AGENCY PROBLEM ON

THE OWNERSHIP OF ICA GRUPPEN SWEDISH COMPANY

INTRODUCTION

ICA gruppen is a Sweden based retailer company which is the food retail-based company that
also includes real estate, banks and the pharmacy chain in the retail business. In the early
stages the company was found with the idea of business model created by Hakon in
1917.After 1938 with more than 1500 retailers separately the company of ICA have been
established having the half of the share to the individual. With around 1,300 stores and a
market share of around 36%, ICA Sweden is the leading grocery retailer in the country. The
business is operated in cooperation with independent ICA retailers. They each own and
operate their own store, which makes it possible for them to tailor concepts and offers to local
demand. There is also extensive collaboration on things like expansion, sourcing, logistics, IT
and marketing communication, enabling economies of scale to be achieved. For ICA
Gruppen, a determined sustainability effort and strong community engagement go hand in
hand with long-term profitability. This has been the case since ICA was established back in
1917. Their overall objective is to increase shareholders value and thus meet the demands of
the owners on their invested capital.

According to the ICA Contract, the regional company initially owned 91% of the shares in a
new ICA Store and the individual ICA store-keeper owned 9%. Losses in the first years were
covered by intragroup transfers from the regional company to the store. The regional
companies were the risk bearers of the stores.

When the store began to show a profit, and after the transfers from the regional company had
been repaid (with interest), the store-keeper could acquire the rest of the shares (with the
exception of one share that was kept by the regional company) at their nominal value. The
regional company was entitled to a fixed percentage of the ICA Store’s profit for a 10-year
period following the store-keeper’s acquisition of the rest of the shares. There was a rule
stating that the ICA store-keeper, when selling his shares, had to offer them to the regional
company first. There was also a pricing rule; the value of the shares was to be the equity in
the store corporation. The salary of the store-keeper was also stipulated in the ICA Contract.
The salary was tied to the sales volume in the store. This case revolves around the ownership
form of the ICA company and the steps taken to overcome the conflicts in the transfer of
shares between the regional companies and the group.

AGENCY PROBLEM

There were ICA Stores that were possessed 100% by the individual retailers and there were
stores in which the regional company had a substantial share on a perpetual basis. From the
case it obviously proposes that a consistency in the ownership of the ICA Stores that was not
there. Initially, there are the agency problems in the stores. Besides, there are the agency
problems in the regional companies. A significant observation that is presented in this case is
that these two are interrelated. The structure of residual rights in the ICA Stores was with the
end goal that the residual claims were confined to the store-keeper who were most significant
chief.

The agency costs were moderately low because the significant chief in the ICA Store was to a
huge degree influenced by the financial results of his own choices. Then again, there were
additionally hindrances. The cost of capital was moderately high in the absence of economies
of scale in financing and risk sharing. The store-keepers had restricted financial resources,
and bear the risk all alone.

During the 1960s there was an expanded need of capital in the ICA Stores because of
technological turn of events and the presentation of self-administration. The retailers couldn't
raise the capital themselves. The regional companies gave the finance through the ICA
Contract. This tackled the capital problem. but could likewise be relied upon to cause higher
agency costs. The structure of residual rights in the regional companies is unique in relation
to that in the stores. The chiefs were not residual claimants. This could be required to mess
agency up. The ICA store-keepers were residual claimants and residual risk bearers in the
regional companies. They were likewise customers through their stores. The distribution of
the residual is an indispensable issue.

The residual must be distributed to the residual claimants eventually somehow to guarantee
their proceeding with interest in the undertaking. The residual claims in a regional company
could theoretically be distributed in the types of dividends just as price decreases. The
distribution of assets to the proprietors in Hakon as dividends is comparative found in the
other regional companies. The extent of value that was distributed to the proprietors as
dividends plainly diminished. Dividends were not changed in accordance with the
development of benefits or value, but were a level of share capital. This indicates that
dividends were not seen as a method for distributing the residual to the residual claimants, but
rather as a fixed pay-off to one sort of specialist the lawful proprietors.

