Nestlé’s KitKat Diplomacy: Neutrality vs. Shared Value

BRIAN KENNY: On September 13, in the year 1515, a bloody battle ensued on the outskirts of Milan, the implications of which are still with us today. The Battle of Marignano, where French troops came to the aid of Italy to dispel Swiss invaders, dragged on for a grueling 16 hours of hand-to-hand combat. Some 20,000 lives were lost, including 10,000 Swiss, leaving the old Swiss Confederacy with little choice but to abandon their aggressive colonization efforts. Surrounded on all sides by countries with greater military might, the Swiss concluded that their interests would be best served by staying out of wars. Swiss neutrality, which was ratified in the Treaty of Paris in 1815, survived two World Wars and countless regional conflicts. It seems that the security and economic stability that comes with neutrality is not only good for the people of Switzerland, it’s also pretty good for business. Today on Cold Call, we’ve invited Professor Geoff Jones to discuss the case entitled, “Nestlé, Shared Value and KitKat Diplomacy.” I’m your host Brian Kenny, and you’re listening to Cold Call on the HBR Podcast network. Geoff Jones is a historian who researches the evolution, impact, and responsibility of global business. He co-leads the School’s Creating Emerging Markets project, and he is a repeat customer on Cold Call. Geoff: did you know, I think you hold the record for being on this show the most times of all HBS faculty? This is your seventh appearance.

GEOFFREY JONES: I’ve got to get rid of this habit.

BRIAN KENNY: We love having you on. I’m a history buff, I mention this every time you’re on the show, and I love the way that you’re able to draw on history to make current stories come alive, they’re still so relevant today. So, I think we’ll start the way we always do, which is to ask you to tell us a little bit about the central issue in the case and what your cold call is to start this discussion in class?

GEOFFREY JONES: So, this case comes at the end of my long MBA elective course, which tracks cycles of globalization from the 19th century to the present day. So, its purpose is to explore how things are changing right now compared to the historical past. And one of the big changes we can see is a huge growth in societal expectations about how corporations should behave in response to political events, social events, all sorts of events. And nothing illustrates the scale of the change, I think so much that even Switzerland, the country and Nestlé are having to abandon a huge long tradition of neutrality in response to the Russian invasion of Ukraine. Something really has changed. How do I begin that? Well, I want to make sure the students demonstrate the scale of the change. So, I will typically say something like, the case says that for 100 years, Nestlé has made a business out of neutrality. Did this make Nestlé a responsible or an irresponsible company?

BRIAN KENNY: And the case really delves into all of that because you could argue it many different ways. That’s a great way to start off the class. Now, you write a lot about these kinds of cases. We’ve had you on before to talk about IBM and Nazi Germany and the role of the United Fruit Company in Latin America, really interesting examples of well-known firms that have faced moments of truth where they had to make a decision about something. And this is in that same vein, I’m wondering how you landed on this idea of writing this case and why it’s important to the kinds of things that you think about as a historian?

GEOFFREY JONES: I think it was the scale of the change for a company that’s navigated its way through 100 years of conflicts. The fact that it’s doing something now, I think from once you realize the history is quite shocking, so that intrigued me. It intrigued me that they took a decision to divest KitKat, but not to divest pet food. And of course, there’s also a strong HBS connection in the concept of shared value. So, the multiple things came into my head, which attracted me to write this.

BRIAN KENNY: Yeah. And the protagonist in the case, we should say, is also a graduate of the school.

GEOFFREY JONES: Indeed.

BRIAN KENNY: And we’ll talk more about that as we go along here. Everybody thinks of Nestlé, I think as a chocolate maker, but they make a lot of products. Can you talk a little bit about their portfolio?

GEOFFREY JONES: Nestlé is quite simply the largest food and beverage company in the world. So, indeed they have chocolate and KitKats, but they have huge baby foods business, bottled water business, coffee business, dairy products business, ice cream business, pet care business. They have an extraordinary number of brands all over the world.

BRIAN KENNY: And the founders of the firm are not Swiss in origin. But why did they decide to base the business in Switzerland?

GEOFFREY JONES: Indeed. Funnily enough, it’s the merger of two firms. One firm, the Anglo-Swiss Condensed Milk Company was founded by two American brothers, George and Charles Page, and George Page was the US consul in Switzerland. And the second firm, Nestlé, was founded by a German guy, and they were all attracted… Switzerland has a lot of cows, basically it has a big dairy industry, and that’s the way they start. Anglo-Swiss started with making condensed milk. Nestlé started by making milk-based baby food, and they rolled on from there. But dairy was absolutely at the core of their business.

