To address the possible agency problem, corporate governance should address the internal controls necessary to prevent conflicts of interest. Those controls range from 1) the rights of shareholders, 2) the responsibilities of the board and management, 3) measuring management performance, 4) compensation of management, 5) financial audit process by an independent third party and 6) the obligations to serve the interest of other stakeholders.
Three Pillars of Corporate Governance
Different from the traditional financial management theory, companies must define corporate governance through three main perspectives; 1) financial, 2) legal and 3) social.
Financial
From this view point, companies should address the question of “what can we do to deliver competitive return for our shareholders?” Corporate governance should ensure that the financial measurement and performance are aligned with the corporate objective. In addition, it should address the internal controls needed to accurately produce the financial results.
Legal
From a legal perspective, companies should address the question of “what can we do to ensure compliance with the various regulations?” Corporate governance should address the need for controls and the enforcement of regulation compliance.
Social
From a social aspect, companies should address the question of “what can we do to be a good corporate citizen?” Much like people, companies are an integral part of the community in which they reside. Therefore, companies are obligated to do their part as good citizens.
The three pillars of corporate governance are consistent with the idea of corporate social responsibility. Companies have to be cognizant of all stakeholders and not just the shareholders. Corporate governance should be approached holistically. Simply put, it’s not all about profit. It is similar to owning a home; homeowners do not buy only for the investment reasons. While upgrades to the house such as landscaping and remodeling make sense from an appreciation point of view, we often do it because they look nice and make us feel good. Additionally, we invite neighbors for cookouts and dinner parties as good neighbors do. And finally, along with government compliance such as paying taxes, we follow rules set by the homeowner’s association.
Efficient Market Hypothesis and Corporate Governance
The efficient market hypothesis states that the financial markets are efficient and all prices reflect all relevant information. Therefore, you cannot consistently beat the market except through luck.
For the market to be efficient, the key element is the effective corporate governance and the reliability of the information that are made public. Also the theory assumes that all information is accurate, which means that companies are truthful in the information they disclose. For this reason, there must be an effective and enforced corporate governance by all public companies before an efficient market is achieved.
Case Synopsis
The case examines Ben & Jerry’s and the tough decisions it faces as it grows from a small Vermont ice cream maker to a large national brand. It begins by tracing the history of Ben & Jerry’s, which was started in 1978 by Ben Cohen and Jerry Greenfield. From the beginning, Ben & Jerry’s was established as a company committed not only to making premium ice cream, but also to supporting a broad range of social causes as well. Over the years, Ben & Jerry’s supported numerous causes with both its time and money, a summary of which is shown in Exhibit 1 so as to illustrate the scope of its activities.
Exhibit 1: Timeline and Description of Ben & Jerry’s social activism
Ben & Jerry’s went public in 1984 with an IPO exclusive to Vermont citizens, and later extended to the broader market. With a high-quality product and a unique market position, Ben & Jerry’s experienced rapid growth through much of the eighties and nineties. Recent financial performance, however, has lagged the market, and now many other companies are extending acquisition offers for Ben & Jerry’s. The case finishes as the Board is about to meet to consider the various offers on the table.
Financial Dilemma
Ben & Jerry’s lackluster financial performance over the past few years has led to numerous companies approaching its board with offers for acquisition. By and large, these offers would benefit the stockholders financially by significantly increasing the value of their stock. The concern of the board focuses on Ben & Jerry’s mission and sense of social responsibility. The stockholders have bought into a company that has a long-established commitment to socially responsible business, including above market wages for employees, environmentally and socially sound sourcing practices, environmentally sound manufacturing processes, and community giving and activism. Ben & Jerry’s has also always been committed to being economically viable, knowing that its social mission would prohibit it from maximizing shareholder financial returns. In this case, the Ben & Jerry’s Board of Directors is the decision maker. The board must weigh the numerous offers and determine which one will put the company on the surest financial footing for future success, benefit the stockholders the most financially, and allow the company to stay true to its stated mission of social, economic, and product responsibility.
Material Information
Exhibit 2 illustrates the three-part mission statement that helps direct Ben & Jerry’s operations.
Exhibit 2: Ben & Jerry’s three-part mission statement
Note that nowhere in the mission statement is the concept of “maximizing shareholder value”. The economic mission, which is put on no greater footing than the product or social mission, simply calls for profitable growth and increasing value.
At the time of the case, Ben & Jerry’s is entertaining four separate acquisition offers, each representing a unique path that the company could take. The four offers are listed below in Exhibit 3, complete with financial and non-financial considerations.
Exhibit 3: Summary of Bidder Proposals for Ben & Jerry’s
Additionally, it is stated in the case that the average price premium offered in successful acquisitions for food companies has been approximately 70%.
