Throughout the COVID-19 pandemic, a time when low-wage workers struggled to get a paycheck as many businesses were forced to close or continued to work in essential frontline jobs, an elite group of business leaders was not at all struggling. In 2020, average CEO compensation rose 16%, rocketing S&P 500 CEO pay to nearly 300 times that of a median employee at their firm.
While exacerbated by the pandemic, as so many economic issues have been, this “K-shaped” recovery — where the rich get richer and those living paycheck to paycheck are still doing just that — is not unique to 2020 and 2021.
CEO pay is indicative of deeper problems in the shareholder primacy system that drives most public companies. Profits to shareholders is the main objective and, as a result, much of executives’ pay is tied to short-term stock gains rather than long-term investment in stakeholders — like employees or communities — or even innovation. Furthermore, the boards themselves typically include fellow C-Suite executives, leading to elite back-scratching as well as a never-ending upward spiral of executive compensation as companies compare their CEO salaries to others.
But what happened to the discussion of “stakeholder capitalism” that so many large company CEOs claimed to be committed to? The Business Roundtable of influential American CEOs in 2019 claimed the purpose of a company should be to “serve not only their shareholders, but also deliver value to their customers, invest in employees, deal fairly with suppliers and support the communities in which they operate.”
While this statement sounds noble, clearly it does not extend to individual CEO pay. An oft-told example is Business Roundtable signatory Marriott, which after the pandemic struck began furloughing its American workers, so threatening their access to health care, while at the same time pursuing a raise for its CEO. One would expect if such declarations were authentic, during a pandemic there would be more money going to employees and communities, not just CEO pockets.
One company that has been bucking this trend, and systematically focusing on all stakeholders, is Danone, the France-based multinational food giant that was led by Emmanuel Faber from 2014 to 2021. Unlike Marriott, when the pandemic struck, Danone introduced a number of programs to support employees, suppliers, and communities such as a €300 million credit facility for the companies’ 15,000 smallest suppliers. And for employees they committed to no layoffs during the second quarter of 2020, when confinement was most restrictive. At the same time, Faber himself asked for a 30% pay cut and the board of directors forwent its pay for the second half of 2020.
Under Faber’s leadership, Danone was the first listed French company to become an Enterprise à Mission, which embedded purpose into the company’s structure by aligning its operations with environmental, social, and governance (ESG) goals. Its U.S. subsidiary, Danone North America, became the world’s largest Public Benefit Corporation and Certified B Corporation.
Faber also took a personal stance against solely seeking wealth accumulation. He made headlines in 2019 when he waived his severance pay, his top hat retirement, and his non-compete clause. During his seven years as CEO, he also refused any pay raise, even while also taking the Board Chair role in 2017 for which the outgoing non-executive Chair, Riboud had received a €2 million annually. Ultimately, Faber chose to not increase his personal wealth by millions of dollars annually, while also pushing the company toward a deeper purpose.
Yet even with purpose baked into the company to give greater weight to stakeholder considerations, Faber was ousted in March 2021 by the company’s board of directors, which was facing pressure from activist shareholders to focus more strictly on fiduciary duty and less so on the social mission during the stock price hits that COVID-19 caused for Danone.
As part of my research of purpose-driven businesses, I once again spoke with Faber — the most recent time we talked about the Enterprise à Mission governance change — this time to hear his thoughts on why he feels he was pushed out, the state of CEO compensation and overall pay inequity, and what it means for Danone moving forward.
Christopher Marquis: How were you pushed out, essentially because of shareholder pressure, while as an Enterprise à Mission, Danone was supposed to focus on broader stakeholder governance?
Emmanuel Faber: Artisan Partners used the fact that the share price went down significantly for us more than others through COVID to create a thesis that I was just too focused on ESG and did not deliver as much on shareholder return. They basically had an opportunistic approach to the fact that our categories were hurt more than others.
Incidentally, Artisan were also part of the group that did not vote for Enterprise à Mission; while 99.4% voted for it, Artisan owned 0.2% at that point in time and was the only top 50 shareholder that voted against it.
