4 Social responsibility in the finance industry

4.1 Introduction

A well-functioning banking system plays a central role in all countries. Banks accept deposits from the public, are responsible for the provision of cash, and provide credit that funds investments. Historically speaking, the emergence of banks and other financial institutions has constituted an important basis for economic growth and modernisation. Accordingly, the social responsibility of the banking sector primarily involves ensuring that there are healthy, solvent and liquid banks that perform their core tasks in a sustainable manner.

For almost 200 years, savings banks have been a cornerstone of the Norwegian banking system. A characteristic of savings banks is, and has historically been, engagement in philanthropy: donations in the form of subsidies and pledges to various causes that serve the common good in the banks’ local communities. Such philanthropy is a special form of social responsibility. Philanthropy by savings banks has changed along with times and circumstances, and the scope of donations is increasing. The purpose of this chapter is to describe the background to this philanthropy, discuss relevant legislation, quantify donations from savings banks and savings-bank foundations, and outline the connection between philanthropy and public education and democracy.

4.2 Savings banks – definition, history and development characteristics

Roughly speaking, there are two types of banks in Norway: savings banks and commercial banks. The two types of banks have much in common. For example, Norwegian commercial and savings banks hold the exclusive right to accept deposits from the public, and deposit and lending activities constitute the core of the banks’ operations. The difference between commercial banks and savings banks lies in their own funds capital instruments. Banks that are organised as limited companies (commercial banks), obtain their capital by issuing shares. In the case of other banks, the capital may include either only primary capital or, in more recent times, equity capital as well. The differences in the legislation reflect the fact that savings banks have historically been self-owning, while commercial banks are owned by their shareholders and have a stronger focus on profit maximisation. This also constitutes an important financial difference between savings banks and commercial banks. For example, a self-owning institution is fairly free to set financial targets for its activities. In the book Om sparsomhed og særlig om vore sparebanker [On thrift, and particularly on our savings banks] (1898) by Hagbard Emanuel Berner1, we find old evidence that savings banks have in practice adopted other financial targets than the commercial banks. Berner wrote, among other things: “As savings banks, unlike limited liability banks, are not designed to produce dividends for shareholders, they do not seek to produce a large profit.”

The difference in profitability was perhaps greater in the past, and research indicates that savings and commercial banks have produced quite similar profits in recent times. Morten G. Josefsen has compared Norwegian commercial and savings banks over a period of 17 years, from 1985 to 2002.2 The study showed that savings banks generally took smaller risks than commercial banks. This was observable in their funding structure, investments and lending practice. Nevertheless, it did not appear that, on average, the savings banks were less profitable than the commercial banks.

Savings banks have existed for a long time. The first ones were founded in Germany at the end of the 1770s, and in 1795 the Danish-Norwegian government founded a Danish life insurance association which included a savings fund which was to accept deposits from the general public. In several countries, savings banks emerged after 1810, and in 1821 the Storting appointed a commission to consider whether savings banks should be established in Norway. On the initiative of that commission, Norway’s first savings bank was founded in Christiania in 1822. The bank was to contribute to “Industry, thrift and the promotion of good morals”.

In 1824, the Storting adopted a special law on savings banks, after savings banks had been founded in Bergen, Drammen, Skien and Trondheim. By 1840, 25 savings banks had been established in Norway, mostly in cities. Over the next 40 years, the number of savings banks grew quickly. By 1850, there were 90 savings banks, 58 of which were rural savings banks. By 1860, the number had risen to 174, and by 1880 there were over 300 savings banks in Norway.

The first Norwegian commercial bank was founded in 1848. For a long time, the number of commercial banks grew quite slowly. Norway’s locally-based savings banks provided many of the services to the business sector which “universal banks” (both commercial and savings banks), provided abroad. While other countries had universal banks and commercial banks with nationwide networks of branches, the Norwegian banking system was for a long time characterised by locally-established and controlled savings banks, often with close ties to their local municipalities.

Figure 4.1 shows the number of municipalities and savings banks in Norway from 1840 until today. The number of savings banks rose quickly until the end of the 1920s, when it approached 640. Beginning in the 1960s, the number fell sharply. In Report No. 71 (1961–62) to the Storting, the Ministry of Finance wrote that there was a clear need to merge savings banks. The Ministry took the view that there was normally no basis for having several independent, smaller savings banks in the same municipality. Nevertheless, the Ministry did not want to force the banks to merge if they did not wish to do so themselves. From the 1960s onwards, the Norwegian Savings Banks Association began to examine the savings bank structure more closely. The Norwegian Savings Banks Association’s own committees made specific, detailed proposals. Among other things, the association’s area committee proposed cutting the number of savings banks to 61. A subsequent planning committee, also appointed by the Norwegian Savings Banks Association, did not match the area committee in making such specific geographical proposals, but did point out that county savings banks might be a logical objective. The authorities set more strategic structural policy objectives for the savings bank sector. In Proposition No. 36 (1976–77) to the Odelsting, the Ministry of Finance wrote that it was desirable to have larger regional units, but that the concrete structural rationalisation required was something for which the savings banks themselves had to take responsibility.

