This story is one of 24 outstanding entries selected as finalists in the Long-Term Capitalism Challenge, the third and final leg of the Harvard Business Review / McKinsey M Prize for Management Innovation.
Over the past 20 years, Novo Nordisk has been a pioneer and a success story on multiple fronts. The company is delivering needed health solutions globally. It’s reaping strong financial returns for shareholders and continues to grow its employee base, boasting a strong corporate culture and a challenging and engaging working environment. Concurrently, it is meeting and beating standards for corporate social, ethical and environmental behavior.
Our secret sauce is ‘The Novo Nordisk Way’ - the values-based DNA of the company. Since its early days, Novo Nordisk has architected its growth to reflect the fundamental belief that the company, and every employee must “act responsibly.” The Novo Nordisk Way is central to innovations in the company’s structure, business proposition, communications and reporting.
Novo Nordisk is a global healthcare company with nearly 90 years of leadership in diabetes care. Novo Nordisk also has leading positions in haemostatic management, growth hormone therapy and hormone replacement therapy. Moreover, the company is actively researching to develop therapeutic treatments for autoimmune and chronic inflammatory diseases.
The company has an unusual capital structure for a public company. The current company was formed in 1989 through a merger of two Danish companies, Novo Industri A/S and Nordisk Gentofte A/S. Novo Nordisk shares are split between A shares and B shares. The A shares are held by Novo A/S, an unlisted public limited liability company wholly owned by the Novo Nordisk Foundation. The Foundation is a self-governing commercial organization whose main purpose is to support its companies' operations and to make contributions to scientific, humanitarian and social progress. The B shares are traded on the New York Stock Exchange and on the Copenhagen Stock Exchange. The A shares carry the lion’s shares of voting rights (10 times the voting rights of the B share) and cannot be divested by the Foundation. In essence, this means that investor control of Novo Nordisk lies with a Foundation.
The company’s financial returns are enviable. As one of the world’s leading providers of insulin, sales continue to experience double-digit growth. Over the past decade, its stock has quintupled, and at $64 billion, its market cap is bigger than biotech stalwart Amgen ($52 billion) and its rival Lilly ($39 billion). During 2011, Novo Nordisk’s revenues were approximately $11.84 billion. Novo Nordisk is headquartered in Denmark and employs more than 32,000 people across 75 countries.
Much of our innovation is rooted in the principles of our founders. Yet, over time, several events have reinforced our vanguard business model. It is significant that we are largely controlled by a Foundation. We also have had important partnerships with thought leaders in the sustainability world that have further driven us to pursue principled and highly conscious management practices.
In 1988, John Elkington and Julia Hailes, the co-founders of the campaigning think-tank and consultancy SustainAbility, published “The Green Consumer Guide”. The book warned consumers to ‘beware of enzymes’ in detergent products. This was not the first time enzymes came under attack. Novo Nordisk faced an image and publicity challenge. In our view our enzyme products were natural, totally biodegradable, and environmentally sound, yet “The Green Consumer Guide” took a different stance.
The Head of Novo Nordisk’s BioIndustrial Group, Steen Riisgaard (now CEO of Novozymes), invited John Elkington to visit Novo Nordisk and tour the company’s Copenhagen facilities. This was the start of a long relationship with John and SustainAbility. They have helped us shape and hone our Triple Bottom Line principle.
Since the 1920s, Novo Nordisk has been a purpose driven company. We were founded with the sole purpose to offer life-saving treatment for people with diabetes, and today we frame this as a promise to change diabetes. Today, we engage thousands across the world with the passion, the skills, and the commitment to continue this journey to prevent, detect, treat, and ultimately cure diabetes.
Our guiding principles:
- Our ambition is to strengthen our leadership in diabetes.
- We aspire to change outcomes in haemophilia and other serious chronic conditions where we can make a difference.
- Our key contribution is to discover and develop innovative biological medicines and make them accessible to patients throughout the world.