Other material information is found outside of the case. For example, in interviews with Ben & Jerry’s CFO in December of 1998, we find that they have recently completed a deal to allow Häagen-Dazs as its distributor, and that international expansion has been identified as an attractive growth strategy.
A Review of the Various Alternatives
As Exhibit 3 summarizes, each of the proposals provides a unique set of benefits and concessions that must be considered. Both Dreyer’s and Unilever have extensive knowledge in the ice cream and general food categories. Unilever’s offer, obviously, represents the most financially lucrative opportunity for the shareholders, at a 71% price premium. Further, the proposals offer various levels of management “shake-up”, from Dreyer’s offer to leave the management team intact, to Unilever’s partial replacement, to the private equity companies’ proposals for wholesale change. Similarly, each proposal varies in the degree to which they would allow Ben & Jerry’s to remain autonomous and, specifically, to continue their work in social projects. Here, Chartwell expresses the most “hands-off” approach, whereas the other three indicate some limitations would be required.
A fifth option would be to reject all offers and continue as an independent company. The corporate structure in place allows this to happen due to the voting power held by the founding members of the company through their Class B Common stock, which permitted ten votes per share.
Financial Analysis
Clearly the most significant financial impact will come from accepting the Unilever offer of $36 per share. Exhibit 4 summarizes the overall value impact to the company as a whole for each scenario.
Exhibit 4: Summary of Impact of offers on Company Value
7,561,989 shares
Recommendations
It is the role of the Board of Directors to represent the interests of the shareholders. We have tried to illustrate that this responsibility does not necessarily translate to “maximize shareholder return”. Shareholders invest in organizations for various reasons, and in the case of Ben & Jerry’s, it is reasonable to assume that a significant factor with many investors is their socially responsible manner of conducting business.
That being said, the board must also consider the long-term future of the company. It is with this perspective that we recommend that Ben & Jerry’s Board of Directors accept Unilever’s proposal, and we do so with the considerations as outlined below.
Clearly, Unilever’s offer is the most beneficial from a financial perspective. Regardless of a shareholder’s expectation of return, it can generally be agreed that they would prefer to maximize their return, holding all other considerations constant. Not only does Unilever’s offer accomplish this, but it is also the only offer that falls in line with current trends of successful acquisitions. Accepting any of the other offers would mean that the company was sold below current market pricing.
Additionally, Unilever proposes to do a partial shake-up of the Ben & Jerry’s management team. We believe the board would be acting in the interests of the shareholders to consent to this level of shake-up, since it is the current management team that has allowed the company to continue its substandard performance. A partial shake-up would allow them to improve the team while possibly maintaining some of the spirit of Ben & Jerry’s.
Unilever also proposed to restrict social commitments. Without further details, we interpret this condition to say that the social activities would not be eliminated, but would be curtailed. We see this as another example where growing pains of the company force the board to make compromises between the three components of the mission statement. Just as when Ben & Jerry’s was forced to raise its ice cream prices, or when it went away from its 5-to-1 salary ratio cap, a limitation of social activities is a fair compromise for long-term growth and success.
Finally, Unilever represents an attractive parent company in light of Ben & Jerry’s strategic position. For example, its vast array of branded food products probably means that it has a robust distribution network. This would allow Ben & Jerry’s to exit its relationship with Häagen-Dazs for distribution. Unilever also has an extensive worldwide presence, which would be useful for Ben & Jerry’s in its attempt to penetrate international markets.
References
Ben & Jerry’s Homemade Website, http://www.benjerry.com/
Ben & Jerry’s, http://en.wikipedia.org/wiki/Ben_%26_Jerry%27s
Corporate Governance, http://en.wikipedia.org/wiki/Corporate_Governance
“Corporate Governance Defined”, Corporate Governance
http://www.corpgov.net/library/definitions.html
Corporate Social Responsibility,
http://en.wikipedia.org/wiki/Corporate_social_responsibility
Eun, Cheol S. and Resnick, Bruce G., International Financial Management. Boston:
McGraw-Hill, 2007, pp. 78-99.
Graney, Brian. “TMF Interview with Ben & Jerry’s Homemade Inc. CFO Frances
Rathke”, The Motley Fool 17 Dec 1998,
http://www.fool.com/foolaudio/transcripts/stocktalk981217_benandjerrys.htm
Kennedy, Ellen. “Where are They Now: Ben & Jerry’s Post-Unilever”, Calvert Online
11 Jan 2007,http://www.calvert.com/news_newsarticle.html?image=cn.gif&
keepleftnav=news&article=10554
Meadows, Donella. “The Globalization of Ben and Jerry’s”, CommonDreams.org
13 Apr 2000, http://www.commondreams.org/views/041300-106.htm
Schill, Michael J. “Ben & Jerry’s Homemade”, Bruner: Case Studies in Finance: Managing for Corporate Value Creation. Fifth Edition, McGraw-Hill, 2007