CSR and Partnerships

partnership agreement

partnership agreement (Photo credit: o5com)

One of the more resent developments within the field of CSR has been the emergence of strategic partnerships. Ever since the start of business there have been different forms of partnerships from small business franchises to large-scale outsourcing. In the last decade there have been an emergence of other forms of partnerships such as business and governmental institutions and in the last few years between Business and NGOs. While the first form of partnership is relative unproblematic as it is assumed that both parties have similar end goals in their efforts to maximize return on investment it is another case for the two last forms of partnership.

Business and Governmental partnerships have been seen in areas were both parties could see synergies. This could be in cases were companies wanted to explore markets in developing countries but needed support in-order to get a foothold in the market. In both Sweden and Denmark business partnerships are promoted by governmental development agencies like SIDA Business-4-Devlopment and DANIDA Business-2-Business programs (SIDA, 2012, DANIDA, 2012).

Denmark is becoming a safe harbour for finance

Who would have thought that Denmark would become a safe harbour for scared investors? This country that has one of the highest tax in the world is now viewed as a safe place to store money. With an inflation rate of just 2,7%, which is significantly under the EU and US average of around 3,3% it would seem that the financial situation here is much better. So why is Denmark such a good place to keep your money safe?

In Denmark the tax on business is 25% and on average personal tax is around 48% ranging from 36% to around 60%. For decades the Danish tax, have been under attack from just about everyone because it was thought that it was a burden on growth, innovation and entrepreneurship. But while these things in theory might be true it would seem that hard-core capitalists now think that Denmark is one of the best places to put money.

In a resent auction of Danish state bonds an all time record of 1,36% for a one-year convertible loan in real estate while a 5-year loan was only slightly higher. (For a 1-year loan you need to renegotiate every year while for a 5-year loan you get a lightly higher rate but only need to negotiate every 5 years). For homeowners this is truly good news as the economy is tight and the job situation is somewhat shaky the extra money will be handy. All this is something we can thank investors in Danish real-estate bonds for who apparently regard 1,36% as a good investment even though inflation will properly eat up any profits that they might make in the process.

So why is Danish bonds suddenly becoming so attractive? It would seem that big-government is on the offensive (big as in influence not necessary in size). That all the things we learned in business school about large scale privatisation, low tax and minimum government intervention in markets, were not as true as they seemed at the time.

Now we see that the Danish government that have “robed” the taxpayers and businesses for decades are the only ones that have the capability to save the economy. Several times big-government have been the only buffer between large-scale bankruptcy in the financial sector and massive runs on banks. Only the Danish government have forced bankers to sit together made them solve the problems that they have caused the problems in the first place. With a resent Keynesian undertaking the big-government have proclaimed massive spending on education, infrastructure and social services in order to boost the economy and mind you doing so within a reasonable balanced budget. Something that the governments in the UK and US would only dream of.

Now it seems that only big-government is able to ride of the storm on the financial markets by providing a safe harbour for investors who have capsized in the troubled waters of European economy. I would not make the claim that our financial theory is wrong and should be rewritten but it seems that new stories of how to achieve sustainable economics is being written as we speak.

Hunger in the US and Europe – the fuel for social unrest

Illustration of starvation in northern Sweden

Starvation in Sweden

The contradiction between between the have and the have-nots is becoming increasingly salient worldwide. The UN commitment to end poverty and the millennium goals have been in place for the last eleven years and with only four years to go it does not seem to be going in the right direction.

While we normally associate poverty and hunger with countries outside the western world we have a growing number of people who experience starvation. At the same time we se a similar increase in people who are obese and suffer from malnutrition.

The worldwide nearly doubled between 1980 and 2008. According to country estimates for 2008, over 50% of both men and women in the WHO European Region were overweight, and roughly 23% of women and 20% of men were obese.

The Estimated number of overweight infants and children in the WHO European Region rose steadily from 1990 to 2008. Over 60% of children who are overweight before puberty will be overweight in early adulthood.

While the numbers for starving people in Europe is hard come by there are a growing concern that real starvation will occur on a growing scale especially in relation to the weak economies in the euro and the countries that stand outside the EU.

If one looks at the capacity of a country to cope with these kind of stains one can just look at the US were. There has been a similar trend over the past 20 years, have been a dramatic increase in obesity. In 2010, not a single state had a prevalence of obesity less than 20%. Thirty-six states had a prevalence of 25% or more; 12 of these states (Alabama, Arkansas, Kentucky, Louisiana, Michigan, Mississippi, Missouri, Oklahoma, South Carolina, Tennessee, Texas, and West Virginia) had a prevalence of 30% or more.

