7 takeaways from the Unilever U-Turn

During these last months, we have followed up the battle for changing the governance and structure of Unilever. This case offers 7 takeaways for IR departments that we think are worth sharing.

The actions carried out by the Unilever board, some UK institutional investors, government lobbyists and the economic and conventional press have seasoned one of the stories that have captured great interest among the specialists in the corporate governance sector during this year.

Unilever is one of the world’s leading consumer goods companies. It was formed by the merge of operations of Dutch Margarine Unie and British soapmaker Lever Brothers in 1930. Since then, the Anglo-Dutch consumer goods group has operated as a dual-listed company. In this case, it consists of Unilever PLC, based and listed in London, and Unilever N.V., based in Rotterdam and listed in Amsterdam. The two companies operate as a single business, with a common board of directors, adopt the same accounting principles and pay dividends to their respective shareholders on an equalized basis. N.V. and PLC.

On 15 March 2018, the board of Unilever announced the intention to simplify the Unilever Group’s dual-parent structure under a new single holding company that should be based in Rotterdam. This process was termed as “Simplification”. The Extraordinary General Meetings to approve this change were planned for the 25 and 26 October 2018.

In Alembeeks Group, as proxy advisors, we analyzed the proposal and advised our clients to vote FOR as we agreed that the proposed structure improved some of the limiting and unequal conditions that are currently applicable to existing Unilever shareholders. We assessed also that the new simpler structure also unlocks certain constraints that might help the company attain a fair value and a greater flexibility to grow in the future.

Nevertheless, after a rebellion lead by main UK based asset managers – Columbia Threadneedle, Aviva Investors, M&G, L&G, and Schroders – the Unilever board decided to U-turn and withdrew the proposal.

In our opinion, Unilever major U-turn offers at least 7 takeaways for IR departments that can be applicable to other companies when thinking about voting major changes:

  1. A “good proposal” may have also detractors. There are several reasons for having opposition in a proposal that technically and according to all the corporate governance handbooks is a clear vote “FOR”. Shareholders base is not uniform, and shareholders' interests are not always aligned. Shareholders may have conflicts of interest in their different investment horizon approaches towards the company. Some proposals may look for a better long-term competitiveness but might imply a short-term setback that some shareholders are not willing to bear. In this Unilever case, the fact of falling from the FTSE 100 had been claimed as a major argument to vote against the proposal among detractors. The fact that the company was gaining flexibility to adapt to the market and improving its governance structure was not considered among those short-term oriented shareholders. Nevertheless, all shareholders have the right to vote according to their own views, which means that all may be right at the same time, voting for different options.
  2. A proposal should have no weak points at all. The weakest side of a proposal will be the most attacked and it will give a strong argument against it. In this Unilever case, it was the pending resolution of the Netherland’s government about the abolition of the dividend tax. It created fear not only among UK shareholders, but it also created rebuke among some Netherland stakeholders.
  3. The content of a proposal must be perfect, but also must be the timing. In this case, the proposal was planned during a period in which the Brexit tensions were in their zenith. It made that this issue fell in the scope of sensationalism. The UK press has found a gold mine with it, and it has been largely commented not only in the economic but also in the yellow press.
  4. Gaining the message battle. Most of the media was labeling the Unilever proposal as a matter of “Going Dutch”, “Leaving UK”, “Moving HQ from London to Rotterdam”, … Efforts must be made to explain the proposal clearly. Sometimes it is difficult to defend some complex arguments against simplistic ones. But this shouldn’t be an excuse. It also may happen that old stories like remuneration or unfinished problems came up and are mixed with the new proposal. In this sense, to face major changes the least unfinished problems, the better.
  5. Earlier shareholder engagement is key to endeavor major changes. By nature, shareholders are not prone to like changes. Engaging shareholders beforehand entails the same efforts than doing it after formally announcing the proposal. In the Unilever case, the board and the management should have paid more attention to this point, as this late withdrawal leave them in a weak stance for the next general meeting.
  6. Pay attention to the stakeholders. Stakeholders may have an indirect but important role in voting. This may come in a wide range of ways depending on the subject. In the case of Unilever, UK fund managers had a special strain from their clients and UK citizens to reveal against the proposal, especially as heated by the UK press. In some sense, this is a good thing, as it probably aligns fund managers vote with the will of their clients. Nevertheless, this ensures a non-robust voting policy.
  7. Beware of voting hurdles. In this case, Unilever needed a 75% majority of the UK votes but also a simple majority among all UK shareholder by number. On the one hand, institutional shareholders are more sensitive to fulfill their fiduciary responsibilities as regulators are pushing in this direction. On the other hand, retail investors are more conscious of their voting rights and their shareholder status than in preceding decades. The era of delegating the vote to the management is over.

In Alembeeks Group, as corporate governance consultants and proxy advisors, we follow up the Annual General Meetings of the listed companies in which our institutional clients invest in and provide them reports to vote in a well-informed manner. We also help listed companies improve their disclosure and corporate governance transparency.