Artisan and another smaller fund started to derail the board on issues that required unanimous consent, and people’s reputations were threatened in the inner circle of Paris elite business. They started to threaten the reputation of our lead independent director — bad mouthing and campaigns in the French press and leveraged a couple of begrudged board members, who disapproved of our multistakeholder adaptation plan to the crisis. They started derailing the board. Everybody knew our share price would come back, so this was a one-time, short-time opportunity, so the threat outside and inside the board was pushed to its climax in March. And, when confronted with the question of whether I should stay or whether it would be safer for the company for me to move along, 8 votes were needed for this, and 10 members voted I should go.
Frankly, I have to say that shareholder activists are not a bad thing. They keep companies on their toes, and in many ways, they are shareholders that do the job. You might not like it, but I think you need people who will challenge you. The question is how you react to this challenge; that’s an important question for boards. In our case, the consequence was clinical death of the board, pronounced 3 months after the crisis., The company announced in July that the board would entirely step down, with no member seeking reelection in the next 2 years, and with accelerated retirement for all of them beyond 2022. This is how bad it can turn when a board loses so much credibility.
Both Enterprise à Mission and Public Benefit Corporations need really strong directors, who are ready to fight for what the mission is. And the board of Danone was inherited from the past, with the first real opportunity to refresh it in 2021. And some did not want this to happen. On the one hand, there was this unequivocal consensus to become an Enterprise à Mission. But on the other hand I don’t think that the Enterprise à Mission system was deeply rooted yet in the board’s culture and its representatives. Shareholders had given an overwhelming yes at 99%. The idea was so obviously connected to the heritage of Danone founder Antoine Riboud that going against it looked like betraying this heritage. But it did not mean that all board members were profoundly aligned.
It’s more a lesson to me about the fact that the governance of companies also needs to evolve along with the unavoidable climate and social transition agenda of business. What boards are really designed for is shareholders. Board members will gradually need to embrace this transition, otherwise they will be left behind, with dangerous consequences for their company, as business is progressing on this agenda, and as shareholders will catch up fast with the set of ESG metrics soon to become mainstream and norms.
Marquis: So why did you choose to focus on purpose as a CEO in the first place?
Faber: First I deeply believe that purpose is a competitive advantage for any collective organization and business is one. Second, humankind is facing challenges that will not be solved unless business is part of the solution. I think business leaders need to really think about how can we best contribute to society and the fundamental purpose of our business, which cannot just be for the CEO or shareholders to accumulate wealth.
Marquis: Speaking about wealth, you seem to have a rather personal approach when it comes to pay. How do you see CEO pay as a lever for purpose?
Faber: Wealth concentration is a time bomb at the planetary level. In addition, I have seen on a number of occasions that the younger generation is having troubles with businesses that don’t have a purpose. So if large companies want to still be able to attract the right people in the future and have those people become the leaders of the company, we need to change the paradigm.
The question of, “What is my purpose as a leader in business?” is one that many CEOs are addressing right now. But few are ready to touch their own money, and personally, I believe that you cannot then be a leader that says, “I put my money where my mouth is” if you are not taking the money vs purpose question for yourself. The money I take because “I can have it, this is legal and this is a free market” is money that might well be much more useful in the hands of your employees, farmers, consumers, or even shareholders who, for many, are providing pensions to millions.
As you mention, one decision that I made in line with this as CEO was to simply give away my special pension plan, which was on the books for about $25 million. It released that money in the accounts of the company and we used it to allow each employee to become a shareholder. So each of the 100,000 employees at Danone in 2019 became — at no cost for the company, no cost to the shareholders — a shareholder in the company.
That created this ownership mindset in employees that paved the way for us to become an Enterprise à Mission company, with 99% support from the shareholders, and increased sustainable engagement in our teams.
Marquis: is it that you don’t like money?
Faber : I simply don’t need the kind of money that many CEOs are making right now.
Marquis: So, what do you do with the money you do earn?
Faber: I give it away, immediately, because I don’t think we still have time to accumulate wealth for a decade or two, and then think about what I am going to do useful for the world with this excess money I have? I feel a sense of urgency to put at work what I don’t need. I want my work and my money to be regenerative. Now. So gave nearly all my CEO pay. But this is me. Anyone can have their own opinion.
Also, one way to avoid the accumulation issue to grow with time was that my pay didn’t change from the day I became a CEO seven years ago to when I left in March. And I don’t want to take any credit for that because I was paid enough for it to just stay like that for a long time. But when it came to not taking a pay raise, it was never an easy discussion with the board and the compensation committee.