The methods for distributing the residual to the residual claimants, the ICA store-keepers,
was by means of price decreases in the offer of merchandise to their ICA Stores. The residual
rights in the regional companies were confined to customers. The individual ICA
store-keeper had the residual right simply by righteousness of being a storekeeper. He didn't
reserve the privilege to move the residual claims in the regional company openly when he
sold his store.

The residual claims in the regional companies were not unreservedly transferable. There was
a solid impetus for the ICA store-keepers supporting the distribution of the residual in the
regional companies to the stores through the price mechanism. The potential problem was not
unravelled even after the introduction of B-shares in the company.

REVIEW OF LITERATURE

ICA Gruppen, which was previously called Hakon Invest, was originally ICA Förbundet
Invest. The company was formed when Ahold became an owner of ICA AB in 2000. The
new company’s assignment was to exercise active and responsible ownership in ICA AB and
to strengthen and develop the ICA Idea.

In conjunction with the change of ownership in ICA AB in 2000 the former owners of ICA
AB were offered the opportunity to subscribe for shares in ICA Förbundet Invest. After the
issue, the Association of ICA Retailers owned 75% of the shares in ICA Förbundet Invest and
the remaining 25% were owned by ICA retailers and former ICA retailers.

In 2005, ICA Förbundet Invest changed its name to Hakon Invest ahead of the IPO. Hakon
Invest was listed on the Stockholm Stock Exchange’s O list on 8 December 2005 (Share
History, n.d.).

This paper looks at some models in agency theory which relate a firm's ownership form to
agency problems and residual claims. The discussion is based on a close examination of a
successful Swedish firm, ICA, whose ownership form is of theoretical interest. The relevance
of the theory in this case is demonstrated by identifying specific problems in ICA from the
models (Schuster, 1990). 

EXPLANATION OF THE CASE

This case is dealt with the problem between the shares of the company and the policy of the
transferring of the ownership after the founding time period. Initially the 1500 individual
retailers started the company of the food retail company and with the merging of the whole
sale company, combining 4 companies the new firm called ICA AB was established in the
year of 1939. After the Hakon deal was made with the individual retailers were made and in
1972 the ownership change policy is made where the ICA association was the top
management dominating the individual retailers but the individual retailers were the members
of the association.

The regional company owns the half of the shares and the residual shares were owned by the
individual retailers. the individual retailers were called as the ICA store keeper. Regarding the
ownership policy the association has made a new policy by introducing the B shares, it says
that every shareholder is required to hold the B shares of the ICA reginal company. and there
was also a statement that if a store keeper decided to sell the shop the shares must be
transferred to another store keeper. And then final ICA contract was introduced which was
the major deal for all the members and management of the ICA management association. The
ownership deal ICA contract was made between the regional company and the store keepers.
According to this contract, the regional company owns the 91% of the share and the rest 9%
was made to kept with the store keeper.

This shows that the priority of the ownership was kept with the side of the regional company
as because the regional company provided the capital requirement of the company in the year
of 1962. So, the ownership was made on the regional company as they are the top share
holder. since that made the regional to take over the domination, the capital fund was
acquired at the initial stage of the regional company. Misleading in the first years were
covered by intragroup exchanges from the local organization to the store. So, it reclaims that
there was an agency problem in the regional company as well as the agency problem in the
retailer’s shops. Thus, the two problems are interrelated. Then in 1972 there occurs the
cooperative system were the introduced, in which the system was scheduled as per the law of
cooperative states that each member can claims the equal number of the assets and the shares.
So, they also can admit the new member without any charge. these made the owners to pool
their resources.

So, in 1979 Jensen and Meckling finally found out the flaws in the cooperative system and
then turned out in the limited time horizon way. this made a huge problem in the transfer of
the ownership when we sell the shops. i.e., the residual claims are not being transferable
when the claimants (shareholders). there occurred the risk that the residual claims are not
freely transferable. Even after the introduction of the b shares in 1982, which made the
claimants only transfer the values equal to the normal value or present value of the share
through the B shares.

