Whenever the management team is not able to balance these two seemingly opposing demands, the firm ends up either with profits that are lower than what could be expected or it places a burden on society that is greater than needed. To address the latter, regulations have been enacted to impose punishment in the form of fines and other restrictions on business operations.
Corporate Governance
On the other side of the scale, the task of controlling how much community involvement and charitable contributions a company should make is left to the firm’s own control. The role of Corporate Governance is to exercise this control.
Corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance
To summarize, Corporate Governance is the set of rules that dictate how a company is to operate in order to meet its goal of increasing shareholder wealth.
For Ben and Jerry’s Homemade, Inc. in the late 1990’s, the case study leads us to believe that corporate governance was constructed in a manner that is not in line with what one would normally think of for a company that has profit maximization as its goal. We believe this was the case not because of a lack of care for profits, but rather because profit maximization was not the main emphasis. An example of this comes from the company’s own mission statement as presented in the case.
Product: To make, distribute, and sell the finest quality all-natural ice cream and related products in a wide variety of innovative flavors made from Vermont dairy products.
Economic: To operate the company on a sound financial basis of profitable growth, increasing value for our shareholders, and creating career opportunities and financial rewards for our employees.
Social: To operate the company in a way that actively recognizes the central role that business plays in the structure of society by initiating innovative ways to improve the quality of life of the broad community – local, national, and international.
Although the mission statement includes three different types of goals, namely Product, Economic and Social, one can’t help but notice an imbalance on the emphasis with which these goals seem to be placed on the statement. The use of terms such as “finest quality”, and “wide variety of innovative flavors” demonstrates the high level of expectation for the process of creating its products. On the Social side, by highlighting businesses as playing a “central role … in the structure of society …” and by hoping to “… improve the quality of life of the broad community – local, national, and international.” the ground is laid for decisions to be made in the future that puts the good of the community above all else.
In contrast, when looking at the economic portion of the mission statement we see lukewarm enthusiasm towards reaching profit goals. “To operate the company on a sound financial basis of profitable growth …” doesn’t elicit the same level of urgency to reach the economic goals of the firm. It seems to indicate that as long as the company is not losing money, any actual performance on the financial sphere is acceptable.
Asset Control
Further yet, the case shows us that the founders were careful to put mechanisms in place that allowed them to maintain close control of the company and its assets. These takeover defense mechanisms are used to discourage, make difficult or sometimes make it impossible for one firm to take over another. Different companies do this in a variety of ways ranging from deflating cash reserves and increasing debt (making the financial ratios unattractive for a possible suitor) to putting in place rules and regulations, such as “poison pill” clauses that make them unattractive to corporate raiders.
For management at Ben and Jerry’s, the latter approach was the one followed. The company’s charter contained amendments “… that gave the board greater power to perpetuate the mission of the firm.”. By staggering the board of directors into three different layers, and placing restrictions on the conditions under which a director could be removed, the firm aimed to maintain the status quo.
In addition to these amendments, there were three classes of equity and different voting rights for each class. This arrangement gave “The company’s principals – Ben Cohen, Jerry Greenfield, and Jeffrey Furman … 47 percent of the aggregate voting power, with only 17 percent of the aggregate common equity outstanding.” Further yet, “The class A preferred stock was held exclusively by the Ben and Jerry’s Foundation, a community-action group.” Unlike what you normally see in the market, this preferred class A stock also had voting power, that went as far as limiting “… the voting rights of common stockholders in certain transactions such as mergers and tender offers, even if the common stockholders favored such transactions.”
Finally the Vermont Legislature gave the power to decide if a merger was in the best interest of the company’s stakeholders (minus the shareholders) to the directors of any Vermont corporation.
The combination of these three factors creates an incredibly strong defense mechanism against possible takeovers. In essence, unless the board members are entirely supportive of the decision, a takeover becomes nearly impossible.
The existence of defense mechanisms has both positive and negative consequences for corporations. On the positive side, they allow a young company to grow without having to worry about losing its independence by means of a merger. They also provide management with the flexibility to implement measures that may be in the best interest of the firm in the long run, but may negatively impact the stock price on the short term. On the negative side, these mechanisms protect the management team even if they are not working in the best interests of the shareholders.
Corporate Valuation
When valuing a company, there are few different ways to determine what a business is worth. One of the most common and accepted measures is a technique called “Benchmarking.” Much like the word states, benchmarking is a way for any business to compare itself to other, similar enterprises in the same industry by using financial ratios as yard sticks for goals and success. How well a company uses its resources and assets can be measured in this manner, as well as the efficiency of its inventory and disposal of its equity. Here is how Ben & Jerry’s stacked up against some of its main competitors towards the end of the 1990’s using some common ratios.
This method certainly provides a range for where a company’s share price should be trading on the open market in comparison to other competitors, but it doesn’t give an exact figure that managers and investors often look for.
One way to get this more exact figure is by using a Dividend Growth Model. This analysis takes a series of dividend payments, projects the annual rate of growth for those dividends, and discounts them back to the present. While this method can prove effective in many instances, companies, such as Ben & Jerry’s that don’t give out any dividends, are unable to be calculated. Thus, the only value a shareholder received was the return on their investment in the share price of the stock. Unfortunately for most investors, they didn’t see much return until talks of a buyout began to take place in late 1999.
