Addressing the Economic
This chapter looks at how Novo Nordisk, the Danish healthcare company and a world leader in diabetes care, has approached the economic bottom line and is using socio-economics to help improve diabetes care.
During the early 1990s, Novo Nordisk recognized that sustainable development would be high on the new agenda for business. The company began by addressing the most familiar and immediately challenging part of the agenda – environmental responsibility and eco-efficiency – and adopted a proactive environmental strategy based on stakeholder engagement that went beyond regulatory compliance.
Dialogue with environmental and consumer non-governmental organizations (NGos) and others identified the new issues that would need to be addressed, and – as a biotechnology and pharmaceutical company – the ethical implications of genetic engineering and animal experimentation emerged as important topics to include in the learning process. However, it was realized early on that sustainable development is not just about the environment, it is also about people and how they interact.
Moreover, outside the walls of the company, its activities and performance have far-reaching impacts and consequences. As global corporate citizens, international companies not only need to behave responsibly, but also need to be accountable to society, as well as to their employees, customers, shareholders and other stakeholders. Progressive companies now recognize that they must engage with a variety of stakeholders across national and international borders
to help create policies and practices that will shape the future sustainable development agenda.
Today, Novo Nordisk, like a number of other companies, measures business performance against the triple bottom line (TBL) concept of sustainable development, which attempts to integrate not only the environmental and social aspects, but also the economic aspects. This is a complex equation and many companies are only just beginning to explore the real implications. The triple bottom line brings together three critical elements: environmental responsibility, social equity and economic performance. By adopting this formulation, companies hope to be able to take a more systematic and sustainable approach to managing business risks, staying attuned to the concerns of society and to spotting opportunities, as well as potential problems.
In reality, the three bottom lines are closely inter-linked; but the concept of the triple bottom line is a convenient reflection of the different types of capital that any company or other organization uses in providing goods and services to society, as illustrated in Figure 15.1. The challenge for business – and societies worldwide – is to operate in ways that maximize all of the scarce forms of capital involved in producing goods and services, recognizing that there are three main types of capital, rather than one: environmental (or natural), social (or human) and human-made (or economic).
Defining the economic bottom line
Publicly listed companies are required by law to make freely available certain information about their business, to file particular information for public inspection and to circulate accounts to their shareholders. Corporate annual reports primarily address the immediate needs of shareholders and financial analysts; but they do not directly account for what is important to stakeholders in economic, as opposed to purely financial, terms. For example, investments made by a company in training and educating employees make an economic contribution beyond the company's boundaries by building national productive capacity in society at large. Yet, such information is not provided in a traditional financial report. To illustrate the point further, financial reports do not detail the wider economic impacts of a company's activities at the local community level through the provision of employment, the income that employees earn and use and the taxes that they pay, as well as the impact on local suppliers and service providers.
So, while the economic component of the triple bottom line is often assumed to be synonymous with financial performance, in fact, there are significant differences between the two. In its simplest form, finance is about the provision of money when and where required for consumption or for investment in commerce. As such, it concerns the market valuation of transactions that pass through a company's books. Economics, on the other hand, is the means by which society uses human and natural resources in the pursuit of human welfare. As a result, economics extends beyond the boundaries of a single organization and is inextricably linked to both the environmental and social elements of sustainable development.
However, economic growth on its own is an inadequate indicator of progress towards sustainable development. From both an environmental and social perspective, the growth in human-made capital may imply either improvement or deterioration. Although damage is rarely deliberate, the long-term consequences can be irreversible. Yet, efforts to remedy environmental damages or to alleviate social inequity require financial resources, generated through economic prosperity.
Economic growth, therefore, is not a goal in itself. Rather, we need to look at how the benefits are achieved, who benefits and how we can offset any harm done. Companies today are primarily rewarded for their financial performance – even if what they are delivering to society may be socially or environmentally damaging.
A company's economic impact may be seen as either positive or negative, but neither is measured in today's traditional financial accounts. A company's investment in a community can serve as an engine of growth in the economy through employment, boosting local supply chains and developing a new skills base. The goods and services that companies produce can also contribute to a higher quality of life.
Yet, growth in economic activity and wealth does not necessarily reduce poverty, provide a cleaner environment, or achieve greater equality or better quality of life. in fact, there is widespread disagreement about the type of economic growth that supports sustainable development. it is only by attempting to understand, manage and communicate economic impacts that the areas in which corporate activities have positive environmental and social outcomes can be identified, as well as the areas where there is room for improvement.