BRIAN KENNY: So, access to cows is important, but were there more reasons why they thought Switzerland would be a good place to base their business out of? What are some of the benefits, I guess, that they found from being in this country that uses neutrality as kind of their position?

GEOFFREY JONES: There were two aspects of Switzerland. One, it was already when they started a very stable country. All the countries around them, Germany or France or something had periodic revolutions, changes of governments, the Swiss had evolved this sort of consensus, decentralized structure, so it was stable. And secondly it was literally neutral. And so, a Swiss-based company could claim the benefits of being neutral. And that’s something that, particularly as the 20th century rolled on, became more and more and more important because we’re going to see huge political disruptions across the century. And being neutral turned into a huge competitive advantage.

BRIAN KENNY: It even became sort of a saying. People would say, “I’m playing Switzerland on this one,” so people understand that meant you’re not taking a side, which as we know, is getting it harder and harder to do these days. So, we’ll come back to that at some point. I’m wondering, I teased in the beginning about how Switzerland was able to navigate two world wars and maintain their neutrality through that, so did Nestlé. So, how were they able to work their way through the landmines, metaphorically and otherwise, that existed around World War I and World War II?

GEOFFREY JONES: Well, for better or for worse, they didn’t mind what country’s government they’re operating in. So, they’re the only western firm to continue to operate in Japan during World War II. They continue to operate in Nazi Germany, they continue to operate in apartheid era, South Africa. They never criticize the government, they always cooperate with each government, and they say they are neutral and take no political view. And as I said, that was a huge asset. You could say it raises other questions, but it’s a huge asset for the business. And when Switzerland claimed to be neutral, they were very serious about it. They don’t join United Nations until 2002, which also means Nestlé could operate in all sorts of countries actually sanctioned by the United Nations, but Nestlé could say they’re a Swiss firm. So, whatever the United Nation says is it’s not their responsibility.

BRIAN KENNY: That seems super convenient, doesn’t it?

GEOFFREY JONES: When I’ve taught this class, some students very strongly articulate that what does really neutrality mean? Often neutrality means you actually taking one side more or less by not criticizing or doing anything else.

BRIAN KENNY: Yeah.

GEOFFREY JONES: So, it’s a very tricky complex…

BRIAN KENNY: And it did catch up with them at one point. The case talks about a boycott of Nestlé’s products. I actually remember this happening. Can you talk a little bit about what the circumstances were around the boycott?

GEOFFREY JONES: Yes. In 1974, an NGO War on Want published a book entitled, “The Baby Killer,” which denounced Nestlé’s strategy to sell infant formula in developing countries. Now, the thing about this was the formula was completely safe. No one ever said the formula was dangerous of any kind. The trouble was that Nestlé used extremely aggressive marketing techniques, including dressing sales girls in nurses uniform, giving away samples to persuade often very poor people to use the product rather than breastfeed. And to save money, many mothers often diluted the product because they couldn’t afford it in its full amount, and they used often contaminated water, because a key problem in many African countries was lack of clean water. And the upshot was a great many children died in this episode. So, it caused a boycott, started in Europe, spread to the United States, stopped and started, and it was enormously damaging to the company’s reputation. In fact, people still remember this whole episode. It’s a huge stain on its brand.

BRIAN KENNY: Okay. And it sort of sets the stage for a shift at Nestlé that the case goes into in great detail, a shift towards shared value. Can you talk a little bit about what that is and why Nestlé started to move in that direction?

GEOFFREY JONES: Beginning, I think in the early part of this present century, this starting of this skepticism about big business and about capitalism and about the whole concept of the whole purpose of a firm being to maximize shareholder value. So, there’s a kind of rethink going on in response to that. And there’s a rethink at Harvard Business School, and there’s a rethink in Nestlé, and they kind of converge around this concept of shared value. The rethink at Harvard Business School was led by Michael Porter, the famous strategy professor, and Mark Kramer, and they start thinking about how foundations can create social value, then they turn to how corporate philanthropy can create value. And finally, they became convinced that the whole concept of CSR needed to be integrated into core business strategy, and that’s what they called shared value. Over the same period, Porter and Kramer were working with Nestlé through their consultancy, their nonprofit consultancy, ESG, and these two streams came together. 2006, Nestlé produced a report, Creating Shared Value in Latin America. Mike Porter published a series of HBR articles culminating in one in 2011, explaining this concept.

BRIAN KENNY: And they came together at one point, they started to work together, which I found interesting because inevitably in the line of work that we’re in at Harvard Business School, we focus on real firms and we have to write about what those firms have gone through, good, bad, or indifferent. So, I thought this was an interesting situation where Nestlé became almost a poster child, for lack of a better word, for shared value.

