Tuesday, January 19, 2010

On corporate responsibility, malaria, and tax

The Guardian has a headline today "Glaxo offers free access to potential malaria cures" and adds that Glaxo-SmithKline plans to publish details of 13,500 chemical compounds from its own library, with potential to act against the parasite that causes malaria in sub-Saharan Africa and kill at least one million children every year.

Malaria's no joke, as this blogger can testify, and while we cannot assess the substance of what's going on here, the sentiment seems right. Yet from our point of view, the key point is this paragraph:

"Andrew Witty, the British boss of Glaxo-SmithKline, will say in a major speech that multinational drug companies have to balance social responsibility alongside the need to make profits for their shareholders. There is, he will say, an "imperative to earn the trust of society, not just by meeting expectations but by exceeding them"."

GSK isn't the first company to embrace this notion, but a reminder is clearly needed here. This touches on one of the great questions at the heart of corporate capitalism itself. Do managers owe a narrow duty merely to shareholders, or to wider society as well? We've made our position pretty clear on this - it's the latter, of course. And with that duty comes a responsibility not to dodge tax.

TJN's director John Christensen once stood up at a conference at Chatham House in London that was discussing these matters, and mentioned the dreaded T-word. He said he had read through all the corporate responsibility statements, and never found the word "tax" in any meaningful context. Tax, he said, should be the first responsibility to be tackled from a corporate responsibility point of view; and noted that none of those present appeared to be taking account of this.

The reaction? Christensen remembers all too clearly what happened.

"When I sat down it felt like a 30 second silence. They looked at me as if I'd left a dog turd on the table."

One other thing that comes up, time and time again, is the hoary old notion that directors have a duty to shareholders to cut costs - and that means to cut the tax bill.

No, because this reflects a fundamental misunderstanding about what costs are.

Cost is a word that comes out of economics – cost applies to costs of production, the basis of capitalism. Competition forces directors to improve on price and quality, which is a good thing, and production has costs associated with it – labour inputs, material inputs, and so on. It is quite legitimate for directors to seek to drive down costs, to improve productivity, produce the output faster, and so on. That leads to better consumer benefit, and lower prices.

Now we turn to tax. You are taxed not on turnover, but on profit. On the profit and loss account, these production costs are contributors to the overall profits, but crucially tax comes after (or below) profits, which means it is correctly identified as a distribution out of profits.

Tax is a distribution to stakeholders - which includes society. So directors say "we are cutting our tax bill to cut our costs" is to exhibit a fundamental misunderstanding. They are trying to conflate distributions with costs, to confuse the public. Among other things, this confusion tends to contribute to directors' personal remuneration - which suits them. This doesn't make them any more right. Tax is a distribution, and company directors have a duty to the public, as well as to shareholders.

The time has now come to change the political culture. Some people are beginning to notice that tax is a central part of corporate responsibility, but the wake-up is proving far, far too slow and limited.

So while we're glad to see companies like GSK accepting the view that company management owes a duty to wider society, rather than just merely to shareholders, we want company managers to start acting bravely, and recognise that tax is front and centre of corporate responsibility.

Read more here.


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