However, another more efficient approach is the Corporate Valuation model. “Fortunately, the corporate valuation model does not depend on dividends, and it can be applied to divisions and subunits as well as to the entire firm.” Using this method recognizes projected revenue streams for a company and translates it into a value for that business.
CASE CONCLUSION
In late 1999 “Ben & Jerry’s announces it has received indications of interest to acquire the Company.” At the time of the board meeting described in the case study, the offers on the table were a cash offer by Unilever for $36 a share of stock, a stock offer for $31 a share by Dreyer’s Grand, a cash offer for $32 a share by Meadowbrook Lane and an offer to acquire a minority interest in the company by Chartwell. Each offer had slightly different main proposals as shown in the following table:
Table 1
Recommendation
After analyzing all the data in the case and select readings from articles that came out at the time of the board meeting about these mergers, our recommendation is that Ben & Jerry’s should accept the offer from Unilever.
It may be easy to look strictly at the monetary figure when trying to decide which offer to take, but we believe there are other factors as important, if not more so, than the money implied. In the current case, all the offers came with costs in the form of changes to the management autonomy, changes to how the company would operate, and changes to how the company would get involved with social causes.
Keeping all these factors in mind, we think that selecting Unilever’s offer presents the best social and economic balance for Ben & Jerry’s, in addition to providing the greatest increase in the reach of its operations. Our recommendation is based upon a belief that all items in the various offers are negotiable with regards to corporate structure and social responsibilities. However, given the global position Unilever has, the potential increase in exposure to international markets and distribution capabilities afforded by a company like Unilever is something that cannot be replicated or matched by anyone else.
What Actually Happened
On April 12, 2000, Ben & Jerry’s signed a deal to be acquired into the frozen desserts division of Unilever. “Ben & Jerry's shareholders, frustrated by their socially conscious holding's (a portion of pre-tax profits go to charity) generally disappointing recent share price performance, no doubt love the deal…Unilever will pay $326 million or $43.60 per share in cash for Ben & Jerry's, about a 23% premium to last night's close.” The deal was attractive for both parties as Unilever didn’t have a brand in the premium ice cream line, and they presented an offer that simply could not be topped. “Of course, neither Ben nor Jerry (Greenfield) wanted to sell. But when your shares miss out on one of history's great bull market runs…shareholder pressure is bound to take its toll.”
That being said, while it seems as though Ben & Jerry’s simply “sold out” to the highest bidder, don’t cry for the charities just yet. It is important to note what type of concessions Unilever gave to Ben & Jerry’s in order for the company to maintain its corporate image. “As a condition of the deal, Unilever will continue giving away 7.5 percent of all pre-tax profits and will contribute an up-front $5 million to the foundation -- plus another $5 million for minority-owned business startups and yet another $5 million to employees.” All Ben & Jerry’s operations will remain in Vermont, and they also kept Ben & Jerry’s customer appreciation “Free Ice-Cream Day.”
In the end, however, when all was said and done, “in the world of public enterprise, the loudest voice is always the shareholders'.”
Where Are They Now
Ben & Jerry’s continues to make super premium brand ice cream and is still promoting the idea of a socially responsible company. They have a lot of company in the realm of earth conscious enterprises that also happen to be businesses. It seems as though every corporation on the planet, no matter the size, tries to either be Earth friendly or promotes “’greenwashing’—using philanthropy to convince customers the company is aligned with good causes, so the company will be seen as good, too, whether it is or not.” Ben & Jerry’s was one of the first and still does more than just talk, but it also walks the line.
Unilever saw its stock price fall from $17.08 on the day it closed the Ben & Jerry’s deal to $14.33 a little less than 3 weeks later. It is difficult to tell whether or not it was the premium paid for the high end ice cream brand or the deal with Slim Fast, which was seven times the size of the Ben & Jerry’s deal at $2.3 Billion and also closed the same day. Regardless, Unilever continues to be a global behemoth in the consumer goods industry with a current market capitalization of just over $60 Billion.
WORKS CITED
- Bruner. Case Studies in Finance: Managing for Corporate Value Creation
- Wolf - http://creativecapitalism.typepad.com/creative_capitalism/2008/08/profit-maximiza.html
- Encycogov at: http://www.encycogov.com/WhatIsGorpGov.asp
- www.secfilings.gov
- Brigham & Ehrhardt: Financial Management – Theory and Practice
- http://www.benjerry.com/our_company/research_library/timeline/index.cfm
- www.fool.com/news/foolplate/2000/foolplate000412.htm
- www.commondreams.org/views/041300-106.htm
Wolf - http://creativecapitalism.typepad.com/creative_capitalism/2008/08/profit-maximiza.html
Encycogov at: http://www.encycogov.com/WhatIsGorpGov.asp
Ben & Jerry’s Company timeline at: http://www.benjerry.com/our_company/research_library/timeline/index.cfm
www.fool.com/news/foolplate/2000/foolplate000412.htm
www.fool.com/news/foolplate/2000/foolplate000412.htm
www.commondreams.org/views/041300-106.htm
www.fool.com/news/foolplate/2000/foolplate000412.htm