Since 1975, the number of municipalities in Norway has remained fairly stable, while the number of savings banks has dropped sharply. From 1970 to 1980, the number fell from 493 to 322, and fell further to 142 by 1990.

The data series for savings banks is based on 10-yearly observations in the period 1840–1900, and on five-yearly observations in the period 1900–1920. The data points between these regular observations are estimates.

Kilde: Sparebankstiftelsen DnB Nor

At the end of 2011, there were 113 savings banks and 15 savings-bank foundations in Norway. In addition, various savings banks have entered into different forms of cooperation in recent years. The Sparebank 1 and Terra alliances encompass around 100 Norwegian savings banks in total.

The drop in the number of savings banks in recent decades indicates that savings banks have adapted to economic, technological and social developments. Changes in savings bank structures reflect the development of the Norwegian economy and the demands made of the banks in a modern economy. For example, the dismantling of credit regulation in the 1980s meant that local savings banks faced increased competition, causing downward pressure on interest-rate margins. As a result, savings banks have also had to change in order to cut costs. In addition, bank operations have become more demanding over time, and requirements relating to, for example, IT and product development are constantly increasing. While savings banks were generally small just a few decades ago, there are now large, medium-sized and small savings banks.

4.3 Philanthropy among savings banks

4.3.1 Introduction

The entire finance sector engages in tasks and functions which involve social responsibility. The most important function the banking system performs for society is to run good, efficient banking operations. Moreover, savings banks have exercised particular social responsibility as regards the use of profits. Under section 2b-18 of the Financing Activities Act, savings banks may retain their profits or distribute parts of the profit added to the primary capital to society in the form of donations to causes which serve the common good. Such funds may flow from the banks to the recipients through various channels. Profits may be used to make direct donations to causes which serve the common good, or may be transferred to funds for such donations or foundations engaged in causes which serve the common good, which distribute the donations further.

Distributions and allocations of donations to funds form part of a savings bank’s annual settlement. Savings banks’ articles must contain provisions on, inter alia, the banks’ activities and how their profits may be used (see section 4 of the Savings Banks Act).

It is the supervisory council, the supreme body of a savings bank, which decides whether the bank will make donations, how much to donate, and who is to receive the donations. The decision regarding who is to receive donations is often delegated to the bank’s management or to a special donations committee.

The savings-bank foundation Sparebankstiftelsen DnB Nor was founded in 2002 as the first of its kind in Norway, when the savings bank Gjensidige NOR Sparebank was converted into a limited company. A 2009 statutory amendment made it easier for savings banks to choose between different conversion and merger models. In many cases, the changes meant that all or parts of savings banks’ non-owned capital was separated out into a savings-bank foundation, which was given an ownership interest in the new savings bank or limited liability savings bank. Such savings-bank foundations are required to use their profits for similar purposes as those of a savings bank, and may thus make donations to causes serving the common good.

4.3.2 Causes which serve the common good

According to the Nynorsk Norwegian dictionary,3 the word gåve (“donation”) derives from the Norse word gáfa, and indicates something which is given or received without payment. In the same reference work, the word ålmennyttig (“common good”) is simply illustrated by means of an example: “allocating money to measures which serve the common good”. In the Bokmål Norwegian dictionary, the definition is “of use to the general public”.

The philanthropic history of savings banks shows that particularly the interpretation and application of “causes serving the common good” has been flexible and subject to change over time.

In his book Om sparsomhed og særlig om vore sparebankar [On thrift, and particularly on our savings banks] (1898) Hagbard Emanuel Berner wrote:

“The profits which the [savings banks] produce go to “causes serving the common good” (such as: church and religious causes, to museums, collections, libraries and reading rooms, the schooling system, arts and crafts and handiwork schools, children’s homes, workers’ associations and workers’ homes, associations to support the sick and relief associations, musical and artistic causes, water pipes, etc.)”

