The shareholders, which represent 3% of the company, expressed their views on the company's performance and their suggested path forward for Danone.
The letter notes the company’s positive environmental credentials, but vents its criticism on financial performance, and calls for changes including splitting the CEO and chairman roles.
“As you know, over the course of the last year, the Artisan Partners International Value and Global Value teams have made a significant investment in Danone, approximating $1.6bn—a position of more than 3.0% of the company, making us one of the three largest shareholders,” the letter begins.
“Both teams are long-term value investors managing collectively over $45bn in long-only equity. Our teams have a proud track record of supporting European businesses as constructive shareholders with a very long-term investment horizon. By way of example, we have held more than decade-long investments in companies such as Diageo, Unilever, Novartis and Sodexo.
“Our attraction to Danone is very simple: It has one of the best collections of assets in the global food industry. Its brands are well-loved by consumers, command powerful market positions and are in categories that have natural growth rates above industry averages. Danone is truly a star in the industry and deservedly a French icon.”
The letter, however, says the financial performance of Danone is not consistent with the quality of its assets.
“On almost every measure, Danone's performance has lagged,” it continues.
“Revenue has underperformed relevant category growth rates, margins are below its peer group, and return on equity and capital have stagnated or declined. As a result, the company is in a weakened position as reflected in job losses and the underperformance of its share price over the last one-, three-, five- and ten-year periods.”
The letter says Schnepp, as incoming lead independent director, will be supervising the path forward for Danone at what it calls a “critical juncture.”
“Your operating experience and track record of success are welcome and sorely needed. Our analysis indicates that Danone's problems span several years. Whilst the COVID-19 pandemic has had a negative impact on certain products in the shorter term, the larger and longer-term issues stem from underinvestment in innovation, product development and product support. In addition, the company's resource allocation is inefficient, and its capital allocation is value-destructive, creating a lack of resources for needed growth investments.
“These issues have created operating structures and a reliance on certain financial outcomes that are deeply ingrained and difficult to change for even the most experienced internal company managers. Deep product and operational experience from outside the company, rather than financial leadership, is required to execute a fundamental turnaround. We hope you share our view that change is urgently needed to avoid permanent damage to the group's iconic brands and market position.”
The investors say they applaud the steps the company has taken towards becoming a more environmentally sustainable, socially responsible business.
“But while its efforts in this regard are leading edge, it is to Danone's detriment that the same cannot be said about its corporate governance. The steps towards remedying this are simple and should be uncontroversial. The roles of Chairman and CEO must be separated. Further, proper corporate governance standards require truly independent directors, to the exclusion of former company management. It is standard and prudent that company leadership be able to execute a new plan without inertia from former executives.”
The letter continues: “We do not take lightly our decision to go public with our views. It is neither our preference nor a feature of our investment strategies. But Danone is beginning yet another re-organization involving a new structure that has not proven successful at other global food companies. Danone may also be considering merger, acquisition or disposal activity that could further complicate or weaken the business. Timing has become critical, and there is an opportunity now to make changes that can reinvigorate the company.
“Given the lack of consumer goods experience on the Board of Directors, we have taken the initiative to design a plan in consultation with Jan Bennink, an industry executive who has been in a leadership position at two of Danone's three businesses. Mr. Bennink has a history of growth and innovation, as evidenced by the value created while President of Danone's dairy division (now EDP) and while CEO of Numico, currently Danone's specialized nutrition business. Our plan is based on fundamental, long-term growth and value creation.
“It is not based on financial engineering, a break-up of the business or the sale of the company. It is designed to grow the value of the company for all stakeholders over the medium to long term. We are eager to share our plan with you and the rest of the Board of Directors at your earliest convenience, and prior to any fundamental decisions' being made about the future of Danone or its leadership. We look forward to continuing our engagement with you and the rest of the Board of Directors.”
In response, Danone told DairyReporter in a statement the board of directors and the management team are fully dedicated to value creation in a sustainable and responsible manner.
"We welcome all investments and value constructive views on how we deliver long term sustainable value," the statement said.
"Danone is continuously re-evaluating the way the Board of directors and the Executive Committee are fulfilling their duties, in the best interest of shareholders. In recent months, the company has already taken significant steps to reinforce its governance, starting with a comprehensive refreshment of the Board of directors announced on December 14, 2020, towards greater independence, diversity and expertise, and the creation of a Strategy and Transformation Committee which will monitor progress on the execution of Danone’s adaptation plan. The Danone leadership team has been refreshed, as announced on October 19, 2020 and further detailed during the Investor Update Event held on November 23, 2020. They look forward to sharing additional elements of the plan in subsequent investor updates, the next being on March 25, 2021.
"The Board of directors and the management team will continue to engage with shareholders and Danone will update on FY2020 performance on February 19, 2021.”