In contrast to these numbers there were in 2010, 85.5 percent of U.S. households that were food secure throughout the entire year meaning that they had a steady supply of food. The remaining 14.5 percent were food insecure at least some time during that year. This meant that around 45 million US citizens did not have a steady inflow of food over the year.

In 2010, 5.4 percent of households experienced food insecurity in the more severe range, described as very low food security.

There is no doubt that there are real issues to be handled but it does not seem like it is a matter of supply as we have seen elsewhere in the world. Rather it is a problem of distribution and nutrition, which from a societal point of view is much worse as it threatens the ability of a community to keep its structural integrity. As we see uprisings in London, Madrid, Athens and the central issue is the uneven distribution of resources and while the central theme seems to be around monetary funds it would seem that the availability of food might be the next big thing to fight over.

Socialist government will tax multinationals – Nestle is next

Creating Shared Value Forum 2010

Image by Nestlé via Flickr

The new socialist minister of Tax Thor Möger Pedersen will upgrade the Danish treasury organisation with an extra 160 employees in order to investigate international companies on their tax books.

“It is high time to intervene. The Government will increase the transparency of companies’ payment of corporation tax. All the promise and all must contribute to the Danish economy back on its feet – even the multinationals’ he says

In practice this will mean that multinationals tax information will be posted on the treasuries website and their books will looked into. The claim is that these companies even during the good times up to 2008 (or 2007) did not pay their fair share and now that things are bad they claim even higher tax reductions.

One of the companies that are being named is Nestle a company that have been under scrutiny in several countries around the world for their ability to pay very low taxes. They even have tax manager positions that make around 100’000 Euro with the purpose of reducing the tax paid by the company.

With the prospect of being named and shamed the company is threatening to move their Nordic headquarter to Sweden. Which is strange is this country is even higher taxed than Denmark but I guess they had not really thought the idea fully through. As the Danish CEO of Nestle Fred Holm puts it.

“We have our Nordic headquarters in Denmark, but if we are to be exhibited in this way, then we might as well move to Sweden. Then there is no reason to be in Copenhagen. We want to be here, but we will not be shown, when we just follow the rules, “says Fred Holm, who says that Nestslé has 230 men employed in Denmark.

To be honest I find the idea appealing. What could our society do if we all contributed to the same pot? Some of these companies have made billions of Euros on operating in these countries and have not paid their fair share of tax for several decades. Their ability to hide and shuffle their money around has been remarkable and clever. While I do not think they have done anything illegal they could at least be challenged on their morals and ethics.

On the Nestle website the company proclaims that they are all for share value e.g. the Kramer and Port kind I would guess, but in the interpretation it means that

Creating Shared Value is a fundamental part of Nestlé’s way of doing business that focuses on specific areas of the Company’s core business activities – namely water, nutrition, and rural development – where value can best be created both for society and shareholders.”

So according the Nestle interpretation of CSV it does not include tax so one could hardly claim that they are unethical on that point on the other hand leaving it out does say something about the company mind-set and approach to the societies it operate in.

If a link between profit and society can’t be established it is not in Nestle mind CSR and therefor is tax not included.

I for one will be looking forward to what the Danish government will do and how they will go around the business of making multinationals pay more back to the society that they operate in. One must not forget that there are companies that do pay their fair share and that they are put at a disadvantage by companies that have the ability to shuffle money around. It could actually be a competitive advantage that tax paying companies can utilize in the Danish market as tax evaders leave and create new market opportunities which were out of reach before.

The 99% of Denmark

You would be blind if you had not noticed the spreading of the “anti-capitalist” movement in the US also know as the 99% or Occupy Wall Street. And while the do have big issues there is no place were the fall from being the world leading economic superpower and the mall of the world to real tangible poverty have been greater then in here. In Denmark we have seen the first Facebook groups being formed and some of the first attempts to form demonstrations by ordinary people.

So how does the 99% compare between the US and Denmark and does the Danes really have anything to complain about?

Business insider has featured a number of interesting statistics about the situation in the US and I have tried through the Danish statistical office to replicate some of the same charts just in a local Danish context.

For one thing is the unemployment rate around 9% or around 14 million people in the US while it in is 4,2% or around 110 thousand people. While the numbers have been increasing from around 2% in 2008 and more people have lost their jobs the impact is still manageable. And we have yet to see real poverty on a large scale and fall in living standard among the middleclass. Also is the time from the loss of job to the time when people get another place of employment not as long as we have seen it elsewhere.

