Category Archives: Recession

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.

Can the Olympics Boost British Business?

Olympic Judo London 2012 (2 of 98)

London 2012  (Photo credit: Martin Hesketh)

An interesting phenomenon has hit Britain over the past 2 weeks – the traditional British reserve has been replaced with enthusiasm and a sense of national pride I’ve not seen here before. What’s more – the normally omnipresent negativity about almost everything (not just the weather!) has been quietened to a large extent.

This gives me great hope. Can we draw on this new-found upbeat attitude and start to pull the country out of its recession?

After all, markets are driven at least as much by sentiment as anything else, and a positive sentiment among the people here will inevitably lead to a strong upturn.

So, what lessons have we learnt this month?

Firstly, and very importantly for the future, that competition is healthy after all. For far too long here, and in some other countries, governments have discouraged competition on the basis that it is unfair to those less able. Hence the ludicrous situation of school children, for example, progressing through school regardless of whether they pass or fail their exams, and exam pass marks being lowered, too – the reason we have such huge numbers of school leavers who are functionally illiterate and innumerate. And then wonder why they cannot find, or keep, a job.

Secondly, celebrate success. It seems to me that the news services focus on the negative, and ignore the positive. With the Olympics they were even starting to be accused of jingoism, such was the positive tone of the UK TV services! I realise that disasters sell more newspapers and TV viewship of news channels increases, but it really is not necessary to focus on the negative / bad news about everything all the time. Hopefully, the record viewership and readership during the Olympics will show that good news also sells… And there is good news on the business front – not just bad. There are many success stories, large and small, from Jaguar-LandRover’s expansion to over 300 000 new businesses starting this year – some of which will become the market-leaders of the future (there’s an interesting correlation with market-leaders having more often than not started in periods of recession/downturn).

Thirdly, sport is good for everyone. Britain is already one of the most obese nations on earth and the costs of this in both human and monetary terms are massive. By making sports compulsory for school children – a minimum of three afternoons a week would be good – they develop habits that will stand them in good stead throughout life. It not only reduces the issues associated with obesity, but encourages both team spirit and competition – two things that are critical for overall success in life.

Fourthly, a sense of national identity and community, and pride in this, is good – look at the great work done by the army of volunteers! It really is time for the “Great” to be put back into Britain in the minds of its people. It turns out that not only is Britain third overall in the medals table, but has the best ratio of the all-important Gold medals to GDP of any country (50% better than the next closest) and one of the best ratios in terms of population size, too.

We’ve a unique opportunity to take these lessons and move forward strongly. To move away from a grey society where competition is bad, winning isn’t important and there’s no pride as a consequence. The results will be not only good for business, but a stronger, healthier and happier society, too.

Should the Euro Survive?

Spanish Euros

Image by Gadget Virtuoso via Flickr

There’s been an enormous amount of ink used on the ‘veto’ that David Cameron used in Europe last week, with warnings of dire consequences if the UK doesn’t help to support the Euro.

Frankly, I don’t understand this as the Euro has been doomed since introduction in January 1999. In fact, the 10th anniversary of the release of Euro banknotes and coins on 1st January, 2002, would be a great time to announce its departure as a central currency.

“Heresy” I hear being loudly cried… But the facts are simple – for a central currency to work, it needs central control, and Europe doesn’t have this. Sure, it has a hideously expensive, large, bureaucratic parliament that shuffles (at even more expense, thanks to French Government insistence) between Brussels and Strasbourg every month, but all this body does as far as I can – apart from ensure regal lifestyles for its members at taxpayer expense – is create complication in everyone’s life, and silly rules that have clearly not been thought through. What the Eurozone doesn’t have is central fiscal control. A United States of Europe, if you like, where the member countries have the status that individual states have in the USA.

Of course, the reason for this is simple – no member country’s politicians want to be answerable to a (central) higher authority. You can see this in the choice of the European President – a nice enough chap, apparently, but basically invisible, and certainly no “leader of Europe.”

Unlike the USA, Europe is not united in a common history/language/culture. It’s a very diverse set of countries and should remain as such – celebrating the differences, rather than trying to blend them into a murky sameness. It could never support a central government, and shouldn’t.

What it SHOULD be is a free-trade zone, as originally envisaged. The Euro should be simply a currency that exists to facilitate this free trade – similar to the ECU of pre-1999, but actually existing as a currency. Legal tender in all EU countries, it would operate alongside those countries’ own currencies, with a rate of exchange that floats against each, allowing that country to determine its own fiscal policy (as they all do to a large extent anyway – which is what caused the mess) and have the relative value of its currency determined accordingly. Like trade, loans could be made or sought in Euros or a country’s own currency, depending on the will of both parties to the transaction.

The dissolution of the current Euro would be simple – start with each country having its currency at par with the Euro, and let them float from that point. Market forces would soon determine the real value of each currency.

As a considerable side benefit, this would also facilitate the dissolution of the European Parliament saving us all a great deal of money and aggravation.