Operational, financial factors are affected by the company and only faced by the individual
retailers not by the regional company. So, the ownership of the company has been the main
part in the agency problem.

DETAILED ANALYSIS

According to the paper published on the year 1990, it was stated that the company was facing
a financial issue in the partnership, At the start of the company there was the partnership
between the retailers and the wholesale company to increase the sales rate in the regional
company. To make the company to get into the successful market only they decided to make
the company to partner with the retailers and the regional company. After this they got with
the ICA association which is the top most management in the ICA company they were the
short of the capital amount in developing the technology and resources so that the wholesale
company came forward on the paying the funds for the capital on the development. To earn
up the capital on the interest the whole sale company was made the primary shareholder and
the ownership was also on the hands of the regional company. So, by this capital investment
the shops are developed in the market and gained good scope on the future by developed
technology. So, on acquiring the ownership, the company made some of the contract and the
deal favourable of the regional company as they want to take the capital invested money. after
that the residual claims transfer was made tough by the owner regional company, they made
the residual claims the non-free transferable. Thus, the individual retailers were facing the
huge impact on their ownership on the own stores. the profit also was not acquired by the
individual retailers. So, the revenue owned by the retailers were not up to the mark and the
salary to be paid to the shop managers also in the risk hands of the individual retailers. This
was the major problem of the company retailer shop owners according to the ICA contract.

Top events in the ICA groups

1917
Hakon starts ICA. there by collaboration with the retailers and the purchasing centres their
design was to achieve a good economic scale in the market.

1938
ICA AB was establishing with the Hakon idea

1940
ICA-handlarnas Förbund is prepared and launched.

1964
The ICA logo was designed which is the most familiar logo in Sweden.

1966
ICA becomes the market topper and preparing with the success to build the stores and open
it.

1972
The name of the purchasing centres is changed to ICA AB. ICA-handlarnas Förbund
becomes the main shareholder in ICA AB.

1998
ICA AB and Norwegian Hakon Gruppen AS merge under one parent company – ICA AB.
ICA Förbundet (wholesale company), which owns ICA AB, becomes the parent company,
but Canica AS, which owns Hakon Gruppen AS, also becomes a significant shareholder.

2000
An agreement with Royal Ahold is concluded. At the end of 2000 ICA Förbundet Invest
owns 30% of the parent company ICA Ahold AB, while Norwegian Canica AS owns 20%
and Royal Ahold owns 50%. Hakon Invest is created under the name ICA Förbundet Invest
AB.

AFTERMATH

In the case, the vital part is the ICA contract made by the regional company which made the
entire retail shop owners to look for the ownership transfer from the wholesale company. As
that of the company is the major shareholder of the ICA so that they bided the law n
preference of their own way gaining the profit, they were not kept the state of the store
keepers as they also the members of the ICA association.

If the company has made the same issue then the ownership would be in the hands of the
Wholesale company, but the efforts made by the individual retailers who made all the efforts
to start the company would have been wasted and after this the retailers who were not able to
pay the salary to the managers will have to make a decision to sell their shares to the
wholesale company without any returns as the law was mentioned that the residual claims are
not easily transferable, so that the wholesale company would take over the all the
responsibilities of the ICA association .If it happens then the goal of the all the individual
retailers are wasted without any concern about the partnership. Finally, to gain the profits the
wholesale company will eliminate all the members of the association so that they will become
the top commanding to the ICA AB.

In the second, if the residual claims are made easily transferable then the individual retailers
(store keepers) will have the shares of the company which they will be provided with the
company shares and the equity shares of the company also. so that the payment salary will be
made easier and the retailers will make them part of the company. the company would be safe
and all the shareholders will be safe in such a way of uprising the company’s market share
there by increasing the shareholders so that the reputation of the company and so the financial
status, policies, shares everything will be on the equally distributed to all the contained
shareholders in the company. After this the company has to look for major funding company
to provide their fund but not the shares.
At present the shares were equally distributed so that there was no problem with store
keepers. Each store is owned and operated separately, but operations are coordinated within
the group. All feature ICA brand products. Now the company has emerged in the many field
like real estate, bank, and pharmacy chain in the diverse countries by abiding their law.