Another interesting thing is that corporate executives pay continue to rise both in the US and in Denmark. As one of the leading Danish corporate Asger Aamund said, “The Danes better get used to higher corporate payrolls” in spite the fact that the economy is a recession or as close to one as it can possible get. And as unemployment continue to grow and more and more people have to live for less it is no wonder people start o get upset.

One of the most discussed political and economical subjects discussed in Denmark is the growing inequality or the gap between the relative poor and the relative rich. According to the CIA (yes, it is the CIA you are thinking of) is Denmark number 17 on the list on the US is number 93!  Located in between Bulgaria and Camaroon. According to the survey are the most unequal country being Nambia and the most equal country being Sweden. One might argue that equality is not a goal in it self but it is shown that the level of inequality and social stability is to a large extend co-constructive. This means that countries where the economic differences are small will have a larger degree of political stability.

In both the US and Denmark was the pre crisis proportion of rich people around 2% and the poor 30% so when the number of poor gets higher it is no wonder that people start to make noise when they are asked to pay the bill. While we are far from some of the countries in the developing world we the propositions are not shifting in a more equal direction.

Do the Danes have a cause for alarm and a reason to take to the streets is a question, which is difficult to answer. But there is little doubt that the people who are asked to pay the bill after the relative rich have taken their share are the people with the lowest income. And as people with high incomes again and again are exposed as fraudsters, inside traders, pyramid builders, or just plain greedy the reasons for ordinary people to take to the streets just increase.

Are women on boards positively associated with tighter audit committee controls and thereby improved internal control?

There is evidence that gender diversity is associated with tight financial control and tougher monitoring practices, thereby also with improved risk management governance (Adams & Ferreira, 2008). Women are also more likely to enter monitoring committees while men enter other committees for example the committees that are dealing with compensations etc. Men that have entered the audit committee also have greater attendance problems than female colleges (Ibid). Furthermore research also shows that there is a link between feminine traits, gender diversity and more honest governance practices especially in relation to corruption (Sung, 2003). As women are elected to corporate boards in Denmark and Sweden it is expected that they will find their way into roles which is supported by their talent and their traits. The audit committee has the function of overseeing the governance of the board and act as an internal corporate control mechanism. Both of these roles are supported by feminine traits and research has shown that these committees are positively influenced by women participation. In this context a higher than average representation of women in the audit committee would support the argument that traits are important in relation to board behaviour and that women contribute to effective risk and audit management on Swedish and Danish boards.

The process of finding empirical evidence for the claim that gender has influence on audit committee performance is somewhat different for Swedish and Danish companies. The governance structure of Swedish companies is disclosed in a separate report, in most cases called the Governance report. In some cases the report can be found as part of the annual report. In the governance report, companies disclose their organisational structure, financial information about the board members, ownerships structure and the work done in different committees. The audit committee is part of this structure and normally have a separate section where the composition, processes and a recapitulation of the work done is disclosed. The governance structure is not always as transparent in Danish companies as seen in Sweden. Even though the companies disclose the same information it is less structured and there are more sources that one that has to investigate in order to get an overview of committees, composition and processes. Most of the information is, however, disclosed in the annual report. In cases where the structure was not totally clear I used other sources such as corporate website and greens online database.

The results show that the average size of a audit committee in Denmark is 5.1 (ranging from 2 to 13 members) while the same for Sweden is 3.4 (ranging from 3 to 7). For four of the Danish companies the whole board were part of the audit committee in practice making the audit committee and the board one and the same. The gender composition in Danish audit committees is 9% for highly diversified while it is 11% for low diversified compared to the 16% women on Danish boards in total. Compared to the overall average including all Danish companies in the survey the average female representation was 12 % making both high and low diversified companies below average. This indicates that women are not represented to a significant degree in the Danish audit committees. The average number of women in the Swedish companies in the survey is 32% indicating a significant gender impact compared to the total percentage of women on Swedish boards, which is 23,9%. Companies considered low diversified have significant lower than average women on the audit and the numbers indicates that women do not find their way in to the committee if there is an overrepresentation of men on the board.

In Denmark, companies have only recently been required to create an audit committee, which should function as a control body of the internal audit. The legislation is part of a general tightening of controls that have followed in the wake of several great financial scandals abroad and domestically. The Danish regulations are especially influenced by the practices in USA where audit committees have been in place for a longer period as an integrated part of the Securities and Exchange Commission (SEC) regulation (Collier et al., 2003). The short time that the legislation has been in place can explain why companies in Denmark have audit committees where the number of members’ range 2 to 12 and in some cases encompasses the whole board. As there are no rules on the size or composition of the committee the board can decide to elect the whole board as the audit committee. While this can be viewed as complying with the law, the practice is not a representation of “the intend” of having an independent review committee, that can supervise and improve the decision making process of the board in total.

