase landfill waste diversion to 100% from 74%, and its making a credible push toward getting all of its energy from sustainable sources (already, about a quarter comes from such sources).

Phillip Haid, a Toronto marketer and expert on marrying social causes with capitalism, tries to pinpoint what is different about moves like Walmart’s. “This is not about employee bike-a-thons, runs against cancer and once-a-year holiday-season donations,” he says. “It’s about a sea change in the way business is done. Charity doesn’t scale, governments aren’t as active as they once were, a growing group of executives is realizing that they can be the change. Or part of it. That it makes good business sense to do so.”

Puzzlingly, some of these moves, by Unilever and others, challenge what we’ve traditionally seen as core values of capitalism—values, like, for instance, maximizing sales. Unilever’s Pureit, a relatively low-cost water purifier, reportedly makes hardly any profit, but Polman is bullish on its potential to help make unsafe drinking water a thing of the past.

But other campaigns that initially seem to flout the capitalist imperative ultimately prove to make good business sense. Outerwear maker Patagonia’s 2011 ad campaign, “Don’t Buy This Jacket,” and its decision, recently, to start selling used, but serviceable, clothes in selected outlets, seems predestined to undermine sales of the (higher-profit) new items. But both decisions have evidently played well with their environmentally conscious customer base: its revenues in the last financial year were a not-insignificant $540 million, a year-over-year jump of 30% in a category that is struggling.

Patagonia has, for years, given at least 1% of its sales to environmental causes, and it was one of a rapidly growing group of companies—nearly 90 in Canada, and about 750 in 27 other countries—that have registered as “benefit corporations,” or as they’re more commonly known, B Corps. Introduced in 2006, the designation is administered by a Philadelphia-headquartered non-profit, B Lab. Getting a B Corp. designation has become the corporate equivalent of a fair trade seal of approval. Companies submit themselves to an external audit on social and environmental issues, and alter the corporate founding documents to make non-monetary purposes central to the business’s mission.

During a recent meeting at the San Francisco offices of B Lab, director of business development Dermot Hikisch wore a T-shirt emblazoned with the first half of a Gandhi motto: “Be the Change.” Past jobs for Hikisch have included bringing the energy drink Red Bull to Canada and fighting forest fires, but he also has more blue-chip credentials—experience at Procter & Gamble, an M.Sc. from a top Swedish university in strategic leadership toward sustainability—one of an increasing number of business-meets-environmentalism degrees.

In the ’90s, B Lab founders Jay Coen Gilbert and Bart Houlahan started a street basketball footwear company, And1, that did some community-building work in the urban settings where the shoes sold well, while building revenues of $250 million. “It had buzz, and it was purchased [by American Sporting Goods], but after the purchase…the community work essentially didn’t continue,” says Hikisch. “They wanted to find a way to weave the mission into the corporate DNA, so that it wouldn’t be [as easy for a purchaser] to change a company’s approach.”

Accordingly, all B Corps. set out their social and environmental purposes high up in their corporate constitutions. B Lab puts a series of questions to companies that want to be certified—about, for instance, their packaging, employment practices, energy and water use, their sourcing and recycling programs—and give companies a score out of 200 (80 is a passing grade). “It’s not about perfection,” Hikisch says, “but about asking the right questions, and making progress toward some goals.” Every two years, the informal audit is repeated.

Those who buy shares in a B Corp. are forewarned that the company has a mixed set of priorities, and board members sign on knowing the company was formed to pursue something in addition to profit.

“It’s often woven right into the brand,” Haid says. “If nothing else, consumers will expect that work to continue and you may lose them if you alter that.”

Twenty U.S. states now have legislation recognizing benefit corporations, including the key jurisdiction of Delaware, which signed on in July in a move that B Corp. proponents billed as a tipping point. As a post on B Lab’s website noted, Delaware is home to “50% of all publicly-traded companies and 64% of the Fortune 500—it is the most important state for businesses that seek access to venture capital, private equity, and public capital markets. The path is now clear to scale business as a force for good.”

In Canada, B.C. has authorized benefit corporations, and there’s a law on the books in Nova Scotia, but it’s not yet in force.

There are certain truisms, if not truths, that everyone cites to explain the rise of the B Corp.: a generation of consumers that expect companies to care about what economists call “externalities,” or the social and environmental consequences of their work. Meanwhile, the speed and ubiquity of the Internet and social media has added additional scrutiny to corporate conduct.

“There is nowhere to hide these days—no faraway place where you can keep your dark secrets,” says Ryerson’s MacDonald.

