CASE STUDY 1: UNILEVER AND PROFITABILITY
Authored by Professor C. Edward Arrington, Faculty of Business, The University of Wollongong
Unilever Corporation is widely recognized as among the very best companies in being responsible about things like social and environmental challenges throughout the world. Unilever has received many awards and other recognitions for its responsible business practices. Unilever is a very large company. Its total sales are bigger than the sales of Coca-Cola and McDonalds combined!!
In the words of its CEO Paul Polman, Unilever’s corporate strategy and business plan is embedded in core values that represent a very different view than we typically see in more conventional companies. CEO Polman states:
That same article continues and states:
Polman is acknowledged as one of the leaders of a small but growing band of progressive companies that believe humanity is heading for disaster unless politicians, companies and civil society join forces to respond to the challenges of social injustice, climate change, resource scarcity, ecosystem degradation and biodiversity loss.
[Polman continues and states]:
“We have increasing income disparity within the developed world. We have a political system that barely functions after the economic and financial crisis. So continuing the way we are going is simply not a solution and increasingly consumers are asking for a different way of doing business and building society for the long term together.” (Ibid.)
But many do still not share this view. One reason why it is not shared is a continuing focus on the priority of profits and return to shareholders in some forms of capitalism. These forms treat returns to shareholders as more important than anything else, and proponents of this view often state that investors will penalize companies for focusing on things other than short-term profits. As one commentator points out in reference to Unilever:
But Unilever seems to have reached a critical moment. Its recent annual results disappointed the markets and the share price recently dropped below what it had been a year earlier. Shareholders are cautious. “Unilever has built a strong niche position with investors who focus on environmental [matters],” says Martin Deboo of Jefferies, an investment bank. “But for mainstream investors it is a modest positive at most, and then only so long as it does not cost much.” So the big questions are: can the company achieve the targets set out in its sustainability plan? And if it can, will that help it in the long run (as the share-price rise of 2009-2013 suggests)? Or might it eventually cost Unilever dear in terms of market share and investors’ backing, as the recent downturn could imply? “In Search of the Good Business; Unilever,” The Economist, 9 August 2014. (www.economist.com).
This view shares much in common with the views of the Nobel Laureate Milton Friedman, who wrote in the 1970” that
“There is one and only one social responsibility of business–to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud” “The Social Responsibility of Business is to Increase its Profits,” The New York Times Magazine, September 13, 1970.
YOUR ASSIGNMENT IS TO WRITE A REFLECTIVE ESSAY IN WHICH YOU DO THE FOLLOWING:
- Explain Unilever’s business model and how it seeks to be responsible to society and to the environment. Include some discussion of how this responsibility may be important to your home country.
- Explain whether or not you think that Unilever’s model is or is not desirable for stockholders (those who own equity shares in Unilever. They are considered to be the owners of Unilever).
- Discuss a particular problem that Unilever faces. That problem follows from the fact that the group we call “stockholders” is diverse. Some investors are only interested in the short-term profits of a company. Other investors are interested in the long-term profits of a company. Carrying out social and environmental responsibilities as Unilever tries to do can affect short-term and long-term investors differently. Explain that difference. Do you think that Unilever should sacrifice its social and environmental commitments in order to be responsible to “short-term” investors, those who want to make a profit in the short-term and really don’t care about the long-term profitability of Unilever? Defend your position with arguments.
- Discuss whether or not you personally would invest in a company if you knew that its short-term (1 to 3 years) profit would be lower because of its social and environmental responsibilities?
- Do you think that society would be better off if more companies were as committed to social and environmental issues as is Unilever? Do you think that our governments should require companies to be as socially and environmentally responsible as Unilever? Discuss the long-term implications for all of us (including stockholders) if we allow companies to focus simply on returns to shareholders.
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