Obtaining information about our economic impact requires that we measure in concrete quantitative terms the operational outcome of corporate decision-making. By reporting on various economic indicators, companies can gain a picture of the status of their operations and can use this knowledge to measure whether they conduct their business in a way that supports their vision.
However, company responsibility cannot replace societal responsibility. The government is important in its role of ensuring proper regulation, introducing the right incentives and creating laws that enhance our understanding of the type of economic and social behaviour that is to be rewarded by society.
In addition, current price structures do not reflect the real costs of, for example, clean air and freshwater. Creating an environment in which companies and consumers are rewarded for alleviating social and environmental problems, and penalized for negative impacts, poses a major challenge for governments and businesses alike.
One way in which to create this environment is to begin assessing not only the financial, but the wider economic impact of a company. For example, what is the impact of a company's operation on the community seen from a social, environmental and economic point of view? This is a difficult task and, currently, no single method can be applied; but early pioneers have included British Telecom (BT) and South African Breweries (SAB), both of which have attempted to address these issues to some degree in their annual environmental and social reports.
An explicit relationship should also be established between the financial and the economic bottom line, otherwise the economic bottom line will not materialize and management will not be able to argue effectively that the economic bottom line is essential for business, as well as for society. Especially in hard times, pressure will be put on all issues that are regarded as non-essential for survival regardless of the true relationships.
Pilot studies on socio-economic impact
in 1999, Novo Nordisk began to explore more systematically the wider socioeconomic aspects of its business with case studies at the local level. A pilot study was undertaken at the company's largest production site at Kalundborg in Denmark in its first attempt to map out the issues at the local level. The aim was to use the experience gained from this study to begin to develop models and measures to record the socio-economic, social and environmental impact of the company's other sites. A stakeholder approach was adopted and the major local stakeholder representatives were asked to define the issues and dilemmas that they thought were most important. in addition, an analysis of the economic impact of the operations on the local community was performed, as shown in Figures 15.2 and 15.3.
The results are detailed in Novo Nordisk's 1999 social and environmental report (www.novonordisk.com). The presence of a big employer such as Novo Nordisk is of great importance to a small community like Kalundborg. For example, it influences the employment structure as 60 per cent of the factory's 1657 employees reside there. in fact, Novo Nordisk employs one in ten of the working population of the municipality of Kalundborg and is, therefore, the community's largest private employer. obviously, this dominant position implies a strong contribution to the local economy. The total gross salaries paid to the households by Novo Nordisk amount to 10 per cent of the total income in the community. The municipality's budget also benefits from the tax revenues generated by the activities at Novo Nordisk. For 1999, the estimated company tax to be paid by Novo Nordisk to the municipality amounted to 26 million Danish kroner (DKK). In addition, the contribution of income tax from Novo Nordisk employees to the municipality was valued at DKK 58 million, which amounted to 6 per cent of the municipality's total tax revenues. on the other hand, Novo Nordisk received around DKK 3.5 million in 1999 as reimbursements for wage costs to employees on maternity leave and during periods of sickness.
Building on the work undertaken at Kalundborg, in 2000 a case study was undertaken analysing the general economic impact of the Novo Nordisk insulin
Circulation of money in the local community
This figure illustrates how activities at Novo Nordisk influence the circulation of money in Kalundborg. The company pays its employees (households) and it pays taxes. The households, in turn, spend money on consumption and taxes, and the local authorities spend money on social contributions and other public spending.
plant in Clayton, North Carolina, US. The results were presented in the company's 2000 environmental and social report (www.novonordisk.com), and a summary in which the various contributions were quantified is shown in Figure 15.4.
The Clayton analysis demonstrated that the local plant has numerous impacts on the local community, employees and suppliers, and is a stimulus to local trade and industry. Furthermore, employee salaries and wages and income to suppliers spent locally multiply through the local economy as employees become consumers.
