IKEA’s Instruction Manual

You park your minivan next to the gigantic yellow and blue building and unload the kids. They excitedly drag you towards “Småland,” the free supervised play area. After dropping the kids, you and your spouse are now free to shop alone, allowing you to focus on the perfectly arranged displays. You journey through the maze, recording item numbers. Finally, you are reunited with your kids, just in time for some Swedish meatballs and a walk through the toy section. On your way out, you retrieve your items from the warehouse but they look nothing like they did in the store. They are flat-packed into skinny cardboard boxes. That evening you and your spouse spend countless hours trying to assemble thousands of pieces. You are frustrated but you know that it will be worth it. The prices cannot be beaten – you went to IKEA!

Everyday customers have this experience. They flock to over 300 IKEA stores located in over 40 countries around the world (IKEA.com). The firm is praised for its innovative business model but most stakeholders are unaware that the yellow and blue colors conceal some darker secrets. IKEA’s organizational structure is more difficult to assemble than its most complicated piece of furniture. Through the lens of deontology, I will discuss IKEA’s questionable organizational structure and its impact on IKEA’s stakeholders.

To understand any complicated story, it is best to start at the beginning. IKEA’s story began in 1926 in a small village in southern Sweden. At the age of five, founder, Ingvar Kamprad, discovered that he could buy matches in bulk and sell them cheaply to his neighbors while still making a profit. By the age of seven, he increased his range using a bicycle and he expanded his product line to include pens, pencils, and similar household items. In 1943, Kamprad founded IKEA using a small amount of money gifted to him by his father as a reward for excelling in his studies.

Kamprad named IKEA using his first two initials, the initials of the farm he grew up on called Elmtaryd, and the village he is from called Agunnaryd. Together these first initials form IKEA (IKEA.com). This is significant because it demonstrates just how deeply Kamprad embedded himself and the Swedish culture into the IKEA brand as well as its overall significance to him.

(Ingvar Kamprad – IKEA.com)

In 1948, Kamprad introduced furniture to the IKEA line for the first time. Business was doing well and Kamprad wanted to expand beyond local customers. In 1951, IKEA introduced its first mail order catalogue driving the large increase in sales that Kamprad desired. Then in 1956, the IKEA signature flat-pack was introduced. Kamprad saw the flat-pack as his opportunity for a competitive advantage. The flat packaging allowed IKEA to lower its shipping and storage expenses. It passed these savings to customers and allowed IKEA to offer lower prices than all of its competitors. This idea became the heart of IKEA’s business model centered on efficiency and low prices.

Through the years, IKEA has received much praise for its corporate social responsibility. The IKEA website boasts stakeholder management on the “Responsibility” webpage. It says “We can only ensure long term profitability by acting in a way that creates trust among stakeholders” (IKEA.com). IKEA’s website displays a timeline highlighting main accomplishments to justify this claim. In 1990, the firm adopted an environmental policy. In 1993, the firm became a certified member of the Forest Stewardship Council. In 1994, the firm aired one of the first commercials featuring a same-sex couple. In 2000, the firm released a code of conduct that explicitly outlined the legal responsibilities of all of its suppliers to ensure environmental sustainability and protect against child labor. In the same year, the firm joined with UNICEF and Save the Children to begin a donation program (IKEA.com).

In addition to these achievements, IKEA’s flat-pack furniture immensely reduces carbon emissions during shipping. The firm has also been admired for making furniture available to the masses through its low prices that result from its business model. For example, last year IKEA designers discovered a more efficient way to pack a three-piece sofa. This “shaved $135 from the price tag” (Economist SOS).

Case studies and marketing textbooks venerate IKEA’s scientific maze-like layout that maximizes dollars spent per square foot. It is not a coincidence that parents retrieve their children before walking through the section of small items and toys since children are more likely to grab items off the shelves (Armstrong, 95). One would think that all of these accolades would create an impressive portfolio for any firm, right? But would this be an impressive portfolio for the world’s wealthiest foundation? Not even close. IKEA is “the world’s richest foundation but is at the moment also one of the least generous” (Economist FPA).

 

(IKEA Maze – Armstrong)

Before we delve into IKEA’s convoluted corporate structure, let’s consider deontological ethics since it will provide a framework for assessing the ethicality of the firm. Deontology is a “normative theory regarding which choices are morally required, forbidden, or permitted” (Alexander). It comes from the Greek word “deon” meaning duty (Alexander). Deontology “tries to establish a code of proper conduct based on the rights of the individual” by providing the “frame of reference we should use when making decisions,” (Roth, 38).

