Category Archives: Board of Directors

The Morality of Tax Avoidance

Tax

There’s an interesting scuffle about tax going on in the British media at the moment – and it seems that the Government is in danger of being responsible for companies contravening the Companies Act which was rewritten in 2006.

This scuffle started a few months ago with the ‘outing’ of various individuals who were apparently using legal tax avoidance schemes to reduce their tax burden. The newspapers – always looking for some dirt to dig up – leapt on this with joy and the resulting public furore caused a number of wealthy people to apologise publicly for avoiding tax, even though the schemes were legal, and in many cases volunteer to pay more tax.

Secure in the knowledge that a significant part of the British public supported this crackdown on the dastardly villains that were exercising their rights to legally reduce their tax bill, the next step was to take on corporations – and the multinationals were an obvious target: nasty foreign companies taking advantage of making huge profits through the sweat of the (implied: underpaid) British worker, but not paying tax on the proceeds. It’s easy for the press to whip up public support for calls that they pay more tax and for the politicians, ever ready to back a cause that would seem to be a vote-catcher, joined in. In essence, these multinationals were being blamed for cuts in welfare and other government services, completely ignoring the fact of profligate government over-spending for years, if not decades.

What has been completely overlooked in all of this self-righteous posturing (and let’s ignore the ongoing issues with MPs and their expenses) are a few important points:

  • First and foremost, every company’s directors have a fiduciary duty – as laid down in the Companies Act – to “promote the success of the company.” By volunteering to pay more tax than is legally required these boards would act in contravention of the Companies Act and, in fact, directors could therefore be disbarred from serving on boards. Even by the admission of the government, these companies are not engaged in tax evasion (that’s illegal) but are structuring their affairs to minimise tax paid, an activity that is not only legal but necessary in terms of the Companies Act. So the government is encouraging directors to act in contravention of its own laws.
  • E.U. legislation requires there be a single legal head-office for companies operating throughout the region, and companies will obviously look to put this in the country/city that makes the most financial sense overall – tax, employment, etc. So, countries that are competitive in these areas will derive most benefit, while those with higher operating/tax costs will not. That’s called free-market enterprise.
  • The UK tax system is now arguably the most complex of any, having more than doubled in size under Labour from under 5000 pages in 1997, to over 11500 pages in 2009. Such complexity will always result in loopholes being found – a simpler code means more tax, more fairly applied. What about simply imposing a flat tax system – this generally means more tax collected at a fraction of the cost?
  • Figures published early this year showed that some 52% of the working populace in the UK are employed by the State. This means that less than half the workforce is not only supporting those not working, but this massive and grossly inefficient (it must be at this ratio!) government machine, too. The issue, therefore, should not be more tax income, but less expenditure.

But, of course, common sense flies out of the window when it comes to politics.

Our revered “public servants” in the current government recognise that the wealthy, and the captains of industry are unlikely to switch their vote to Labour and by appealing to an increasingly vociferous “mob” they might garner enough votes to remain in power after the 2015 elections. Even if this means abandoning previously-held principles and, in fact, common sense, as by taking this tack they risk chasing even more companies and wealthy individuals to more favourable business climes.

Bear in mind that the top 1% of British earners pay almost 30% of all income tax (more than twice their proportion of earnings), and the top 10% pay almost 60% of all income tax. As these are typically the business owners / leaders – and therefore the employers – encouraging them to move will not only reduce the tax receipts from these critical contributors, but put overall employment at risk, too, threatening the health of the country as a whole.

It’s time for that most uncommon of things – common sense – to start playing a part in the UK; for people to realise that the government doesn’t have money and everyone needs to play their part in the economy and life of the country; for politicians to  stop trying to buy votes with short-term moves that will cost the country dearly in the longer term; and for the media to present a more balanced approach to matters and to actively seek to lift the country out of its current mess by encouraging everyone to work together for the good of all.

Advertisements

Early Birds Make the Best Decisions

Board Meeting.

Image via Wikipedia

A fascinating piece by John Tierney in the NY Times explored the concept of “Decision Fatigue,” concluding that people faced with making a number of decisions do so less well as the day wears on.

In studies with Roy Baumeister, a clear correlation was shown between the quality of decisions made at a point in time and the number/difficulty of decisions subjects had been required to make beforehand.

These studies explain the anomalies in, for example, parole being granted to prisoners by a parole board – those whose applications were heard at the start of the day, or immediately following a break for nourishment, were considerably more likely to succeed that those whose applications were heard at the end of a session, or just before a break.

Car salesmen were able to increase the value of the options taken with vehicles simply by altering the order in which the options were presented: once decision fatigue started to come into play, the buyers were more inclined to simply go with the recommended/default choice, even when it was more expensive and, potentially, less suitable for their needs.

Supermarkets have long had their ‘impulse racks’ at the checkout counters, but the real reasons these work has only recently been understood – shoppers are fatigued from all the decision-making during the shopping process and so are less able to rationally decide against a tempting treat when this is put in front of them.

What transpires from the studies is that the process of decision making depletes glucose levels in the brain and that this affects the way the brain works. In essence, some areas of the brain will work better for longer: the reward centre area continues to function well, while that controlling impulses weakens. So, our buyer who has been through a number of decisions in deciding on options for the new car will look at fewer and fewer factors in coming to a decision and be more prone to impulse – for example, “those leather seats look great.”