Measuring economic footprints
Understanding the economic impacts at the local level can be helpful in building up a picture of the economic footprint of a company. However, as yet, there is no systematic approach to accounting and reporting on a company's overall economic performance and the area is still evolving. Novo Nordisk has used the Global Reporting Initiative (GRI) as a framework for analysing the company's impact on the creation of economic wealth and on the economic stakeholders
that benefit from its activities. In the GRI's 2002 Sustainability Reporting Guidelines (GRI, 2002) the focus is on how the economic status of the stakeholder changes as a result of the organization's activities, rather than on the financial condition of the organization itself.
According to the GRI, each company has to determine what constitutes its own specific communities. A company that operates in multiple sites, in multiple countries, has a diverse supply chain, or has an unusual set of stakeholder groups may need to perform specific analyses that address these communities. A unified approach to the different sites may not always be appropriate. Taking inspiration from the GRI, Novo Nordisk began to create a systematic approach that started with an analysis of the company's direct economic impacts. As a company, the most direct contribution to wealth creation is through employing people's skills in creating goods and services and investing in new plants and equipment. Indirect impacts, in turn, refer to when a company's operations multiply through society and affect the economic activities and performance of others, both individuals and organizations. The direct impacts are equivalent to the impacts on the economic stakeholders who directly profit from the company's activities, while the indirect impacts describe how income earned in society is used to create new income. Indirect impacts are also sometimes external to the market in the sense that current price structures do not reflect the real costs of the company's activities to society and, therefore, have an indirect impact not reflected in the monetary flows of social and national accounts.
The kind of data and indicators available today make accounting for the direct impact a manageable task; but getting a better grasp of the indirect impacts presents a challenge.
The direct effects of Novo Nordisk's activities impact upon certain groups of economic stakeholders, as defined by GRI, who have a direct financial interest in the company. These include suppliers, employees, shareholders, the public sector and a company's management, who control what is retained in the company for future growth and investment. The GRI framework will help companies to achieve the following goals:
- Measure and report economic performance in terms of the financial wealth created by the company, defined by where products are manufactured and where income is earned.
- Examine the direct and indirect impacts of company wealth on selected stakeholders in different regions and countries to obtain information about those who benefit from the company's activities and where these stakeholders are located.
- Address the economic impacts of the consumption of the company's products from a general economic perspective and, for Novo Nordisk, from a health economics perspective.
In the case of Novo Nordisk, the consumption of pharmaceutical products has both direct and indirect impacts on people and affects quality of life. Indeed, the impact of pharmaceuticals, such as insulin for the treatment of diabetes, on human health is perhaps the greatest economic impact as a pharmaceutical company. Nevertheless, the full value of the products is achieved only through interaction with the healthcare infrastructure provided by the society. Novo Nordisk has been addressing health economic issues for many years now and, more recently, has begun to examine these impacts in greater depth. While the indirect economic impact is difficult to quantify, the company has formed new partnerships to further develop its knowledge in this area. The direct impact of the products relates to the health and survival of the patient in question, while the indirect impact is measured through the consequences that better health has on quality of life and productivity of the patient, as well as on the patient's family.
However, trying to extend the positive economic impact of a company's products presents a dilemma. How a product, such as Novo Nordisk's insulin, is used is a function of the product itself, its price and its distribution and availability within the particular healthcare infrastructure. Not all of these are within a company's control. For example, it is not always possible to control wastage or damage to a product due to improper storage, or to control the optimal use of the product due to lack of awareness and knowledge about the disease. But, as a profit-maximizing company, Novo Nordisk can exercise influence over the price of the product.
Herein lies the dilemma. It is Novo Nordisk's vision to have a positive impact on human health through the use of the company's products, particularly in the developing world. Therefore, how the company impacts upon human health through its pricing cannot be disregarded. An affordable product price level needs to be found that allows the company to remain profitable and to deliver a healthy return to investors. Novo Nordisk attempts to begin resolving this dilemma through the application of a new pricing strategy for the least developed countries where insulin is offered at 20 per cent of the average price in Europe, North America and Japan.
In its 2001 triple bottom line report (www.novonordisk.com), Novo Nordisk set out data on the distribution of created wealth by the company using the approach described by the GRI and earlier adopted by South African Breweries. This showed how the company's cash received was distributed across different stakeholders. For example, suppliers received 47 per cent and the remaining 53 per cent was attributed to various economic stakeholder groups profiting from company value added. The impact of the company wealth on selected stakeholders in different regions provided information about where those economic stakeholders are located.
The local studies of community impact presented above show that it may be difficult to take an overall and generic approach to TBL with regard to quantification.
