It’s nice to be nice

Sep 02, 2019

Sunday Business Post, Sunday 1 September 2019

There are worrying signs that corporate America may have lost its mind.

Last week some 180 of the captains of American industry in the American Business Roundtable, banded together to re-describe the relationships and accountabilities that executives have when running a company.  Up to now the Roundtable’s principles of corporate governance were based on the premise that corporations exist principally to serve their shareholders.  Now the purpose of a corporation should include delivering customer value, employee investment, fair dealings with suppliers and community support as well as creating long term value for shareholders.

Business governance used to be so straightforward.  People came together in firms because it was more cost-effective to work in collaboration than work on their own.  Limited liability companies were formed so that firms could seek investment and generate resources above their own capacity while limiting the risk to the investors.  The framework of management accountabilities was derived from the simple notion that the prime duty of the management of a company was to mind its shareholders.  Even though academics for the past hundred years have been using all kinds of theories to describe how firms and companies should operate, businesses remained blindly innocent of the theories and just got on doing what they do best – generating shareholder value.

Now all this is to be changed.  The approach being mooted by the American Business Roundtable proposes that management accountabilities extend to stakeholders.  In this brave new (the term they use is “modernised”) world, stakeholders include employees, customers, suppliers and also presumably relatives, neighbours and friends.

Corporate social responsibility has been something of a buzzword in recent years.   What is now being proposed could be described as corporate social responsibility on steroids, and this new emphasis on the responsibilities towards stakeholders may trigger a need for new controls on corporate decision makers.  Up to now, the received thinking was that their prime responsibility was to create shareholder value.  The American Business Roundtable legitimises taking decisions on behalf of companies which are not necessarily in the interests of shareholders but rather reflect the personal views and preferences of the executives running the business.

This can be problematic because too often corporate social responsibility can be used as cover for little more than funding the chief executive's pet project.  Maybe it just becomes a marketing strategy - buy stuff from us, because we’re good people.  This latter approach at least is in the shareholders’ interest.

Not for the first time, the value of having a solid tax regime is way ahead of this new found “importance of stakeholders” posse.  Proof of tax compliance has been an obligation for a long time when the public sector is hiring private sector services or purchasing goods.  More recently it is becoming a de facto requirement for larger entities in the private sector.  Many businesses look to ensure that their suppliers and contractors are themselves tax compliant, and structure their commercial arrangements with them to ensure that the compliance continues. 

Sundering the link between the duties of the management of the business and shareholders’ interests creates a tax conundrum.  If a stakeholder is receiving a benefit, financial or otherwise, from a company, that benefit might well be taxable. 

The tax position of some situations is clear.  Stakeholders clearly include employees.  When an employee receives an additional benefit, such a benefit is immediately taxable.  Not only that, the cost of providing the benefit to an employee is usually deductible when calculating the company's own taxable profits.  But what happens if the benefit is to another type of stakeholder where the relationship is not as clear cut?  What happens when monies are paid into local charities, or contributed to a pool among businesses in the area towards an environmental initiative? 

In such situations, the tax relationships and consequences are not clear cut.  The taxman doesn’t care whether a tax liability is generated by advanced corporate social responsibility or not.  The tax liability must still be paid.  It is notable that the American Business Roundtable omitted from their list of stakeholders a key stakeholder in every business in Western society - the local tax authority. 

Maybe corporate America has not indeed lost its mind.  It's not that there isn't merit to this “mind the stakeholder” idea, but rather the Roundtable statement is articulating what already happens frequently within companies. 

It is important that companies operate in a manner which reflect the needs of the environment and the concerns of society in which they operate.  Employees work better when their employers help them in their work and careers with appropriate training and benefits.  It is also good business practice to look after suppliers properly.  It is easier for environmentally friendly industry to raise and retain funding and increasingly, evidence of such environmentally sound strategies are sought by investors.

Commercially, it’s often nice to be nice.  Do we need a high-powered Statement on the Purpose of a Corporation to tell us that?

 

Dr Brian Keegan is Director, Public Policy, at Chartered Accountants Ireland