- Growing our business and delivering competitive financial results is what allows us to help patients live better lives, offer an attractive return to our shareholders and contribute to our communities.
- Our business philosophy is one of balancing financial, social and environmental considerations – we call it the Triple Bottom Line.
- We are open and honest, ambitious and accountable, and treat everyone with respect.
- We offer opportunities for our people to realize their potential.
- We never compromise on quality and business ethics.
This is the ‘Novo Nordisk Way’. It frames and guides every strategic decision we make. It is rooted in the basic belief that we must “act responsibly” as managers, employees and as a business. Every day we make difficult choices, always keeping in mind what is best for patients, employees and shareholders in the long run. We know that the right choice is not always apparent. We have guidelines and mandatory training on ethical behavior. 99% of relevant employees partake in e-learning, supplemented by face-to-face workshops, designed to help them make the right decisions when faced with an ethical dilemma.
In terms of how we express our values to the market, we believe that access to essential medicines is a human right. We sell human insulin (the most basic kind) to 36 of the world’s poorest countries, as designated by the UN, at no more than 20 percent of the average price in the western world. And we estimate that 24 million people all over the world are being treated with Novo Nordisk injectable products, of these more than 40% live in Asia, Latin America and Africa. We advocate for more public awareness of the socio-economic burden of diabetes and the costs of inaction. And, we educate doctors and nurses to better diagnose and treat diabetes; in China, for example, we have educated more than 50,000 doctors. These are examples of our principles in play.
The Novo Nordisk Way has been central to innovations related to corporate structure, our communications and our financial reporting. Here’s how:
1. Corporate Structure
Novo Nordisk is majority owned by a foundation. Although the company trades on the NYSE, the foundation controls the lion’s share of voting rights. This means that Novo Nordisk management is largely shielded from the short term performance pressure wrought by traditional investors. The company has more latitude to make decisions that might trade-off short term returns for a longer term or non-financial gain.
The impetus to ‘act responsibly’ is directly linked to our roots and the foundation ownership structure; both better enable us to “act responsibly,” weighing long-term benefits and considering how to best make balanced decisions.
In 2004 our Board of Directors updated the company’s Articles of Association, the bylaws, and specified in the objectives that ‘the company seeks to conduct its business in a way that is financially, environmentally and socially responsible’. This is unique, and a clear signal to investors, employees and business partners that this is how we do business.
Novo Nordisk’s mission plays out in a number of unusual ways for a corporation. Our commitment to establish the World Diabetes Foundation is a good example. We presented the idea at our annual meeting, and requested shareholder supported, even though the Foundation votes would have been sufficient. The shareholders applauded the proposition.
2. Communications and stakeholder engagement
We take a different approach to many partnership and communications efforts. We do not just work to singularly advance the Novo Nordisk brand. We take a holistic look at the communities in which we operate, and we consider our opportunities to benefit not just our business, but society at a local and global level.
The company believes our outreach efforts build trust, provide a basis for establishing common ground on tough issues, and help inform executives about emerging trends with the potential to affect the business. Our stakeholder engagement process is not static. Difficult issues, such as how to ensure equal access to health or how to approach stem cell research, are presented as interactive challenges on the company’s website.
One of our regional managers commented that Novo Nordisk is more likely to pick up early signals about market opportunities or how products are doing because of our involvement: “…when we are with [stakeholders] on a regular basis, working on projects, discussing all kinds of things .. if anything comes up in discussion, we will know about it...”
In April 2010, Novo Nordisk launched “The Blueprint for Change Program.” The intent was to facilitate stakeholder engagement and demonstrate how the company delivers value to business and society. So far three cases have been made: one on the Climate change challenge, one on changing diabetes in China, and one on creating shared value in the US. Built on the same methodology, they assess the business case for the company’s Triple Bottom Line approach and document with numbers and facts how this way of doing business also benefits society. (Reference the ‘Blueprint for Change’ document in the Materials section.)