Marquis: Why wasn’t it easy? It seems this should be something boards would appreciate.
Faber: Boards don’t like extremes. Excessive pay will put pressure on them. But on the other side of the spectrum, even not talking about a pay decrease, simply no pay raise can be considered as extreme. There is now this very difficult situation, in many countries with the “say on pay” transparency that exists now, that has the consequence of actually inflating the average CEO pay. It has certainly avoided most of the embarrassing excesses, you know the guys whose pay was way out of whack. But now you have all these studies by these recruitment firms setting every year the average pay as a benchmark to judge CEOs pay against.
So if your CEO falls below the benchmark on pay, what do you do? Do you fire the CEO because he’s below average? Or do you say, “No, our CEO is great, so he couldn’t be below average,” and raise his salary? This immediately creates a continual inflationary system. And the result is that next year’s average will be higher than this year. It’s mathematical.
But as you say, it is hard for a board to go against a CEO who says, “thank you I have enough money”. they know that for the broader reputation of the company among stakeholders, it is a good idea to be low-key on CEO pay raises, but this is where governance is still lagging behind : unless companies and boards address the issue of equity in economics, and this includes money, starting with pay gap, they will fail in creating the conditions for the huge social transition which is required to engineer the climate transition to come in their companies. For instance, I think companies should benchmark their Gini coefficient, which measures income inequality vs the local Gini country coefficient. I used the GINI coefficient as a benchmark to set up the FutureSkills program that we designed when restructuring in the company through our COVID adaptation plan so as to reduce Danone’s local and global Gini coefficient, thereby contributing to fight the global social inequalities created by the pandemic.
Marquis: Despite being removed from Danone, do you see any benefits to the purpose-driven changes you made as CEO and especially the adoption of the Enterprise à Mission structure?
Faber: Yes, I can give you a very simple example. Last year, when the company became an Enterprise à Mission — and even though we paused recruiting in France because of COVID — Danone jumped 20 ranks in the top 50 list of favorite companies for French students. That’s never been seen before. So it’s just incredible how attractive Danone became because purpose is a competitive advantage. Then in the second half of the year, we attracted significant amounts of ESG-committed shareholders, who are longer-term shareholders. Even before that, in 2017, we were able to renegotiate the terms of a €2bn syndicated banking loan with an interest rate incentivized on the coverage of B Corp certification as a percentage of our total sales. So, you start seeing that finance looks at ethics, governance, and stakeholder management as a source of alpha (getting more business) or as lowering the beta (de-risking the business and increasing resilience).
Being an Enterprise à Mission allowed us to start discussions with stakeholders in various countries and with NGOs with a level of intimacy that we would have never achieved before. For instance, we started a big reorganization plan through COVID, which we call “local first,” that meant that we were going to cut the pyramid and flatten the pyramid of the organization, so we had to let go of 1,500-2,000 staff, which out of 100,000 is not a huge amount, but it was the biggest that Danone had ever done. And because we had Sharan Burrows, who is the General Secretary of the International Trade Union Confederation, as part of our Mission Committee, we had very, very direct discussions with the unions on how we would go about it. And at some stage during the crisis, I got public support, despite this reorganization in France, by four out of the five big unions. That helped speed up our plan by three to six months and helped save money and uncertainty for people because there was this assumption that we were acting in good faith. Our objectives as part of being an Enterprise à Mission is to support employee wellness and engagement, so the unions understood that we would do everything to protect the most vulnerable employees as part of that plan.
Last thing I would say, looking at the future, as an Enterprise à Mission, we also created a Mission Committee, which is independent from the board, and populated it with people who are very highly regarded. That allowed us to navigate the difficult COVID period with continuity regarding our mission.
Then, after I left, the Mission Committee pushed hard and publicly on the board of directors to maintain the key performance indicators and the objectives on the Mission that had been established for 2021 and beyond while I was CEO. So, they played the intended role of stabilization, despite the change in the chair and CEO…and now even, with the announcement that all board members will not seek renewal and would step down in an accelerated manner, it creates an even bigger role for the Mission Committee to guide the company’s mid to long term strategy, without which the company would be without a compass.
Interestingly in the U.S., when Public Benefit Corporation laws were created, the lawmakers were looking to ensure continuity in the strategy and the mission of the company through leadership changes as a key aspect of the law. This is exactly what happened at Danone when I was asked to leave the company.