Interestingly, it was shown that replenishment of the glucose levels quickly restored decision-making ability, so if our buyer chewed on some sweets during the process he/she might well save some money. Of course, using sweet substances for instant glucose replenishment is just a temporary solution as the glucose derived from sugar is quickly used up – that from complex carbohydrates and proteins providing a steadier supply over time – but it certainly can help in tough situations.

If you need a decision from your boss, choose your time carefully, and maybe soften him/her up with a piece of chocolate at the start of the meeting so the glucose can be absorbed before asking for a decision, unless of course the decision you want is one that does not require change to an existing situation – in which case low glucose levels will favour the status quo.

The bottom line seems to be that you should make your biggest decisions at the start of the day (assuming you have breakfast, of course!) or after a healthy meal. In board and management meetings where there are many decisions to be taken, ensure the participants are suitably nourished and their glucose levels are maintained. As the article recommended – don’t make decisions on restructuring the business at 4pm…

 

Capitalism – What the Future Holds

Wall Street

Image by Mirka23 via Flickr

The world is in a state of flux.

With the economic downturn lingering far longer than most people expected, governments are under growing pressure to kick-start economies. However, a growing number of countries with looming debt crises and a consequent unwillingness or inability of governments to spend more money hampers this.  And, as the northern hemisphere weather warms up, we can expect to see growing numbers of demonstrations by people wanting jobs or, at least, a reduction in job cuts.

All of which leads to the question – is the capitalist system doomed?

I don’t believe for a moment that this is the case – history shows that capitalism is the most effective way for countries and people to grow their wealth – but I do think we’re going to see some far-reaching changes.

Back in September 2009, I suggested in my post, “The Perils of Quarteritis” that the short-term thinking so prevalent in recent years had contributed significantly to the crash, and that businesses would move to a longer-term, more strategic model.

The March 2011 edition of Harvard Business Review has a wonderful paper, “Capitalism for the Long Term,” by Dominic Barton, Global Managing Director of McKinsey & Company where documents his findings from 18 months of research and hundreds of meetings with business and government leaders. In this paper, Barton makes 3 points to support his conclusion that capitalism must survive, but that it needs to change, too:

  1. A return to longer-term thinking by companies, investors and politicians alike – he refers to this as “The Tyranny of Short-Termism” (my version was Quarteritis).
  2. That there is no difference between serving the interests of shareholders and of stakeholders – in spite of a more recent belief that serving stakeholders made shareholders poorer, managing for long-term value growth benefits not only stakeholders and society but shareholders, too.
  3. Company executives and boards need to act more like owners, not temporary care-takers – as by doing so they will naturally look to the long-term and so benefit the company, its shareholders, its stakeholders and society as a whole.

Basically, it all comes down to taking a longer-term view of business (as well as the economy, in the case of government) and a consequent change in leadership style, too – see my post of November 2009, “Leadership for the New Business World.”

This longer-term thinking and more inclusive leadership approach will ultimately be to the benefit of all – investors, executives, employees and society as a whole.

What do you think?

Update (31Mar11): Read the Leadership Interview with James Quigley of Deloittes, just out at N2growth.com – leadership is about trust and looking to long-term sustainability.

Can Mergers & Acquisitions be More Successful?

Board meeting room

Image via Wikipedia

Why is it that although many companies, and almost all large ones, grow through mergers and acquisitions, most of these result in a decline in overall value, rather than the envisaged increase?

In the lead-up to such activity – the “engagement period” if you like – shareholders are shown clearly the benefits that the merger or acquisition will bring: lower overall costs, great (combined) market share, stronger sales teams, more experienced management in the combined entity, and so on. All of which is supposed to lead to greater overall value for the shareholders – a case of the proverbial 1+1 resulting in a good deal more than 2.

The reality is, far too often, startlingly different with 1+1 adding up to a good deal less than 2. In other words, significant shareholder value is lost in the process.

Naturally, there are many reasons for this decline in value – most commonly those resulting from a attempt to merge two very different corporate cultures and the consequent fall-out. And much of this happens in the board room.

I’ve seen many cases of incompatible cultures clashing in boardrooms, although I’m fortunate to have avoided this first-hand. Too often, the newly constituted board in an M&A situation will have directors drawn from the two companies proportionate to the value of each part in the transaction and so the acquirer will seek to dominate the acquiree, even when the reason for the acquisition (as is often the case) is that the latter has qualities the former believes is missing from its own company. The result is the departure of the very expertise being acquired and the consequent drop in overall value.

It seems to me that there is one reasonably simple way to increase the likelihood of success – and that is to increase the size of the overall board with the appointment of further Independent Non-Executive Directors (NEDs) when companies are undertaking mergers and acquisitions.

The Corporate Governance Code states “Except for smaller companies, at least half the Board, excluding the Chairman, should comprise Non-Executive Directors determined by the Board to be independent. A smaller company should have at least two independent Non-Executive Directors.”  But how many companies actually carry this through?

Should this strong recommendation not be even more strictly adhered to during the M&A process? Bringing a substantial body of independent, experienced NEDs to a board can reduce the level of infighting and help to ensure that the talent/expertise being acquired stays in the transaction.

As we see the global economy slowly recovering, we can expect to see a strong increase in M&A activity as companies seek to assure their future positions while values are still relatively low. This is the time for boards of companies – large and small alike – to become more independent.

Related Articles