A more specific look at deontological ethics is through Kant. Kant believed we should do what is right because it is our duty. He believed “it is the intention behind an action rather than its consequence that makes the action good” (Bowie, 3). To better understand this principle, imagine an honest merchant. If the merchant is honest to earn a good reputation, his actions are not genuinely moral. The merchant must be honest because it is right and therefore his duty (Bowie). Another example is through the lens of IKEA. It is extremely apparent that the company prominently boasts its Swedish heritage. Morally, the firm’s intentions should be to boast its Swedish heritage because it would bring economic credibility and respect to the country. However, the firm’s actual intentions are to earn more money using this as a marketing ploy since the firm has not been a Swedish company since the early 1980’s. This is unethical according to Kant.

The most relevant duty Kant outlines is called the categorical imperative. He believes that we should “act only on maxims which you can will to be universal laws of nature” (Bowie, 4). In short, we should only act how we would want everyone to act. This is relevant to business because when managers make decisions they should be cognizant of the fact that they are not the exception to the rule. Mangers should run businesses how they would want their competitors to run their businesses. This would result in an ethical business environment without certain firms attaining an unfair advantage.

I would like to state my disclaimer now. I am not an expert on international tax law. However, I do believe that I am most likely one of few people who have made the effort to understand the intricacies of IKEA’s organizational structure. Kamprad’s very close associate even admitted that there are only ten people who know the full extent of the structure and how the money flows through its entities. I spent the past few weeks playing detective, tracking down facts, listening to Swedish documentaries and even translating international magazine articles in search the truth. The result of these efforts is what I believe to be the most accurate and consistent picture of IKEA’s organizational structure since it pulls from a variety of sources. Below is the picture that is included on the “Inter-Ikea” website outlining its organizational structure.

 

(Inter IKEA Structure – Produced by IKEA)

I believe that this IKEA-produced visual does not show the full picture. I have created the visual below to outline what I think is the true flow of the organization.

 

(Entire IKEA Organizational Structure – Produced by Emily Corelli)

            Let’s go through the structure slowly because as I have previously stated it is quite complex. The complete structure consists of eight different entities in six different countries. “The overall set-up of IKEA minimizes tax and disclosure, handsomely rewards the founding Kamprad family and makes IKEA immune to a takeover” (Economist FPA). Ingka Holding is the parent company for all the IKEA store franchises. Ingka holding is owned by the parent company, Stichting Ingka Foundation, which is a Dutch registered, tax-exempt, non-profit organization with a net worth of at least $36 billion. The foundation’s mission is to encourage “innovation in the field of architectural and interior design” (Economist FPA). Dutch foundations are loosely regulated and are subject to little to no third-party regulation (Economist FPA). The Stitching Ingka foundation channels its funds to the Stichting IKEA foundation, which has the same mission as Stichting Ingka Foundation. Most believe that the chain ends here. However, the organization rises three more levels through Inter IKEA systems to Inter IKEA holding and finally to Interogo Foundation. The parent for all IKEA entities ultimately is the Interogo Foundation in which Kamprad sits on the executive board of five members, including his wife and his two attorneys. Interogo Foundation is located in Liechtenstein, which is the sixth smallest country in the world and a notorious tax haven.

(Map of Liechtenstein – Google Images)

IKEA franchises pay 3% of all sales to Inter IKEA systems. This is deductible from the stores’ balance sheets, untaxed, and entirely legal through the Dutch royalties system. Additionally, all of the associated foundations claim that the money they have stockpiled is saved for charitable purposes and “for investing long-term in order to build a reserve for securing the IKEA group in case of any future capital requirements” (Economist FPA). In short, IKEA claims to be saving these funds for times of economic hardship but during the recession IKEA had massive layoffs, despite being minimally effected relative to its peers (Economist SOS). Additionally, the Interogo foundation at the top of the pyramid has its registered address at a law firm but when the Swedish television channel SVT tried to track down the office, no one would confirm anything about IKEA and sent them on an endless hunt through five different countries to locate the correct office.

Kamprad has gone to great lengths to make IKEA as opaque as legally possible. He claims that it is within the IKEA culture to be thrifty in all matters. It is estimated that Kamprad has saved between 2.3-3.2 billion euros in taxes in the last twenty years according to STV (Knaebel). Their corporate tax rate is estimated at approximately 11.6%. (Economist FPA). Put in perspective the corporate tax rate for a company of IKEA’s size in the United States is 35% and in Sweden it is 22% (Deloitte). Kamprad has even openly condemned the Swedish tax rate and sees no problem being “tax efficient” (Economist SOS).

The question remains: is “tax efficiency” ethical? According to deontological ethics and Kant it is an organizations duty to pay its fair share of taxes. According to the categorical imperative, if IKEA can manipulate the system to this extent, they are opening the gates for all other organizations to do the same. For example, it is estimated that IKEA avoids 11 million euros in taxes every year in Sweden alone. IKEA has a responsibility to pay taxes to educate Sweden’s children, maintain the infrastructure it uses to transport its goods, and ensure the safety and security of the country.