Norwegian society has changed radically since Berner wrote this. Many of the causes listed above are clearly public responsibilities today. It is worth noting that several of the causes are important for the democratic infrastructure – donations to village libraries, reading rooms and schools in particular promote public education. A precise expression of ambitions to strengthen public education are found in Snåsa savings bank’s articles. Snåsa savings bank was founded in 1886 and was the first savings bank in Norway with articles written in the Nynorsk form of Norwegian. Paragraph 30 of the articles reads as follows:

“Once operating capital of at least 1/10 of the sum owed to all depositors is set aside, the council shall be entitled to make donations from the accumulated capital or the annual profits of the bank to suitable causes, particularly to support efforts in the area of Snåsa, which strengthen the cause of public education.”

The paragraph shows an understanding of social responsibility and the term “suitable causes” which fits well into a democracy. Such thoughts remain useful. Savings banks continue to make donations to recipients, projects and measures which in various ways support education, strengthened public institutions and democratic participation.

Donations made by savings banks have differed in form over the years. Current law sets no specific requirements in relation to the type of donations. In other words, donations may still be physical or intangible. The law does not lay down rules regarding who may receive donations, although the requirement that donations must serve the common good naturally limits the circle of potential recipients and types of donations. The law provides that it is the savings banks and savings-bank foundations that are to make the donations. Accordingly, they cannot delegate decisions on donations to another party (outsourcing).

4.3.3 A legal-history perspective

For a long time, savings banks’ philanthropy was regulated by the articles of the individual savings bank. Since 1887, such philanthropy has been regulated by law. Until 2009, the law imposed a ceiling on how much profit could be donated to causes serving the common good.

The legal history begins in 1824, when the first Savings Banks Act was adopted by the Storting. The act did not regulate savings banks’ establishment, structure or activities, but did allow savings banks to have their articles approved by the King. Such approval gave the banks certain legal rights, such as the right to enforce debts and to conduct forced sales. The act of 1824 contained no provisions on donations to causes serving the common good. This was regulated by the articles of the individual savings bank.

Since 1887, savings banks’ donations to causes serving the common good have been regulated by law.

Section 2c of the 1887 Act relating to Savings Banks reads as follows:

“The profits on the enterprise’s activities shall be added to the primary capital. Only if the primary capital – in relevant cases after the deduction of paid-in contributions and interest thereon – exceeds one-tenth of the total sum of the enterprise’s liabilities may a decision be made to apply the excess sum or a part thereof to causes which serve the common good, in accordance with the detailed provisions of the plan.”

The ceiling on how much each savings bank could donate promoted banks’ solvency and meant that capital was retained in the banks, benefiting the local population in the form of banking activities.

In 1924, a new Savings Banks Act was adopted following several years of bank crises and economic depression.

Section 50 of the 1924 Act relating to Savings Banks reads as follows:

“The annual profits from a savings bank’s operations shall be added to the primary capital, unless otherwise provided in this act.

If the primary capital – in relevant cases after the deduction of paid-in contributions and interest thereon – exceeds one-tenth of the savings bank’s liabilities, up to 40 percent of the profits may be used for causes which serve the common good. If the primary capital has not reached this size, but exceeds NOK 100,000.00, up to 20 percent of the profits may be applied in this manner.

Thus, the part of the profits which may be distributed in the form of donations may be wholly or partly allocated to a donation-adjustment fund, from which allocations of up to 20 percent of the fund’s capital per year may be made to causes which serve the common good.”

In the years following World War II, it became clear that the legislation governing savings banks and commercial banks had gone out of date. Circumstances and needs had changed. Accordingly, a new Savings Banks Act was adopted in 1961. However, no major changes were made to the right to make donations, and savings banks could still give up to 40 percent of their profits to causes which served the common good.

In 1970, the ceiling on donations was lowered to 20 percent of profits, and further to 10 percent of profits in 1977. In 1987, the provisions on donations were adjusted as a result of savings banks being permitted to issue primary capital certificates to obtain equity. The primary capital certificates conferred entitlement to a proportion of bank profits. Under the amendment, savings banks could continue to distribute up to 10 percent of the part of the profits falling to the banks’ self-owned capital. In 2002, the ceiling was raised again, to 25 percent.

