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Swede dreams

04 May 2016

A long-term, collaborative view has seen Scandinavian industries prosper, from banking to tech start-ups.

Scandinavia’s tech start-ups, led by music-streaming company Spotify and the clusters of life-sciences companies on either end of the Øresund bridge between Sweden and Denmark, are the latest in a long tradition of innovative Scandinavian companies.

Sweden is the second most prolific tech hub after Silicon Valley, while TeliaSonera, the Finnish-Swedish telecoms operator, and Ericsson, the Swedish telecoms giant, have announced that Stockholm and Tallinn in Estonia will be the first two cities in the world to get 5G telephone networks in 2018. Technology is inescapable in the Swedish capital: it has a digitally connected public transport system and high take-up rates for tablet and app usage. None of this is accidental; it reflects the subsidies paid by the government for personal computers in the 1990s, the state’s commitment to broadband and fibre optic, and a belief that the next wave of Swedish prosperity would be based on digital connectivity. The investment is paying off.

To be an engineer in Scandinavia in the early 20th century was one of the most prestigious occupations someone could have. Engineers built many of the region’s most successful international export businesses, such as manufacturers SKF and Atlas Copco, while scientists helped create Denmark’s Novo Nordisk pharmaceutical company. Backed by banks prepared to take a long-term view, Scandinavia has produced a number of major international companies that are still at the top of the Nordic stock exchanges almost a century later.

Some of this goes back to the roots of Swedish capitalism. In the middle of the 19th century, André Wallenberg founded Enskilda Banken in Sweden. The bank performed a similar role to that of today’s private equity companies, which have helped to finance tech start-ups (though their time horizons tend to be shorter).

When things became difficult for the bank’s customers, Enskilda stepped in and invested, rather than see the companies go under. Without this kind of capitalism, it seems unlikely that many of the great Nordic companies would have got off the ground – they certainly would not still dominate the local stock exchanges with a consistency unparalleled elsewhere.

In 1916, new legislation required banks to separate their banking, shareholding and investing businesses. Enskilda’s portfolio became Investor AB, whose portfolio, now in a separate unit, still includes Atlas Copco, as well as SEB (the former Enskilda Banken), Electrolux, Saab, ABB, Ericsson and Husqvarna.

As the investor company, Investor ABactively owns a number of companies, placing corporate power in the hands of shareholders rather than management. The shareholders elect board directors and are involved in major strategic decisions. This model is found in many other businesses in the Nordic region, such as the investment company Kinnevik.

Christian Stadler, Professor of Strategic Management at Warwick Business School, says that, while large controlling stakes can make things hard for outside shareholders, family businesses have some clear advantages. ‘Industrial dynasties, such as the Wallenbergs, tend to have very strong personal networks, for instance,’ he observes, something borne out by Cristina Stenbeck, who recently stepped down as Executive Chairman to concentrate on her role as the main owner of Kinnevik, looking for companies in new areas in which to invest. She has publicly admitted that her position as the owner has enabled her to open the doors to certain heads of state and other powerful figures.

‘The CEOs of non-family businesses are under pressure to hit the numbers every quarter,’ observes Stadler. ‘Unfortunately, this also increases the pressure to discard strategies that don’t work immediately; but a glance at some of the most successful family businesses helps to illustrate why they should resist. Patience is a virtue when it comes to strategy.’

Stadler cites Investor AB’s role in saving Ericsson in the 1930s as a positive example of the investor company’s wider social and economic role.

Marcus Wallenberg, the founder’s great-great-grandson, said in a recent interview in the Financial Times: ‘We have stuck with many businesses where we were confi dent that doing so would create value in the long run. The capital markets need investors who recognise that the innovation cycle is often measured in years and that you can’t create successful product portfolios with a short-term view. In our part of the world, the presence of dominant long-term owners on the share registers – investors who feel a responsibility towards companies in difficulty – is an advantage.’

The Nordic model is attracting interest from regulators and governments – including the European Commission – looking to head off financial crises. Some believe that, applied more widely, it could reduce short-term thinking.

For investors, there is some empirical evidence that the structure of family and foundation companies typically found in the Nordic region can be beneficial. In 2013, Steen Thomsen from Copenhagen Business School and Henry Hansmann from Yale Law School suggested that companies owned by industrial foundations seem to perform as well as conventional investor-owned companies.

Other empirical studies – using measures such as accounting profitability, growth, stock market value or stock returns – suggest performance is, on average, no worse, or even slightly better than that of companies with more conventional ownership structures.

Investment companies that are prepared to take an exceptionally long-term strategic view have been integral to the success of many Scandinavian companies.

In turn, the successful financial performance of these has been closely linked to society’s interests. There is, however, a cultural aspect to Scandinavian capitalism, whose success has also owed much to engineering, science, design and, more recently, technology skills, and a society which both respects and rewards these. It is perhaps no coincidence that these, and a long-term business outlook, have evolved from an environment in which long-term planning is required in almost every aspect of life.

It can’t simply be exported in the way that IKEA flat-pack furniture has spread throughout Europe.

 

Past performance is not indicative of future performance.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise.  You may get back less than the amount invested

Some of the products and investment structures documented within this article will not be available to our clients in Asia. For information on the funds that are available please get in touch.

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