When the Delaware legislation came into force on Aug. 1, a number of companies, both operating in Canada and the U.S. became the first to register, with much hoopla, as the first B Corps. in that corporate stronghold. Among them were Patagonia and the environmentally friendly soap company Method, along with a mid-size Canadian professional staffing agency, the Ian Martin Group. A privately held firm, its annual revenues have been as high as $140 million. “We were happy to be there, to join in what might have been a historic day,” says Tim Masson, the company’s chief steward.

A family business operating since 1957, the Ian Martin Group has worked for GM, Ontario Power Generation and Ericsson over the years. “My grandmother started it,” Tim Masson says. “We had the sense growing up that it is not your right to be in this position, that you have an obligation to use that…power, respectfully.” Hence the unorthodox job title he bears.

He pushed the company to become a B Corp. For his part, Masson found the metrics-based assessment useful—Ian Martin scored an 89. “Barely passable,” he says. “When there’s a metric, in business we seek to meet it. The questions gave me an agenda, areas to look at.” The questions made Masson think about a fundamental shift in the mode of employee compensation. “It’s a family firm, and we’ve traditionally done a lot of charitable giving, but the questions about whether we had a profit-sharing plan for employees made me think about that.”

Polman is similarly trying to redirect Unilever’s culture by setting benchmarks beyond the usual financial ones. Under him, Unilever has articulated 50—count them—social and environmental goals for itself, and has begun to report publicly on its progress toward them. Instead of the banned financial quarterlies, he reports publicly on its progress toward these goals—as does Walmart, albeit in a report that is far less detailed. Aims include reducing manufacturing waste and CO2 emissions, as well as removing trans-fats and reducing salt and calories in its processed foods.

In other areas, it exercises an outsized influence: as the purchaser of huge amounts of produce (by some accounts, 6% of the world’s tomatoes and 5% of its onions), Unilever can shift—and is shifting—prevailing agricultural practices toward sustainability, by forcing its suppliers to change their ways. Others goals are less tangible. Through Dove’s popular ads and workshops with girls and women, Polman aims to improve female self-esteem.

In a report not as plainspoken as the global company’s one, the Canadian subsidiary trumpets its move to powering its four plants with relatively clean energy, its reductions in landfill-directed waste and its commitment to use more free-range eggs in Hellmann’s mayonnaise “as a greater and more consistent supply becomes available.”

According to John LeBoutillier, Unilever Canada’s president, these reports “put teeth in a corporate value.”

He adds, “Paul created the plan with very defined targets globally, and those are cascaded to each operating company. Two years ago, he made the commitment to publicly report our progress, and he’s very honest about where we’ve done a good job—and not.” (Unilever Canada reduced its water consumption by 20%—perhaps good, but not so good as the 25% reduction by the chain as a whole.) “Paul’s approach is in keeping with Unilever’s long-time motto,” LeBoutillier says, “of doing well by doing good. It updates that.”

The rise of this latest round of do-betterers have brought with them a new attitude as well. Gone is the preachiness of so-called conscious or ethical businesses in former years—there’s a humour and sexiness at play here. “We didn’t want to start a pious brand,” says Adam Lowry, the co-founder of the enviro-friendly cleanser maker Method. “We wanted it to be fun—responsible—and to make money.”

One substantive thing they did with the brand to give it sex appeal was to pay a Steve Jobs level of attention to the design of the containers in which their soaps would sell. A whole community has emerged online to obsess over particular facets of the bottles, one of which was designed by Karim Rashid. Its promotional materials and packaging don’t hit you over the head with environmental qualities of the product, unlike those of the older, more earnest brand in this general space, Seventh Generation—another B Corp.

Other companies, like canvas shoe manufacturer Toms and online eyeglasses retailer Warby Parker, might make a donation to those less fortunate when you purchase their products, but the shoes and glasses on offer are stylish. “Consumers want the stuff to be associated with a good cause,” Haid says, “but they want it to be cool also. Not many people bought the red iPhone case helping to fight AIDS in Africa. Great idea, but sad to say, who wanted a red phone?”

Lowry and his soap company’s co-founder argue in their book, The Method Method, that a side-benefit of having a purpose-driven business is that it gets mentioned in the media and online—“earned media”—and draws customers, which old-school advertising, “paid media,” with the media fracturing, is having a hard time doing. A Facebook friend who “likes” Warby Parker is saying: Not only do I have style but I possess a conscience.

“There can be a curious, much deeper attachment to a brand with a mission,” Haid says, leading to more sales. But Polman in his Johannesburg speech consistently shifts attention from profits to higher concerns. “Business can’t be a bystander. We’ve reached the point where the cost of inaction is bigger than the cost of action.”