It made headlines when the majority shareholder of Patagonia, Yvon Chouinard, and his family, on September 14th, chose to transfer their shares to a nonprofit entity, which in Danish terms would be called a business foundation. Following the announcement, Yvon Chouinard declared that the planet Earth was now Patagonia’s sole shareholder, and that any potential surplus in the foundation would be directed towards climate-related purposes.
Patagonia, renowned for producing exceptional trekking clothing, is perhaps the most environmentally conscious company in the United States and an icon worldwide. The company is already a B Corp – a public benefit corporation committed to responsible conduct towards its stakeholders. For instance, since 2017, it has been selling used trekking clothing to promote recycling. One percent of sales goes towards environmental causes, and the profits from Trump’s tax reform were used similarly. Emphasis is also put on wages and working conditions.
International interest in the Danish industrial foundation ownership model
The new ownership structure is primarily motivated by a fervent commitment to the environment and sustainability issues. However, there is no doubt that part of the inspiration comes from the Danish foundation model, which the company is familiar with. The connection between foundation ownership and sustainability is not coincidental. The Foundation Day in 2022 also focused on sustainability, a cause the foundation model is well-suited to promote. Research in the field indicates that foundation-owned companies perform better in this regard.
There is significant interest in the foundation model worldwide, except perhaps in Denmark, which is otherwise considered the homeland of business foundations. Here, business foundations are surrounded by interest and respect, but hardly any genuine business foundations have been established in Denmark in recent years, if by that we mean foundations that own companies. Instead, a number of charitable foundations have been established as business foundations, even though they do not have actual business activities, as it provides greater flexibility for the foundations. There are also examples of private equity funds using the foundation model in some of their structures focused on profit-making.
Great conditions but what about the kids?
Tax-wise, it has become less burdensome to establish a business foundation. In essence, the founder avoids paying inheritance tax and capital gains tax if the purpose, as in Patagonia, is to secure the company’s future and make charitable distributions. However, it is still not possible for the founder to secure their children, which is a significant psychological barrier, understandable to any parent. Perhaps more could be done in this regard.
Turning to family businesses, it has become more difficult for them again after the inheritance tax was raised to 15% in Denmark. In many cases, it will most likely result in the company being sold to foreign buyers, who naturally have less interest in developing the Danish part of the company. In the same way, there are also few new association-owned companies like Tryg, Nykredit, Danish Crown, or Arla.
Ownership but no responsibility?
The consequence may very well be that instead Danish companies will be owned by the small triumvirate of American asset managers – BlackRock, Vanguard, and State Street – who now hold an increasing share of the world’s listed companies, including in Denmark. Effectively, these three companies have the controlling influence in themselves and in each other. Vanguard, which is privately owned, is the largest shareholder in BlackRock and State Street, and BlackRock is the second-largest. The three financial houses own around 19% of BlackRock and 22% of State Street. At the same time, they have the controlling influence in other investment firms, which also hold shares in the parent companies. According to an estimate, the three financial houses thus control 100% of Vanguard, 32% of BlackRock, and 42% of State Street. They have become a cartel owning large parts of the world without being accountable to anyone. Poor governance.
Given the significant economies of scale in asset management, the three financial giants are difficult to compete with. Many Danish pension funds and other institutional investors have their capital managed through this questionable constellation. Their high-handedness in the ESG area has undoubtedly helped lure Danish investors into the fold. In the United States, there is now growing opposition to their abuse of power, such as pushing political views under the guise of the ESG debate. Even Elon Musk of Tesla – who rides the ESG wave himself – has spoken out against it.
The good reputation – isn’t it straightforward?
Danish business policy can be rightfully criticised for not seeing the big picture. Do we really want Denmark to become a branch country owned by foreign financial giants? Why not seize the opportunity to make Denmark a place where foreign business foundations seek to come? It’s straightforward to leverage the good reputation we have in this area.