The results from the audit committee gender representation from Denmark show that the differences in relation between the highly and low diversified are not significant. A contributing factor to this could be that the Danish legislation on the establishment of audit committees is not very old and therefore not an established practice on Danish boards. As boards get more acquainted with how the audit committee can be used and what competencies is needed for it members I would expect that more women will be represented as time passes. Another factor can be contributed to the fact that since Danish boards have fewer women in general it makes them less likely that women would be part of the audit committee. In contrast to Danish performance is the representation seen in Swedish boards significant different, where women have can be found to have taken almost half the seats on the audit committee. Swedish boards have more women on their boards than Danish ones but this alone cannot explain the 45% women on the audit committees. A possible explanation can be found in the traits of women and male behaviour.

As I have shown is there research that suggest that women on monitoring committees have better attendance and performance that their male colleagues (Adams & Ferreira, 2008). The reason why women have improved attendance can be explained by the trait of collective thinking. Women are associated with taking ownership of processes and creating working environments, which includes more stakeholders in problem solving (Yukel, 2010:468). In order to be seen as legitimate in the eyes of the collective, and maybe themselves as well, women tend to put more emphasis on own attendance. Men on the other hand will tend be more concerned with own opportunities and development of their career and will not look up on attendance as a way to advance their career. Male traits could lead them in the direction of careerism and informalism in order to develop their own opportunities rather than the aims collective as a first priority.

One of the major functions of the audit committee is to reduce the risks that the corporation is subjected too. It is therefore imperative that the members display behaviour, which strives to meet this goal. As women are associated with being more risk averse (Jianakoplos & Bernasek, 1998) it is more likely that they will be in groups where this trait can be utilized. The reason is that women over time will find a place on the board where they have the most impact and in this case it is the audit committee. As time passes and corporate boards distribute different roles to its members there will under ideal circumstances be a situation where the members’ talents and competencies will determine what function they will have. As Swedish companies have since 1st of January 2006[1] have been compelled to formulate audit committees as part of their structures, it is also more likely that women would have found their way into this committee given their unique traits.

Are women in senior management and board position positively associated with higher than average economic performance?

Evaluating financial performance in relation to gender can be a tricky task. Not only is there numerous ways that a researcher can decide what good performance means but even when we are comparing apples with apples we get into trouble when we try to say something in general about the data.

So what I’m trying to say is that the choices that I have made in-order to investigate gender and financial performance might differ from what you might choose as the best indicator.

The methodology of the article is fairly simple I have looked at corporate Boards and Executive management in the Danish and Swedish most traded companies 40 companies in total. From a statistical analysis, which I will not go into detail, here have I separate the companies into three groups Low diversity, Medium diversity and High diversity relative to the country. This meant that I could produce this chart of high and low diversification among the top management and board members. F.eks. as a highly diversified company in Sweden one which have more than two women on the board and more than two women in top management, while the diversification is a little different in Danish companies. The reason for the difference between countries is mainly due to different legislation and cultures related to gender.

Organisational level Highly diversity Low diversity
SE Boards >2 <2
SE Top Management >2 <1
DK Boards >1 <1
DK Top Management >1 =0 

Together, these two measurements of corporate performance will give an indication on how companies perform with different approaches to gender composition. The data is comprised of two indicators for each country one on EBIT and one on. This gives an indication of how well the companies are able to achieve a profit and earnings per share issued in relation to gender diversity and compared with an overall average.

The EBIT analysis shows that companies with low diversity in their boards and top management have a lower than average ability to produces a profit over the period. While companies with a more diversified leadership team will do better. However, gendered companies have lower or very close to average EBIT performance on the short term e.g. 2006 for Swedish and 2005 and 2006 for Danish companies. In the last period which coincides with the financial crisis and recession gender diversified companies do significantly better when it come to earnings.

When it comes to the companies’ ability to show performance in relation to shareholders the picture is somewhat different. Companies in Sweden considered as low diversified are doing better than average on the long term (e.g. 2008) and even out-performing the diversified companies. In Denmark both high and low diversified companies are able to show and EPS, which is consistent with or a little better than the average. Here the highly diversified companies are able to show earnings which are little better than the low diversified.