GEOFFREY JONES: A kind of natural experiment in some ways. And I think both sides were equal in developing these ideas.

BRIAN KENNY: So, let’s talk a little bit about Mark Schneider, who becomes the protagonist in the case. He is the CEO of Nestlé, and he as a graduate of the school probably pays close attention to the ideas that are coming out of here. So again, it’s sort of a natural fit that he would enlist Professors Porter and Kramer in this kind of an engagement. So, talk a little bit about how that unfolded and what Schneider’s position is, I guess, on shared value as it relates to Nestlé.

GEOFFREY JONES: Schneider is an interesting guy. He is German, he’s not a Swiss. He’s the first CEO of Nestlé who hasn’t worked his way up the company. He was recruited from outside he managed a German healthcare company before. He’s part of this unfolding story where there’s more and more questioning of the legitimacy of big business and of capitalism, something Porter talks about explicitly when he justifies the shared value argument. And so, you can see Schneider changing his position, I think over time. So, after he becomes chief executive, he’s clearly aware that societal expectations have grown on how a company behaves towards society, how a company behaves towards the environment so, he embraces the shared value concept, he commits to sharply reducing greenhouse gases emissions, he sits on numerous industry association boards trying to push the cause of sustainability. So, it’s quite interesting, perhaps how he’s changed.

BRIAN KENNY: And obviously there’s probably some tension in that as well, because whether you believe in shareholder supremacy or not, shareholders want to make money. So, I’m wondering what the board’s reaction to Schneider’s shared value approach was.  Were they fans of it or did they question it, or how did that unfold?

GEOFFREY JONES: What we do know is that Nestlé was hit by an activist investor, which became the sixth largest shareholder in the company and launched a campaign against the company as being too slow moving and Schneider has to do a very large share buyback to try and calm that situation down. So, they certainly have investors who are not apparently on board with some things that shareholder value approach is going to lead them to do, so Schneider is in a tight situation really, that he clearly feels these expectations to move in that direction. But if you move too far, you get your investors after you and that’s a very tricky one.

BRIAN KENNY: And we’ve talked about this a lot on the show over the years, there are many cases that our faculty have written that sort of play out this tension that exists between an expectation that corporations are going to move in a certain direction towards shared value, but at the same time, earnings reports have to be there. And it’s a difficult dilemma for any leader to navigate, I think. So, the case starts to move towards a situation where Mark Schneider really does have to make a hard decision, and this has to do with Russia invading Ukraine. Can you talk a little bit about the context there and the decision that Mark was facing?

GEOFFREY JONES: Well, as we all know, Russia invaded Ukraine and there is this rise in societal expectations that companies have to do something about it, which is kind of a new story. And indeed, they do. And by march of the same year, 400 companies, big ones, Goldman Sachs, Disney, Dell had withdrawn entirely from Russia and Nestlé hadn’t. The company does not wish to do anything because it’ll be putting aside 100 years of history, but clearly times have changed. In February, miraculously, the Swiss’s government decides it will follow EU sanctions. 400 years of neutrality has suddenly been reversed by its own government. And then Nestlé run into an incredibly media savvy Zelenskyy who called it out by name. He keeps talking about Nestlé and so that sets off a giant Twitter storm. Here again, we have something new, social networks now. The voice of protests against companies, it’s just magnified thousands, thousands of times.

BRIAN KENNY: Yeah. There’s no place to hide.

GEOFFREY JONES: There’s literally no place to hide. And with someone like Zelenskyy talking about you to all the world, the company was clearly in a very difficult position. So, they take this decision to withdraw KitKat, but to keep most of the rest of their business in Russia.

BRIAN KENNY: And how do they justify that?

GEOFFREY JONES: I think their justification, which you could say is quite reasonable, is that baby foods and medicinal pet foods are essential products and by withdrawing them, you hurt people who are not responsible for the war at all, nor did they want to hurt the 7,000 workers who work for them in Russia. So again, they’re between a rock and a hard place really, with pressures to divest, being denounced by the president of Ukraine, and then they feel these other responsibilities in Russia.

BRIAN KENNY: We did see examples of other firms at this time, I think McDonald’s was one of them that closed down their operations, but in order to not hurt the workers in Russia continued to pay them. So, there were some examples, I think, of firms that said, “We don’t want to do harm to innocent people in Russia. No, but we also don’t want to justify the Russian government’s actions by staying there.” Do we know if Nestlé considered any of these kinds of things?

