Warren Buffett defended Brazilian private equity firm 3G, with whom he invested in Kraft Heinz, at his annual meeting over the weekend and again on CNBC Monday morning. You recall that 3G, as Geoff Colvin deftly demonstrated in this Fortune profile, is known for taking a ruthless approach to cost cutting, throttling growth in the process, and thus is forced to continuously devour new companies to keep the top line growing. When Kraft Heinz threatened to buy Unilever, which stands out for its long-term commitment to social and environmental goals, I referred to it as a “collision of two very different models of capitalism.” The bid was dropped.
Here’s Buffett’s defense:
“We don’t enjoy the process of getting more productive. It’s just not as much fun to be in a business that cuts jobs as one that adds jobs….But I think it’s pro-social in terms of improving productivity, and I think the people at 3G do a very good job of that.”
On CNBC Monday, he added:
“They (3G) have been very good about severance pay and all of that, but they have followed the standard capitalist formula, market system formula, of trying to do business with fewer people.”
Buffett is right, of course, that improving productivity is the foundation of capitalism and the key to growing wages and living standards. But the question is whether companies like Kraft Heinz should take more of the money they save in productivity gains and invest it into new, job-creating lines of businesses. That was once the standard approach of large companies, as Joseph Bower and Lynn Paine argued recently in an article in the Harvard Business Review entitled “The Error at the Heart of Corporate Leadership.” But these days, the short term view seems to prevail.
Do big corporations have a responsibility to fund future growth? I’ve indicated my sympathies lie with those who believe business should have purpose beyond profits. At a time when polls show people losing faith in the capitalist system, that seems more important now than ever. But others counter that business should be focused on providing profits to shareholders, and those shareholders can then use their gains to fund new businesses if they so choose.
This is no small matter, so I’m eager to hear the views of CEO Daily readers. Do you favor the 3G approach, the Unilever approach, or think there might be a happy medium?
More news below.
• Trump ‘Ignored Two Warnings About Flynn’
Sally Yates, the former head of the Department of Justice, testified that she warned the White House twice in January about Michael Flynn’s vulnerability to Russian blackmail. Flynn, who lied to Vice President Mike Pence over his calls with the Russian ambassador before Donald Trump’s inauguration, stayed in his position as National Security Advisor for another two weeks after that, before ultimately resigning. Yates also told the Senate Judiciary Committee she wasn’t responsible for the leaks that led to Flynn’s position being exposed in the press. President Trump continued to dismiss the issue of potential collusion between his campaign team and Russia as ‘fake news’ through his Twitter account.
• Goldman’s Shake-Up Hints at New Priorities
Goldman Sachs appointed two new co-heads of its investment banking division, in a shake-up of management that follows former president and COO Gary Cohn’s departure to be chief economic adviser to President Trump. M&A specialist Gregg Lemkau and head of global financing Marc Nachmann will join John Waldron at the head of the division, while current co-head Richard Gnodde will in future be responsible for Goldman’s international business, according to an internal memo quoted in various media. Christina Minnis has been promoted to a newly-created position of head of acquisition finance. The Wall Street Journal said the moves reflected an intention to beef up its advisory work for buyers of businesses, in contrast to its traditional strength in advising sellers.
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• All Aboard the Macron Bandwagon
Manuel Valls, France’s Prime Minister under Francois Hollande from 2014-2016, said that the French Socialist Party was “dead”, and that he’ll seek to join Emmanuel Macron’s En Marche movement in time for legislative elections on June 11 and 18. Macron, who has pledged to be “neither left nor right,” faces risks in welcoming Socialist defectors: too many over-familiar faces from a discredited administration will devalue his promise of a genuinely new departure, but he also needs credible, competent candidates to have any hope of forming the parliamentary majority that he’ll need to push through his reforms. Macron’s spokesman said Valls, a moderate with much in common with the new President, hadn’t yet been admitted to the movement.
• New Echo Aims to Defend Amazon’s Lead in Smart Home Hub Race
Amazon is set to unveil a new version of its smart home hub Echo with an expanded range of features including a touch screen and more powerful speakers, according to The Wall Street Journal. It’s unclear if the new version of Echo will integrate Chime, Amazon’s newly launched cloud-based software that lets users make voice or video calls. Competition for such devices is heating up: Apple hinted at a new smart home hub over the weekend, while Microsoft pushed out more details about the “Invoke” speaker that it intends to ship in the fall. At present, Amazon’s Echo accounts for some 70% of the market, while Google’s Home has 24%, according to research firm eMarketer.
Around the Water Cooler
• Facebook’s European Problems Mount
Facebook’s business in Europe is coming under increasing pressure, the product of a political culture that puts more stress on keeping social peace than in defending absolute freedom of speech. An Austrian court ruled Monday that it must delete posts deemed as hate speech across its platform, not just in Austria, an instruction that cuts squarely across the U.S. laws on which its business model is based. Facebook, which last week announced it would hire thousands more people to moderate content on its network, has the option of taking the ruling to Austria’a highest court and, if necessary, the EU Court of Justice.
• Coach Calls a Spade…Part of a Multibrand Strategy
Luxury purse maker Coach completed the acquisition of smaller rival Kate Spade for $2.4 billion, a first step in a strategy to become a multi-brand group. More acquisitions are in the pipeline after a recent restructuring in which it created a holding company structure, akin to that of bigger and more diverse luxury groups. Coach’s margins have recovered since it embraced scarcity again, after an ill-advised period of aggressive discounting. It intends to use the same tactics to revive its new brand. The price of $18.50 is over 25% higher than before media speculation over a deal started, but still well below the $24 level it touched in March. The stock market sensed a bargain, pushing Coach shares up 4.8%.
• Putting a Price on Car Autonomy
The average driver would be willing to pay nearly $5,000 more for a fully self-driving car, according to new research from Cornell University. The findings underline why volume automakers, which operate on wafer-thin margins, are throwing everything at developing the required technologies. Yet the research also said that the amount households were willing to pay varied wildly: Some said they would happily pay $10,000 extra, while many others said they wouldn’t pay anything at all. That should make for some interesting strategy meetings in Detroit’s sales and marketing departments.
• Quebec’s Patience With Bombardier Snaps
Quebec’s biggest pension fund embraced the pleasures of shareholder activism, withdrawing its support for Bombardier’s executive chairman Pierre Beaudoin. Beaudoin, whose family has controlled the Canadian plane- and train-maker for decades, recently had to abandon plans for hefty pay raises for Bombardier’s six top executives after a public outcry. The struggling group has received over $1 billion in public subsidies in recent years to help it survive independently, and is also in the middle of cutting its global workforce by over 10%. Its share price is still over 75% below its 2008 high.
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Summaries by Geoffrey Smith; email@example.com @geoffreytsmith