Emmanuel Faber was ousted as the CEO of Danone in March 2021 due to pressure from two activist hedge funds. Faber had solidified Danone as a leader in CSR. In 2018, he made Danone into the world’s largest B Corporation’, which refers to companies that balance purpose and profit. As a CSR scholar, I was disappointed by the news of his departure, but not surprised. Here’s why.
In research that I conducted with Mark DesJardine (Penn State) and Rodolphe Durand (HEC Paris), we found that activist hedge funds are particularly likely to target companies that excel in CSR. After examining 506 activist hedge fund campaigns between 2000 and 2016, we found that companies whose CSR is two standard deviations above the mean are almost twice as likely to be targeted by an activist hedge fund than their less socially responsible peers. This effect is even stronger when socially responsible companies communicate vaguely and when they operate in industries where CSR is less common. This means CSR leaders are targeted by sticking out from the norm, like Danone.
To understand the reason for this we need to look at the business model of activist hedge funds. The primary goal of activist hedge funds is to identify and target companies they see as ‘wasteful’, in the sense that these companies do not maximize short-term shareholder returns. As one hedge fund manager put it in a background interview with us: “cutting the fat—that’s a pretty classic strategy.” Given their short-term focus, activist hedge funds see companies that act with a long-term vision and that prioritize different stakeholders as ‘wasteful’.
Once firms become a target, earlier research by my co-authors has shown that the CSR performance of these companies drops. So, activist hedge funds target leaders in CSR and subsequently make their CSR
performance drop. This is a problem not just for individual companies but for the mainstreaming of CSR. Leaders in CSR, such as Danone or Unilever, showcase that companies can make CSR a core part of their strategy. Showing this not only influences peer companies directly. Shareholders who care about CSR can point to CSR leaders to demand similar changes from less sustainable competitors. If activist hedge funds target leaders in CSR, this may ultimately slow down the mainstreaming of CSR.
Our research has important practical implications. For policy makers that care about the mainstreaming of CSR, our research implies that new regulations are needed that protect companies from hedge funds attacks. For example, policy makers could give companies the right to initiate a ’cooling-off’ period that would buy them time when they become targets of an activist hedge fund. For sustainability-oriented companies, our findings highlight the importance of clearly communicating CSR strategies to existing shareholders to obtain their backing. Finally, our research has implications for shareholders. Today, many individuals and organisations are unknowingly invested in activist hedge funds through their pension funds and endowments. So, if these investors truly care about CSR, then they may need to rethink their investments in activist hedge funds.