Our emphasis on Triple Bottom Line is reflected in consistently high employee engagement, reputation and physician satisfaction. We believe that maximizing shared value requires investing in societal issues that are aligned with our business strategy; the right capabilities enabling success; and leveraging the Triple Bottom Line principle as a competitive advantage. And we firmly believe that our emphasis on Triple Bottom Line is reflected in our strong company growth.
Importantly, when we reviewed our progress on these initiatives, we looked back at the value it was creating for Novo Nordisk and the value it was creating for society. For example, in assessing climate change challenge, the benefits to Novo Nordisk were largely energy savings and risk reduction. For society, the benefits included not only CO2 reductions, but also the long-term impact of helping kick-start a massive wind energy investment that would supply power to businesses and households.
I was asked to explain the rationale for the climate change blueprint and the blueprint series as a whole. This is more than a communications effort. Fundamentally, it is a way for us to hone and describe our triple bottom line approach to doing business and how it’s benefiting both Novo Nordisk and society. It is an example of how acting responsibly can drive new and better approaches to our diabetes work, our operational productivity, and our communications with partners, customers, and communities.
In 1994, Novo Nordisk became the first company in Denmark, and one of the first in the world, to publish an environmental report. Five years later, we published our first social report. In 2004, Novo Nordisk became the third company to publish an integrated financial, environmental, and social report.
Reporting is another example of how our values drive an innovative approach to managing our business. It compels us to reevaluate and restructure our process and metrics to reflect human, social, and environmental impacts. We’ve often had to pioneer and invent these new reporting structures. In turn, the new reporting structure better enables us to convey how we deliver long-term returns, and apply responsible business practices.
Our former CFO, Kurt Nielsen explains the business case for linking our values to our reporting:
“We have never ever said that we are conducting our business in accordance with the triple bottom line for other reasons than good business reasons. What does “good business reasons” mean? It means to preserve your license to operate. We want to make sure that customers value our products and continue to buy them. We want to make sure neighbors will not close down our factories, that society will not say no to the development of new products, and so on. We think we can best do that by being open and honest, and explaining what we’re doing. That’s the best way we can develop new products.”
Our focus on multiple impacts has been good for our business. We are trusted and respected. We can recruit and retain top talent. It strengthens our ability to expand our presence in current markets and build new ones.
Our practices are increasingly recognized by industry. We top sustainability indices across a broad array of categories - energy, carbon and water productivity; employee innovation capacity; leadership diversity; worker safety; fair remuneration standards; employee turnover.
More importantly, we propose criteria that are not yet part of these indices – such as the linkage between CEO compensation and compensation. We do this because it’s relevant, and we think it can positively influence the way business is done. Take the remarks of this analyst last month:
“Novo Nordisk excels not just in the parameters that landed it in 1st place, but also in the ones that are not included. The company scored top quartile performance in [the given indices]. It is also the only pharmaceutical company in the Global 1000 linking CEO remuneration to corporate performance in sustainability measures.”
- Raz Gozelnik of Eco-Libris.
1923 Company founded in Denmark
1989 Novo Nordisk formed: Merger of Novo Industri A/S and Nordisk Gentofte A/S
1994 Novo Nordisk publishes first environment report
1999 Novo Nordisk publishes first social report
2004 Novo Nordisk published first integrated annual report
2005 Company takes lead position in the U.S. insulin market
2009 Named as an ethical leader of international business by think-tank Ethisphere.
2010 Blueprint for Change Program
2012 Ranked #1 on the Global 100 Most Sustainable Corporations in the World index by Corporate Knights
We faced cultural and logistical challenges in applying triple bottom line thinking to the realities of corporate reporting.
In the Corporate Accounting Services group, with a staff of 45, half of the people come from a Big Four accounting firm. The former CVPshares some of the very basic challenges in transitioning this team to a new approach:
“The integrated reporting process was a cultural challenge. Everyone in the department had the same background. They shared a common approach about how to do things, how you prepare, how to plan.”
