Daniel O’Keefe and David Samra weren’t itching for a fight.
The Artisan Partners portfolio managers — who run the firm’s global value and international value teams, respectively — generally invest in undervalued companies based on their trust in the CEO and management team. They position themselves as traditional long-only investors — not hedge fund activists that push for big changes to drive up company stock prices.
Every once in a while, though, O’Keefe and Samra decide they need to reach out directly to the board of directors of a portfolio company and lobby for changes, rather than just waiting the situation out or selling their positions. With Danone, a French food company, the Artisan portfolio managers had investigated the historical behavior of the company’s management and found things that needed to be fixed, including a corporate governance structure that gave power to one person who was both chairman and CEO.
Artisan wasn’t the only traditional investor calling for change. Causeway Capital Management, a long term value-oriented investment manager, had been in private discussions with management since the middle of last year, according to sources familiar with Causeway. At the time, some of Danone’s products, particularly bottled water, had been hard hit by Covid-19 and the company was losing a number of executives, including the CFO.
On February 11, O’Keefe and Samra published a letter outlining their views, which they addressed to Danone’s incoming lead independent director, Gilles Schnepp.
The letter called for the split of the chairman and CEO role — both of which were held by Emmanuel Faber — and asked that the chairman and directors be kept independent by excluding the company’s old leadership.
In the letter, the Artisan portfolio managers pinned Danone’s problems on the company’s failure to invest in innovation, product development, and product support, among other things. While O’Keefe and Samra acknowledged that Faber had made Danone into a more environmentally-sustainable and socially responsible company — the E and the S in ESG — they argued that he had neglected the G of corporate governance.
“We do not take lightly our decision to go public with our views. It is neither our preference nor a feature of our investment strategies,” they wrote. “But Danone is beginning yet another re-organization involving a new structure that has not proven successful at other global food companies... Timing has become critical, and there is an opportunity now to make changes that can reinvigorate the company.”
In mid-February, O’Keefe and Samra presented their strategy to fix Danone to the company’s lead independent directors in the first of three meetings, according to sources close to the situation. A few days later, the portfolio managers made the same pitch at a gathering of investors organized by Franco-German bank ODDO BHF.
By that time, the Artisan portfolio managers had been quietly going back and forth with the board for months. Samra reportedly told the board and reporters who called him before the ODDO BHF meeting that he and his team were not activists, asserting that they were not asking that for the company be split up or asking for any financial engineering — both typical activist maneuvers. In their discussions with the board, the Artisan portfolio managers never even mentioned the share price, according to sources.
O’Keefe and Samra — like Causeway and a number of other value-oriented managers — had bought the company’s stock because they believe Danone has valuable consumer brands in areas of the market that are growing. But, as the Artisan portfolio managers noted in their February 11 letter, the company hasn’t been able to deliver good financial results. Danone has been struggling with slowing growth, a flat to declining market share, and falling profitability, even as some competitors thrived.
So the Artisan portfolio managers got involved with the board.
But Danone is based in France, a country where activists — or any investors that look or smell like activists — are rare. France has a unique system of capitalism, legal structures, and process around public companies. And activists are not welcome.
Pepsi famously tried and failed to buy Danone 15 years ago, and hedge fund activist Nelson Peltz bought a small stake in the company in 2012. But Peltz’s efforts went nowhere.
People familiar with the situation said Danone’s high profile in the French stock market may have made it tempting for critics to brand the Artisan portfolio managers as activists, even though they don’t usually go after companies that need to be fixed. One source familiar with the situation said that if there’s a proof point that the Artisan managers are not activists, it’s that they were not shown the door. And they haven’t always raised their voices. They’ve owned Sodexo, a French catering company hard hit by Covid-19, for 14 years and “they’ve never uttered a peep publicly,” the source said.
O’Keefe and Samra had plenty of findings and data for their private presentations to the Danone board in February, drawing on information from Danone insiders and former employees, according to a source familiar with the meetings. The Artisan global value and international value funds — which manage $45 billion total — had began began buying shares in the company in March 2020 and now own more than 3 percent of Danone, a stake worth about $1.6 billion.
Last October, Samra got in touch with Jan Bennink, who had run Danone’s dairy and specialized nutrition groups, which make up two of the company’s three divisions. The Artisan portfolio managers tapped Bennink to help them draft the plan for a turnaround, according to the February 11 letter.
After Danone announced its full-year results on February 19 — which the Artisan teams described as “poor” — rumors started swirling that the Danone board was planning to hold a meeting on March 1 to discuss the company’s governance and the CEO.
O’Keefe and Samra wrote to the full board this time, arguing that Danone’s problems were hardly short-term. In fact, they said the problems pre-dated Covid, and that Faber’s restructuring plans wouldn’t work. They called again for roles of Chairman and CEO to be split up and for Faber to step down.
“Management in its own words is embarking on a reinvention and a reshaping of the company,” the wrote. “Overhead put in place by the current management team is to be reduced, and brands purchased by the current management team are to be sold. Jobs created and employees hired by the current management team are to be terminated. These are all hallmarks of management failure.”
At the March 1 meeting, the board announced that it had decided to split the chairman and CEO roles. But Faber would remain as chairman, meaning he would be the boss of whoever the company appointed as its new CEO.
Undeterred, Samra and O’Keefe reached out again, publishing a third letter to the Danone board of directors on March 3.
The board, they argued, lacked industry experience and was riddled with conflicts. One of two vice chairs was the former CFO of the company, and any new CEO who came in would essentially be implementing the policy of the former CEO. They asked the board to appoint “a truly independent chairman” and add at least one director with relevant consumer products experience.
On March 15, the board finally ousted Faber. According to sources, 10 out of 15 of the members of a board that Faber built voted against him.
Samra wouldn’t comment for this story, beyond saying that the end result of his efforts was worth it.
“It’s a victory for the French system of capitalism and the Danone board of directors,” he said.