Finally, the ICA has made the new management governance flow chart which the
two-company having the respected shares and the management members in the important
decision-making process.

ICA MANAGEMENT TEAM

fig. New managemental structure of ICA groups with different sectors

 LEARNINGS

From this case we can get some of the insights that the company who is seeking for the
capital investment should it directly involve them in the shareholder part such that the future
of the firm and the revenue, market share of the firm would be directly rely them to make any
decision on the company. It would be difficult for the owners to take the decision and get the
profit out of them. as they do all the hard work on developing and running the business. But
without any work and restrictions, only investing the capital amount will not provide them
the opportunity to take over the company on their hands. For the betterment of the company
and the owner they must provide the fund raisers with limited policy so that there will be
always the limit between the company and the funders.

This kind of similar structure to ICA in any company would lead to disputes and problems.
This is restricting the claimant rights to the storekeepers who are also the shareholders.

There is a risk that consolidation will be neglected and that long-run investments will be
insufficient. If the regional companies had suffered from a limited time horizon for their
residual claimants, one would expect this ratio to be lower than the ratio of listed companies.
where the residual claims are freely transferable, and where they constitute rights in net cash
flow for the life of the organization.

From the case of the financing of the ICA Stores and the regional companies is that a
formulation and analysis of the problem in an agency perspective could be helpful. The
original individual ownership of the stores by the storekeepers could be seen as a way of
avoiding agency problems. The introduction of the regional company’s partial ownership of
the stores through the ICA Contract could be interpreted as a way of solving the capital
acquisition and risk problems that accompany individual ownership. And finally. the transfer
of the ownership to the store-keepers could be interpreted as a way of mitigating the agency
problems arising from the regional company’s partial ownership of the stores.
 CONCLUSION

Though ICA had an ideal rights structure, alternative structures like the actual residual claims
in retailing combined with unrestricted residual claims in wholesaling could have been better.
ICA’s success in raising enough funds for expansion is that the management in the regional
companies could counterbalance the alleged short-sightedness of owners and secure long-run
investments (which was not contrary to the managers’ interests). Also representing future
ICA store keeper’s interests was easier since the goal conflicts between the individual
principals and between the principals as a group and the agents were not very strong in ICA.

The case of ICA analyses companies characterized by a high degree of continuity in the
composition of their business portfolio, and in their organizational and financial structures. A
focus on residual claims and residual risk implies a perspective rather different from a focus
on legal ownership.

Another inference from the case of ICA is that ownership form cannot always be analysed
independently of operations. This case emphasizes the interaction of operational and financial

factors, and the need to consider the characteristics of the product market. Regular analysis

of the price policy is important to an understanding of the residual claims structure in a

customer owned firm could be generalized to firms owned by suppliers, employees, etc.
Some factors. which are treated as independent of the residual rights structure, help to control
the agency problem. These are the competition between managers and the competition
between firms. It is difficult to assess the importance of these factors relative to the residual
rights structure.
It is possible that managerial competition is less in a company with a cooperative residual
rights structure, because it is more difficult to construct effective incentive pay-offs. It is also
possible that competition between companies is a less efficient remedy against agency
problems, because it is harder to measure the profitability of such a company.
The overall conclusion considering ownership forms is that there seems to be a possibility for
stronger focus on the interpretations of different residual claims and the ties between the
structure of those claims and the firm’s operations.

REFERENCES
Schuster, W. (1990). Agency problems and ownership forms - The case of ICA.
Scandinavian Journal of Management, 6(4), 251–266.
https://doi.org/10.1016/0956-5221(90)90028-F
Share history. (n.d.). Retrieved December 13, 2020, from
https://www.icagruppen.se/en/investors/shares/share-history/