States that have long treated tax breaks as a source of international competitive advantage are learning that they may be big losers. Global companies seem to be hoarding, and sterilising, billions perhaps trillions of dollars in offshore centres. Hand-wringing abounds.
For markets that are dominated by a single utility-like company (such as Google or the Amazon portal), changes in the international tax regime may be the only 'solution'. Consumers have little real choice and thus no leverage to influence these behemoths. They can carry on with modest reputational damage the only likely consequence of systematic tax avoidance as long as it remains legal.
But in some markets, such as food and most other consumer goods and services, consumers have choices. Here, the choice to avoid tax legally can more easily bring reputational damage in its wake.
It's now easy to paint companies that systematically avoid tax as unethical (even though not outlaws), putting them in the same basket as those who, for example, 'exploit' child labour in ways that are legal locally but unacceptable to customers.
Where they have a choice, consumers can, and sometimes do, choose to buy from those who pay a 'fair' amount of tax. Concerted campaigns, especially if whipped to a frenzy by politiciains, could tip this into a climate for tax avoiders that is as hostile as that faced by banks, bringing reputational damage to a scale that exceeds tax savings.
How can companies seeking to be 'fair' locally protect themselves from such a storm? Fairtrade has attracted local brands and international companies driven by pragmatism. "FairTax" could be the new Fairtrade, an independent seal of approval for international companies seeking outside confirmation that their tax structures are fair.
- Reputability LLP
- Reputability LLP are thought leaders in the field of reputational risk and its root causes, behavioural risk and organisational risk. Our book 'Rethinking Reputational Risk' received excellent reviews: see www.rethinkingreputationalrisk.com We help business leaders to find these widespread but hidden risks that regularly cause reputational disasters. We also teach leaders and risk teams about these risks. Here are our thoughts, and the thoughts of our guest bloggers, on some recent stories which have captured our attention. We are always interested to know what you think too.
Friday, 17 May 2013
Does the notion of collective board responsibility place an impossible burden on those it involves?
Members of BP’s, Shell’s and Statoil’s boards, Google’s and the boards of nine FTSE companies alleged by Action Aid as illegally failing to disclose their ownership of “almost 150 offshore subsidiaries based in tax havens” might be wondering how effectively they carried out their duties.
Could they have prevented the embarrassing situations that their companies now find themselves in? What should their actions now be to mitigate corporate trauma?
Classic risk management teaches that boards should establish their risk appetite and tolerance and ensure the board has adequate oversight of risk.
But what if the board, or its non-executives, is simply not aware of critical company actions? What if, despite the best skills and efforts, information regarding questionable corporate activities never reaches the board?
It seems likely from the examples above that many boards simply do not understand fully the environment in which they operate. Information asymmetry can be a real problem. So are unknown knowns.
Assuming that problems will be prevented by the risk management team is simply not adequate. Senior risk professionals now openly discuss the warning signs, “that the risk management profession itself is in danger of being computerised”. And they can’t be expected to seek out risks that have their origins with the boss: they don’t want to be out of a job. Board performance evaluation, as it currently stands, also appears not to address such problems.
If Boards are to exercise control, and so be able to take collective responsibility they need new tools, a new lexicon and, probably, a fresh approach, otherwise this is indeed an impossible load. If they don’t they may find themselves hanging together.