In the eyes of society, our licence to operate as a company is justified by our ability to contribute to social welfare and quality of life. In the same way, the various policies and initiatives taken internally in the company must be justified by its ability to contribute to the financial health of the company. The triple bottom line means that the company focuses on creating value not just for shareholders, but for a broader group of stakeholders, some of whom are internal while others are external. An additional dimension has thus been added to the financial bottom line by supplementing financial profitability with positive socio-economic contributions as company objectives.
The Novo Nordisk economic stakeholder model attempts to summarize the socio-economic impact of the company based on the consumption and production activities. The model illustrates the interaction between the company
and the stakeholders in society, including suppliers, patients and healthcare providers, local communities, global communities and the public sector.
The company's added value is created through a range of internal business processes within which the commitment to TBL is integrated. In each of these business processes the added value is generated through interaction with various stakeholders. This kind of model prompts a new kind of decision-making in which we achieve a better understanding of the company's socio-economic impact.
The Novo Nordisk economic stakeholder model is shown in Figure 15.5.
Socio-economic impact of diabetes care
Understanding the economic bottom line can also help a company like Novo Nordisk to understand its wider socio-economic impacts and where it adds -and can add – value, depending upon the available healthcare infrastructure. But as a healthcare and pharmaceutical company, Novo Nordisk faces particular dilemmas relating to access to health and health economics. The economic prosperity of a nation and the health of its work force are largely dependent upon the investment made in the health of its people. Diabetes, which is Novo Nordisk's main treatment area, has been shown by the World Health organization (WHo) to be one of the four major killers in the world and is often called the ‘silent killer’ as it kills through the late complications caused by inefficient care. over the next 25 years the number of people with diabetes is set to more than double to 300 million, and 80 per cent of those individuals will be living in developing countries.
Those seeking to head off this pandemic face a dilemma. It is known how to optimize care; but, in practice, this happens too infrequently for a variety of reasons, such as lack of information, education, infrastructure, funding and medicine. In addition, poor decisions are occasionally made due to lack of knowledge about the options for addressing disease in the most economical way. Health economics, which present the costs and consequences of diabetes, is one way of showing how investments in healthcare can improve the overall level of care. Economic data that underline the costs associated with diabetes and the economic value of diabetes intervention are widely used to underscore the importance of the disease and its impact on the healthcare system. Health economics illuminates the choices to be made regarding limited healthcare resources, the effectiveness of healthcare treatments, the pricing of products and many other factors. Novo Nordisk has long used health economics as a decision-making tool that focuses the company's efforts, as well as a basis for informing decision-makers about the economic consequences of their choices.
Most people would agree that access to healthcare is a pre-condition for societal prosperity. The benefits of access to healthcare outweigh the costs for two reasons. Firstly, survival and improved health have an intrinsic positive value and, secondly, health improves the productive national capacity by realizing a human and national potential that otherwise would be wasted through sickness and death.
But what are the advantages for a society in ensuring access to insulin and improved diabetes care? To answer that question Novo Nordisk has been developing a model that helps to examine the socio-economic cost and benefits of diabetes and diabetes care, and takes into account quality-of-life factors.
WHO estimates that 9 per cent of all global deaths are caused by diabetes, primarily among people in their most productive years. In countries where access to healthcare is available, the care of people with diabetes also entails significant costs to the health system. Hospitalization and treatment of late complications (for example, blindness, amputations and heart-related problems) due to poorly treated diabetes are the main cost drivers. It is estimated that the costs of diabetes and its complications already account for between 5 and 10 per cent of total healthcare spending in most countries and up to 25 per cent in some.
In contrast, treatment with insulin has positive impacts upon human health and, consequently, people with diabetes can live an almost normal life and reduce the risk of disabilities and premature death. For people with diabetes, access to insulin positively impacts upon their financial situation through improved quality of life and productivity. Their intellectual and emotional capacity, and that of their families, is no longer primarily focused upon worries about health, but rather upon more positive, forward-looking and productive activities.
Much progress has been achieved in understanding the triple bottom line of sustainable development since the early 1990s. Understanding the economic bottom line, as opposed to the purely financial, is an essential pre-condition to achieving sustainability. However, understanding and measuring the interactions between the economic and the social and between the economic and the environmental bottom lines remain the key challenges.