The Fallacy of Unilever’s Conscious Uncoupling from Ben & Jerry’s

In July 2021, Ben & Jerry’s Homemade, Inc (BJH) announced its intention not to renew the license agreement of its Israeli franchisee. This played right into the hands of BDS activists, who had been lobbying BJH. Unilever immediately sought to distance itself from its subsidiary (or, in legal terms, to downplay proximity), saying in its media release, “We remain fully committed to our presence in Israel… [W]e have always recognised the right of the [Ben & Jerry’s] brand and its independent Board to take decisions about its social mission.”

As an exercise in damage limitation, there can be no doubt that this conscious uncoupling, to use a neologism, has failed. From Israel to Illinois, the consequences for Unilever are plain to see. More than this, it has raised serious and ongoing corporate governance issues for investors in Unilever.

Holding companies want to distance themselves from their subsidiaries, but only in certain respects. After all, investors in blue chips don’t bargain for risk and reward in equal measure; they bargain for effective governance from boards with the skills and judgement to minimise the former and maximise the latter. Effective governance requires continuing alertness to risk, not corporate communications after the event.

Income generated by a subsidiary? ‘We’ll take that,’ says the board of any holding company. Income is given free passage up the corporate structure. Liabilities? ‘You can keep those.’ Holding companies attempt to contain the associated liabilities at source, fencing them off behind the corporate veil of the subsidiary. If income works its way up the corporate structure like spawning salmon swimming upstream, the liabilities are ring-fenced like their unfortunate farmed cousins.

To try to head risk off before it crystallises, boards of holding companies usually place great reliance on the use of a series of subsidiaries, each acting as a corporate blocker to contain local risk. The objective of such a corporate structure is to militate against the requisite proximity for liability to attach to the parent company.

A stark example is when employees and former employees of Unilever Tea Kenya Limited, operator of a tea plantation in Kenya, brought mass tort proceedings in the English courts. They contended that they were the victims of inter-tribal violence carried out by machete-wielding criminals after the Presidential election in 2007.

They brought a claim against the ultimate holding company, Unilever PLC. They claimed that the risk of such violence was foreseeable by Unilever, that it owed a duty of care to protect them from the risks of such violence, and that it breached that duty.

A group of NGOs, concerned about issues relating to corporate accountability, wrote to Unilever in connection with the claim, writing, “we understand that Unilever has been arguing throughout that it has no real involvement with or legal responsibility for its foreign subsidiaries. For us, this is a surprising and disappointing position for Unilever to be adopting, not least because… Unilever’s enthusiasm for human rights standards does not sit easily with an apparent attempt in this case to hide behind its corporate structure in order to avoid legal responsibility to these victims of serious human rights abuses”.

Any expectation that Unilever might forego the corporate structure protecting it may have been a little naïve, but it did serve to highlight the management’s reliance on it. On the specific facts, the English courts refused jurisdiction on the basis the requisite degree of proximity had not been established.

In governance terms, if the role of a board in managing group risk is simply to put in place a corporate structure before risk is crystallised, then the board need consist only of lawyers. In the case of Unilever, there is also an intermediate holding company sandwiched between BJH and Unilever and, according to Unilever, the parent company is further distanced from BJH by the terms of the acquisition.

Unilever has also been at pains to emphasise that BJH was “acquired” by Unilever and that, by the terms of the deal, its independent Board takes decisions about its social mission. If this is to imply that BJH is not a home-grown company made in the Unilever mould, but an adopted child with a free spirit or troubled background, then this is an artificial distinction of the first order. BJH does not exist in a vacuum. It is no less a part of the Unilever group than any other subsidiary.

At the same time, Unilever has stated that it remains “fully committed” to Israel. This is desperate stuff. The mixed corporate messaging is undoubtedly a trial for corporate communications executives, usually striving for consistency. They might well fear that such corporate niceties might be interpreted along the lines of Oscar Wilde’s caution that “A good friend will always stab you in the front.”

Yet, despite the distancing strategy, the fallout for Unilever has been significant and widespread. And it is continuing. This suggests that if the strategy at parent level is once again to hide, it is misconceived.

Risk management is at the heart of effective corporate governance. What is expected of any board with regards group risk management? The answer first requires a definition of risk. Alexander Ineichen has defined risk as “exposure to change”. Not all change is uncertain or unknown of course. Risk can often be predicted with a high degree of confidence.

In this case, negative risk (not all risk is bad) was predictable before the BJH decision, assuming Unilever knew or had reason to believe it was coming. Taking a position at odds with the stated purposes of U.S. state anti-boycott legislation was always going to risk a negative impact for BJH and, ultimately, Unilever. Legal, financial and reputational damage have not been confined to BJH; they have followed the money upstream, without regard for separate legal personalities.

There are two possibilities. Either the Unilever board was in a position where it could have proactively managed the risk on an ex-ante basis, but was content to place dogmatic reliance on a playbook that worked in the past; or it was advised that it did not have the corporate authority to manage group risk.

Either case is surely of concern to shareholders. In the first, it was entirely foreseeable that distancing would not work as a strategy. In the second, if the board of Unilever lacked the power to override the decision on risk-management or other grounds, this only serves to highlight to shareholders the existence of a structural problem. Where a company operates through subsidiaries it is not enough for directors to simply distance the parent company from the subsidiary on the basis that they may not be directly responsible for the management of those subsidiaries. Shareholders demand effective governance: control from the top down, not from the bottom up.

As David Chivers QC, a leading company law barrister, has written, “Directors of holding companies must have regard to the same matters in relation to the exercise of control over a subsidiary (even a foreign incorporated subsidiary) as in relation to any other aspect of the holding company’s operations… Directors cannot avoid their responsibilities under the [Companies] Act by placing intermediate holding companies between themselves and the operational companies in a group.”

The board has had its say; shareholders will now want theirs.

If you wish to discuss this topic in more detail, please contact your relationship partner or Dan Harris at daniel.harris@chanceryadvisors.com.

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