GEOFFREY JONES: We don’t know. We know there are plentiful examples of that, although again, the examples are not necessarily helpful for, so McDonald’s pulled out and now a Russian company took over the business and X number of other companies have pulled out, and you simply get a transfer of assets into Russian ownership. So, in class, some students said, what’s the point? The factory’s going to still be there, everything else is going to be still there, and you’ve just got Russians running it who may be much worse. They may be a friend of the friends of the regime, really. I must say other students argued that it was really important to take a stand, that it was really now a matter of responsibility of firms to take a stand. So, the classrooms saw very contested views about this, which I think reflects the fact that it’s a very-

BRIAN KENNY: It’s incredibly difficult.

GEOFFREY JONES: … it’s an incredibly difficult situation, right?

BRIAN KENNY: Yeah. You could argue that they would do more harm by pulling out and that they were being consistent with their shared value stance by keeping some operations there, like you said for medicinal products or things that people saw as essential. What has the public’s view been on Nestlé’s actions?

GEOFFREY JONES: It depends what part of the public you ask, I think. I know in Switzerland there’s a lot of skepticism. I think this case shows a long tradition of skepticism in Switzerland about the whole idea of neutrality and Nestlé’s role in it. So, there’s a lot of commentary, why KitKat of all things? And it does come over somewhat.

BRIAN KENNY: It’s a good product. But I mean, you know.

GEOFFREY JONES: It’s somewhat like you’ve got to do something about the situation, but you don’t want to do anything serious. And I do believe that the pet food and the baby food business are more profitable.

BRIAN KENNY: Yeah. So, does this case really put the concept of neutrality on the table as something that may not be able to be sustained in a world that is so highly politicized? What do you think?

GEOFFREY JONES: The concept of neutrality was running into trouble ever since the Cold War ended, because having to choose now what are you neutral between? Forms of extremist terrorism and law and an order, between this and that, it was simple in the old days of Communism versus the West, I think. Now, what are you neutral towards? And it doesn’t really make much sense, and I think what we’ve seen is this folding of neutrality as a concept.

BRIAN KENNY: Yeah. And we certainly look at other parts of the world where conflict could happen at any moment and firms like Nestlé are going to have to continue to make these sorts of decisions. It seems like any global firm is going to find themselves in a position to have to make these kinds of difficult choices down the road.

GEOFFREY JONES: Yes. And that’s suddenly one of the criticisms one could level against the shared value concept, which heavily emphasizes the prevalence of win-win solutions. You can be both profitable and do social good if you take the right decisions. But what we’ve seen in the last few years is a proliferation of crises where there are simply trade-offs and moral dilemmas rather than win-win situations. And Ukraine is a typical story. I mean, the Ukrainian workers of Nestlé want the company to withdraw from Russia. Russian workers need a job, Russian consumers need products. Social networks are pressuring them to do one thing rather than another. I can’t see any possibility of a win-win, you’re forced to make decisions to face these moral dilemmas and trade-offs. And I don’t think big business at the moment really has the tools to make those decisions. And particularly, they have to make decisions when many of them are involved in matters of geopolitics and which their leaders are not trained. And when you’ve got activist investors floating around, watching over any decision they do make, and you’ve got your profile under constant scrutiny by unknown people on social networks, it’s a very difficult operating environment at the moment, unfortunately.

BRIAN KENNY: Geoff, this has been a great conversation as usual. Let’s just bring it to a close by, if I could ask you if there’s one thing you want people to remember about the Nestlé case, what is it?

GEOFFREY JONES: I think as I began by saying that what we’ve seen in the recent years is historically very unusual, a huge rise in civil society demanding that corporations take a stand on issues. These trade-offs and moral dilemmas are extremely challenging and I think we’ve all got to work on developing tools, I think almost, to help managements steer through this terrible period.

BRIAN KENNY: Yeah. Geoff, thank you for joining me yet again on Cold Call.

GEOFFREY JONES: My pleasure.

BRIAN KENNY: We hope to have you back soon.

BRIAN KENNY: If you enjoy Cold Call, you might like our other podcasts, After Hours, Climate Rising, Deep Purpose, IdeaCast, Managing the Future of Work, Skydeck, and Women at Work. Find them on Apple, Spotify, or wherever you listen. And if you could take a minute to rate and review us, we’d be grateful. If you have any suggestions or just want to say hello, we want to hear from you. Email us at coldcall@hbs.edu. Thanks again for joining us. I’m your host, Brian Kenny, and you’ve been listening to Cold Call, an official podcast of Harvard Business School and part of the HBR podcast network.