Following the 1987 statutory amendment, the authorities faced difficulties in finding solutions which balanced the interests of the self-owned capital with those of the holders of primary capital certificates, which treated the various owners of an institution as equally as possible, and which protected the individuality of the savings bank sector. The Act of 19 June 2009 No. 46 replaced the term “primary capital certificate” with “equity capital certificate”, and repealed the rules which imposed a ceiling on how much savings banks could donate. The repeal was connected to savings banks’ wish to become more attractive for equity investment. Equity capital certificates clearly have common features with shares. The main differences lie in the influence over bank management and the differing capacity to bear losses. In Proposition No. 75 (2008–2009) to the Odelsting on the Act relating to changes in the Financing Activities Act and certain other acts (capital and organisational forms in the savings bank sector, etc.), the Ministry wrote the following about the effects of the statutory amendment on savings banks’ solvency:

“A requirement is introduced that the board must notify Kredittilsynet [today, Finanstilsynet, i.e. the Norwegian financial supervisory authority] if the total distribution from the annual profits is to be set higher than 30 percent of the profits according to the profit and loss account. It is emphasised that what is meant here is the total distribution, i.e. both that which is allocated to the owners of equity capital certificates and that which is allocated to the institution. The reason for such a provision is found in the consideration of protecting the solvency of the institution in the short and long term, and in the consideration of financial stability. In the Ministry’s view, it is important that the authorities, in addition to holding powers to ensure solvency under the capital adequacy regulations, have powers to intervene in specific transactions which may have consequences for the solvency of the institution. It is therefore proposed that intended distributions and donations totalling more than 60 percent of the profits according to the profit and loss account must be approved by Kredittilsynet. The Ministry envisages that normal distributions and donations which are on a par with previous distributions and donations, see the appropriateness limitation, will normally be approved if the capital situation of the institution otherwise indicates that this is sensible.”

Through the 2009 amendments, the legal basis for savings banks’ donations was moved from the Savings Banks Act to the Financing Activities Act.

4.3.4 Savings-bank foundations and donations

As stated, a savings bank may make donations to a foundation engaged in a cause which serves the common good. The Financing Activities Act states that banks’ articles may provide that dividends allocated to the self-owned primarily capital may be used to make donations to causes which serve the common good or be transferred to a fund which makes such donations (the donations fund), be transferred to foundations engaged in causes which serve the common good, or be used to make distributions to policyholders or other customers.

Foundations engaged in causes which serve the common good and which are established by a savings bank are subject to the rules of the Financing Activities Act. Under the act, Finanstilsynet may decide that a savings-bank foundation shall be subject to the supervision of the Norwegian Gaming and Foundation Authority, subject to certain conditions. The provisions of the Financing Activities Act do not prevent a savings bank from making donations to a foundation engaged in a cause which serves the common good which is not subject to supervision by Finanstilsynet, as long as the foundation is the end recipient of the donation.

The mergers of the savings banks Sparebanken Møre and Tingvoll Sparebank, and of Sparebank Vest and Sauda Sparebank, were the first two licensing cases processed after the new statutory rules on conversions and establishments in the savings bank sector came into force. For the Ministry, it was important to ensure that the processing of these cases and the decisions which were implemented provided a good basis for processing similar licensing cases in the future.

The decision concerning the merger of Sparebanken Møre and Tingvoll Sparebank stated that the savings-bank foundation which was to be established should be subject to the rules in the Financing Activities Act, even though the foundation was to own less than 10 percent of the acquiring bank (i.e. the merged bank). Accordingly, the Ministry stipulated that the savings-bank foundation was to be subject to the supervision of Finanstilsynet regardless of the foundation’s ownership share in the acquiring bank. The reason is that the Ministry considers it important that financial foundations and savings-bank foundations that are subject to the rules in the Financing Activities Act are also subject to the supervision of Finanstilsynet.

The Ministry of Finance has given great emphasis to the consideration that the authority which has supervisory responsibility for financial markets, including overseeing compliance with financial markets legislation (i.e. Finanstilsynet), should also conduct supervision of the transfer of donations from savings banks to foundations engaged in causes which serve the common good. The Ministry also emphasises that the supervisory authority should have expertise and powers to supervise in this important area of its responsibilities, so that it does not lose its power of definition in the area.

Financial foundations, including savings-bank foundations, can only be established by financial institutions not organised as limited companies. Such establishment may follow a decision to merge, demerge, wind up or restructure a savings bank, or the conversion of equity capital in such institutions. There are currently 17 savings-bank foundations in Norway. Most of these have been established after a merger of savings banks. The number of savings-bank foundations is expected to increase as more savings banks merge. Like the savings banks, savings-bank foundations may donate profits to causes that serve the common good. A savings-bank foundation engages in business activities in the sense that it manages the funds it receives with the aim of securing the highest possible return.

Savings-bank foundations established after mergers have a key function in the core area of the discontinued savings banks. Section 2d-8 of the Financing Activities Act requires donations from savings-bank foundations to be used “particularly to promote development in areas in which the capital which is added to the foundation upon its establishment was generated”. Most savings-bank foundations have also included a requirement in their articles stating that donations to causes which serve the common good must be distributed in the district which has built up the non-owned capital of the discontinued bank. The savings-bank foundation thus takes over part of the donation-distributor role which the savings bank previously played in the district.