Kamprad has abused the legal system and created an overarching entity that does not uphold its duty to its stakeholders. IKEA hides behind superficial acts of corporate social responsibility that are just motivated by the firm’s concern for its image. “In some EU countries with large deficits, curbing domestic tax evasion is a priority” (Weyzig). IKEA is undermining government efforts to improve economies around the world for the betterment of society.

According to an International Estate Planning Guide written by a Dutch law firm, “foundations are mainly associated with activities other than businesses…A foundation (stichting) is a legal entity under Dutch law with two main characteristics: a foundation does not have any members or shareholders; the foundation aims at realizing a goal, as defined in its articles of association by using capital designated for that purpose” (Deurvorst, 6). The most important part of this passage is that the foundation should have no individual beneficiaries, yet IKEA foots the bill for all of the Kamprad family estates. The foundation is also run in such a way that immense amounts of capital are stored and minimal sums of money are distributed for the pursuit of the foundation’s vision. All capital remains controlled by the Kamprad family.

“In addition, a number of capitalization, auditing, and publication requirements do not apply to a foundation as it applies to a company” (Deurvorst, 8). Therefore, despite the criteria above, there is no follow up to ensure the funds are being properly allocated. Instead of being federally regulated, “board members of a foundation have the duty of care and the duty of good faith. In the Netherlands, the duty of care entails the duty to properly perform management duties. The duty of good faith is part of the reasonableness and fairness requirement that Dutch law imposes on the relationship between the foundation and its board members” (Deurvorst, 9). Dutch law is assuming that board members will act responsibly and resolutely to uphold the foundation’s mission.

IKEA’s socially responsible stunts are motivated by the consequence of effective public relations and marketing efforts thus making them immoral according to deontology. Additionally, the Dutch vision for foundations in its purist form aligns with deontological ethics because board members have a duty to abide by the law since it is the right thing to do. However, Kamprad and all of IKEA’s foundations violate the fundamental principle of working towards the foundation’s mission. Therefore they fail to fulfill their duty. Kamprad has ulterior motives and is exploiting the foundations to serve his best interests and evade taxes. He has created an organizational system that is meant to better society but instead he has used it to ensure lasting financial security for himself and his family through unethical means.

 

 

 

 

 

 

Works Cited

 

Alexander, Larry. “Deontological Ethics.” Stanford University. Stanford University, 21 Nov. 2007. Web. 26 Nov. 2014.

 

Armstrong, Gary, and Milton Kotler. Principles of Marketing. Kotler. Englewood Cliffs, NJ: Prentice-Hall, 1991. Print.

 

BALZTER, SEBASTIAN. “Stiftung Im Steuerparadies: Ein Labyrinth Namens Ikea.” – Unternehmen. Franffurter Allgemeine, n.d. Web. 26 Nov. 2014.

 

Deloitte. “International Corporate Tax Rates.” N.p., n.d. Web. 2014.

 

Deloitte. “International Tax Sweden Highlights.” N.p., n.d. Web. 2014.

 

Deurvorst, Frank. The Netherlands: International Estate Planning Guide IBA Individual Tax and Private Client Committee. N.p.: n.p., n.d. Print.

 

“Flat-pack Accounting.” The Economist. The Economist Newspaper, 13 May 2006. Web. 26 Nov. 2014.

 

Knaebel, Rachel. “Money Flowing through Tax Havens and Shady Foundations, Thanks to IKEA.” Multinationals Observatory. Multinationals Observatory, 10 Mar. 2014. Web. 26 Nov. 2014.

 

 

McGee, Robert W. The Ethics of Tax Evasion. South Orange, NJ: Dumont Institute for Public Policy Research, 1998. Print.

 

“New York Festivals – 2012 World’s Best Television & Films™ Winners.”New York Festivals – 2012 World’s Best Television & Films™ Winners. N.p., n.d. Web. 26 Nov. 2014.

 

Norman E. Bowie, I, Part. BUSINESS ETHICS AND NORMATIVE (n.d.): n. pag. Web.

 

“The Secret of IKEA’s Success.” The Economist. The Economist Newspaper, 26 Feb. 2011. Web. 26 Nov. 2014.

 

Roth, William F. Ethics in the Workplace: A Systems Perspective. Upper Saddle River, NJ: Pearson Education, 2004. Print.

 

“Welcome to IKEA.com – IKEA.” Welcome to IKEA.com – IKEA. N.p., n.d. Web. 23 Nov. 2014.

 

Weyzig, Francis. International Finance and Tax Avoidance via Dutch Special Purpose Entities. Nijmegen: Radboud U, 2013. Print.