Companies that stand out in Sweden are Hennes & Mauritz (H&M)[1] in Sweden that shown a consistent increase in performance since 2004 (EBIT show a consistent raise to 1.93 in 2008) and who has four women in both the board and in top management. H&M women accounts for 40 % of the total board members making it one of the highest performing companies in the survey both in terms of EBIT and gender mix. Also in terms of EPS is H&M among the highest performers having more than doubled its earnings per share in the period to 2.1 compared to 2004. Among the low diversified is Scania[2] doing almost as good as H&M while Assa Abloy[3] more than halved its EBIT in 2008 compared to the 2004 results to 0.4. In terms of EPS Scania was again the best performer at 2.06 while Tele2 was doing worse than in 2004 consistently over the period and was at 0.89 in 2008.

In Denmark several of the highly diversified companies have more than doubled their EBIT (Carlsberg, D/S Norden and Rockwool)[4] but there are also several companies that have lost terrain such as Danisco[5] who lost over 40% to 0.59. Among the low diversified is DSV[6] the best performer at index 1.43 while Lundbeck[7] is the worst performing at index 0.92. Several of highly diversified companies have an EPS around index 2.0 and above (Carlsberg, D/S Norden, Roskwool and Sydbank). Most of the companies among the low diversified have increased their EPS in the range of 1.3 to 2.24 in the period.

These results can be interpreted in relation to a stereotypical understanding or the traits of men and women. When analysing the results of the highly diversified companies they can be explain using the trait of adaptability and being risk averse (Cadsby & Maynes, 2007, Daruvala, 2007). As the market leading up to the financial crisis changed rapidly and new opportunities arose were companies that were willing to adapt their business model to these changes were also able to harvest new opportunities. Hereby they could increase their earnings rapidly and produce above average EBIT results in 2007. When the crisis started in the mid 2008 the ability to adapt to changes in the business environment again became a competitive parameter. Businesses could use the trait of adaptability and use it in dampening the impact of the rapid decrease of trade on the global market place. At the same time have more gender diverse companies have been accepting less risk in their financial transaction and thereby experienced fewer losses. Companies that was receptive to changes in the market could thereby react effective and utilise opportunities before their competitors. The same companies were also able to use their knowledge to assess the risks that they were exposed to more efficiently and take action in time to reduce their loses when the market changed. The combination of being adaptable and risk averse help companies that are willing to embrace these characteristics, as they become highly competitive and able to react to changes in the marketplace.

Like the feminine traits can explain the results of the highly diversified companies (during the financial crisis) the same approach can be used in understanding the results of the low diversified companies. Male stereotypical behaviour prescribes that men are more likely to demonstrate traits that are associated with informalism and paternalism which in-turn create more rigid forms of organisations (Maddock & Parkin, 1993). This means that male dominated companies would be slower to react to changes in the environment, and they will be less likely to have connections with more distant stakeholders. A strong connection to a mentor can reaffirm that changes in the market should not be taken notice of because the mentor himself does not understand the significance of the change. The changes in EBIT among the low diversified companies are inline with this perspective as they missed the opportunities that arise in the market and were slower to adopt their business model resulting in lower than average performance.

Gender arguments can also be used to explain the changes in EPS. Companies that have a higher proportion of women have fewer tendencies to focus on shareholders as the only stakeholder than male dominated boards and top management. Women will be more likely to incorporate more distant stakeholder into the business decision process because of the trait of being collective thinking. This trait favours the company overall survival and wellbeing rather than keeping one stakeholder content, e.g. shareholder. Collective thinking favour long-term sustainability of the corporation rather than dealing with the immediate crisis and relying on keeping the shareholders content. In highly diversified companies shareholders are being cared for when earnings are high, but when the crisis hits the focus is on the company and its long-term survival and the EPS is reduced dramatically. Keeping in mind that the EBIT was considerable higher among highly diversified companies the results can be interpreted as these companies less diversified organisations are consolidating and focusing on retaining enough liquidity to maintain the level of EPS. In times where businesses have to change in order to maintain profitability the masculine trait of entrepreneurialism becomes valuable. Being able and willing to take risk is what traditionally have been the characteristics that have differentiated companies and the same applies here. However, the situation that companies is facing can be made worse if management and board is unable to evaluate the risk that they are taking and more or less guessing what the future will bring. This could be an ok situation if everybody did the same and nobody had a clear advantage thereby creating a situation where there was no clear advantage to anyone. However, a higher degree of stakeholder engagement will facilitate an improvement in quality decision-making and thereby an improved risk calculation. This means that companies that are able to display feminine traits have a clear advantage compared to companies who have to rely on their ability to guess and take risks, which might or might not pay off.