Most savings-bank foundations have existed for a relatively short period of time. Accordingly, experiences with donations from these foundations are not particularly extensive. None of the savings-bank foundations have defined causes which serve the common good in their articles. In 2010/2011, Finanstilsynet conducted a survey of donations by various savings banks and the foundations Sparebankstiftelsen DnB Nor and Gjensidigestiftelsen. The result of the survey was conveyed in a letter from Finanstilsynet to the Ministry dated 15 April 2011. The surveyed savings banks and foundations actively and attentively promote growth and development in their local communities, and use donations to promote participation and activity. They do this in different ways. Particularly the larger savings banks prioritise donations to recipients engaged in business activities, while other savings banks and foundations give less to such purposes.

Norwegian savings banks and savings-bank foundations emphasise that donations are not be used in commercial parties’ own operations, but rather must benefit end-users. The banks and foundations also emphasise that their donations are not to create competitive advantages or disadvantages for businesses.

4.3.5 Philanthropy in figures

Statistics Norway has previously published statistics on savings banks’ philanthropy. These were published annually from around 1914 until 1923, cf. the publication series Norges Sparebanker by Det Statistiske Centralbyrå (the central bureau of statistics, today Statistics Norway). In these statistics, donations to causes which serve the common good were divided into different measures. In 1923, the savings banks distributed NOK 1,152,520 to “causes which serve the common good”, which amounted to 0.75 percent of their total revenue. The measure which received the most support in 1923 was “associations to support the sick and relief associations, support and care of the poor, etc.”

A summary of the donations made by savings banks from 1975 until today shows that total donations have increased considerably in the last 10 years; see Figure 4.2A. In 2008, total donations fell due to the financial crisis.

Figure B shows data supplied by the Norwegian Savings Banks Association for donations by savings banks to different causes from 2003 until today. The data shows, among other things, that donations to business initiatives have increased.

Kilde:  Statistics Norway and the Norwegian Savings Banks Association

Historically, savings banks have been happy to retain profits to build up capital, to ensure sound solvency and a basis for growth. Since 1988, savings banks have had the opportunity to raise capital by issuing primary capital certificates, and since 2009 have been permitted to donate a larger proportion of their profits. The trend in recent years has thus been to donate larger sums than before, and there is reason to believe that this increase will continue.

The 2009 statutory amendments also permit structural changes to a greater extent, and the establishment of more foundations. This may also result in more “professionalised” philanthropy as the distribution of donations is in more and more instances concentrated in one institution, in which the donations themselves constitute a key activity. Overall, donations by savings banks and savings-bank foundations are a growing phenomenon. In view of this growth in donations, the Ministry has contacted Statistics Norway to ensure the publication of statistics in this area. These statistics may provide more knowledge about philanthropy in the Norwegian savings bank sector.

4.4 Philanthropy, public education and democracy

Philanthropy by savings banks is a long-established part of the Norwegian financial sector, and an expression of local and regional social responsibility. Throughout their history, savings banks have given subsidies and pledges to various causes which serve the common good, and thus strengthened democratic participation and the public debate in Norway. Current law, and its application by Finanstilsynet, is based on the principle that the term “causes which serve the common good” should be interpreted relatively widely. Public education and democracy fall within the definition of causes which serve the common good. Moreover, it is important that philanthropy has both local and traditional ties, and that donations express social contracts between savings banks and savings-bank foundations and their local communities. Donations to teams and associations, initiatives and projects to strengthen Norway’s democratic infrastructure are of social importance. Moreover, the Ministry aims to discuss in more detail the content of the term “causes which serve the common good” in the planned proposal to the Storting on a new act on financial undertakings and financial groups, due this autumn.

Strengthening democracy through local measures and central initiatives is both an individual and a collective, and both a private and a public, responsibility. The old savings banks’ articles and donations provide examples of fundamental democratic objectives. Today, there are still examples of savings banks and savings-bank foundations that pledge funds to causes which add democratic value. Three examples of donations to causes serving the common good are described in Box 4.1. The examples show that savings banks and savings-bank foundations are constantly finding new ways to support measures that promote public education and democracy.

The most important social responsibility of banks and other financial institutions is to ensure the sustainable performance of their core operations and activities. However, the history of the Norwegian savings banks also describes broader social responsibility. This social responsibility can be developed further by savings banks and savings-bank foundations, in line with the times and circumstances.