Some of the regulatory requirements further complicated the transition. Because Novo Nordisk was required to comply with the internal control reporting requirements of the U.S. Sarbanes-Oxley Act of 2002, the team shared an understanding about the need for robust controls, processes, and systems to ensure data quality. From an accounting and finance perspective, sustainability and other non-financial information generated by systems that were not Sarbanes-Oxley compliant did not belong in the annual report.
There was also a challenge related to internal controls. In finance and accounting, data was subject to preventive and detective controls. This thinking was not prevalent amongst groups compiling non-financial data. Preparers of non-financial information asked whether they had done something wrong when subjected to the same reviews.
Another cultural dilemma was posed by differences in determining materiality for financial and non-financial information. Financial materiality is often defined as a percentage of income before taxes or as a percentage of an account balance. In the financial world, you generally have a fixed amount, but how do you define materiality for the other information—rate of employee absences or for CO2 emissions?
- Strong values orientation and reputation attracts and retains top talent;
- Transparency increases market trust – and facilitates stakeholder relations;
- Integrated reporting helps the company navigate difficult decisions;
- Stakeholder network and communications breeds goodwill, provides better access to product and market information;
- Triple Bottom Line approach has benefits in three dimensions:
- Risk management – license to operate and innovate
- Incremental innovation – through development of business practices based on stakeholder inputs
- Radical innovation – through a broader systems approach, tackling bigger societal problems at their roots via sustainable, mutually accountable partnerships.
As Miguel Nogales, a Partner at Generation Investment Management sums up:
“My strong view is that Novo’s approach to integrated reporting has helped them make better decisions over time, hire better people, and have a stronger culture. This has ultimately led to a better earnings performance which has been rewarding for shareholders.”
Other organisations should learn that there is a need to bring both values and direction to the table. A solid company wide value commitment creates and environment for innovative thinking along the lines of social, environmental and business performance (escpeccially in regards to long-term reflection). Integrated reporting and executive management commitment support and guide the direction on how to achieve long-term success on the three bottom lines. Values and direction are a recipe for success.
Our own invetment in values can be traced back to around 1922 to 1925, the founding years of the companies that make up the current Novo Nordisk. It was decided even then that Novo Nordisk (in its then form) would be a company deeply invested in sustainable solutions. Decisions and experience by the company’s founding families had already formed the deeply rooted values which have become the foundation and drivers of our current sustainability work.
For companies that do not have such a history and principled rooting, it is not a simple plug and play excersise. It is fundamental change. It takes an assessment of the company’s values – what they are and what you would like them to be. The values should be aligned with your core competences as a business. It is then critical to identify the factors that must be measured. Measurement helps ensure you are delivering to your values and helps uncover opportunites to create shared benefit, to society, your customers, your employees and the business.
Joe Tidd, John Bessant, Keith Pavitt; Learning to Look – Stakeholder Innovation in Novo Nordisk; Wiley, Europe Case Studies 2005
Triple Pundit: Is Novo Nordisk Really the Most Sustainable Company in the World?
Strategic Imperatives, Novo Nordisk Named Global Leader in Sustainability
Kyle Peterson, Matthew Rehrig, Mike Stamp, Samuel Kim; Competing by Saving Lives: How Pharmaceutical and Medical Device Companies Create Shared Value in Global Health; Foundation Strategy Group, March 2012
Novo Nordisk website
For more information about Novo Nordik’s approach to sustainability, go to http://www.novonordisk.com/sustainability/default.asp
For more information about how Novo Nordisk is driving change for people affected by diabetes, go to http://www.novonordisk.com/about_us/changing-diabetes/CD_programmes.asp
For more information about how Novo Nordisk is addressing the many faces of haemophilia, go to http://www.novonordisk.com/about_us/improving_haemophilia/our-ambitions.asp