There would be no need to try to prop up a fatally flawed system and countries could celebrate their individuality while sharing in what should arguably be the biggest and wealthiest free trade zone in the world. This would also mean an acceleration of growth at country level.

Given the Euro cannot survive unless all in the Eurozone abrogate power to the centre – which I can’t ever see happening – isn’t it best to ackowledge the role the Euro should play and move to individual currencies; the sooner the better?

Communication in the Information Age

Note: the plate says - "The quick brown f...

Image via Wikipedia

Johannes Gutenberg’s invention of the printing press in 1440 heralded the start of mass communication – for the first time, text could be reproduced quickly and inexpensively for a large audience. Of course, very few people could read in those days and many authorities were against it, fearing the impact of mass uncontrolled communication on their rule, so it took a few hundred years for this to spread.

The introduction of broadcast radio from 1920 started to spread information even more quickly and widely, marking a significant jump in the speed of communication.

But it was the Information Age which has really accelerated global communication.  Widely accepted to have started in the 1970s with the advent of the microprocessor, it took the introduction of the Internet Browser in the early 1990s for the Information Age to really become as integral to life as it is today.

And yet, it seems, the Information Age is just a quicker way to spread the same sort of information as before. Certainly our main sources of news seemed to have missed the point – news bulletins rely on “sound bites” or their video equivalents to relay information with the result that this is often inaccurate or, at best, unbalanced. Newspapers, too, have not really worked out how to embrace the digital age fully – you either get print (almost as in 1440, albeit more quickly), or the same articles available online, missing the opportunity to have summaries of stories and the ability to drill down for more information.

This is the key – we’re bombarded with information from multiple channels but have not developed the tools to effectively sift it. Long messages are often ignored as we don’t have time for them, while short messages are frequently taken out of context missing the real point that was being made. What’s needed is the ability to capture the essence of a point in a short burst and then enable people to get more information as they require it – almost an inside-out onion, with successive layers giving more and more detail.

Twitter is a great example of the modern communication paradigm – 140 characters to get the basic message across, including a link to more detail, which you can access if you wish. That more detailed message, in turn, could have links to other sources for even more information, and so on…

Nowhere, perhaps, is this communication problem more evident than in politics. There’s no argument with the fact that the UK, like many other countries globally, has woefully overspent and has to completely revisit its bloated public sector spending (how can a majority of the workforce be civil servants – effectively paid for by the minority?).  And yet it, like so many others, is facing widespread revolt at the prospect – look at the pension reform issue, for example…

Why?

Primarily because the government is incapable of effective communication. White papers, government statements and debates are far too long and not suitable for the news media or the viewing/listening/reading public, so people simply don’t understand the issues. I absolutely believe that the vast majority of people are decent, willing to work hard to get ahead and happy to help those less fortunate (but NOT those that are not prepared to help themselves).

But, for as long as governments cannot get the message out in a way that the media can carry without distortion and people can understand in just seconds, they will be unable to implement the changes that are needed, worsening the financial state of their countries, prolonging the agony and the economic downturn.

It’s time to turn traditional communication on its head and embrace “the 140 character world.”

When Will Interest Rates Rise?

The Bank of England in Threadneedle Street, Lo...

Image via Wikipedia

With the Bank of England having revised the growth rate down to 2.7% this year (from a previous forecast of 2.9%) and inflation rate up to peak at 5% in the fourth quarter (previously 4.5%), expectations are again growing for an interest rate rise in the near-term.

Of course, the classic economic theory is that a rise in interest rates reduces inflation as spend decreases and so demand-driven price rises are no longer a factor.

However, we’re not living in classical times. This economic slowdown – it can’t be called a recession as we’ve not had a further 2 quarters of negative growth – is persisting and there’s no real expectation of a marked change to lacklustre growth rates throughout the developed world. So it’s not demand that’s driving inflation but rather a number of external forces, including climatic conditions and wars, that have pushed up commodity prices. These won’t respond to a rise in interest rates.

So, given this, let’s understand who benefits from the current scenario and what this means for interest rates.

The main beneficiaries of the sustained low bank rate are:

  • The banks themselves – don’t confuse low bank rates with low interest rates for borrowing money. Certainly, the rates are lower than they were before the crash, but not as low as they should be, given the drop in the bank rate. In fact, looking at interest rates charged to companies and individuals for borrowings, the bank’s margins are extremely high. A margin of 3% to 3.5% (the difference between bank rate and lending rate) is normal – today it’s running somewhere between 5% and 7%, depending on your financial profile. The banks are, quite literally, “coining it” – just look at the new bonus rounds for evidence of this.
  • The government – the massive government debt attracts interest costs (they have to borrow the money). Historically, governments borrow money at, or extremely close to, the bank rate, so by keeping this low, the government reduces the amount of its budget spent on interest to service its massive debts.

Yes, homeowners can benefit to a degree, too – but the advantages tend to be a lot smaller in real terms for most people due to the structure of mortgages and the costs associated with moving between fixed and tracker rates, together with the fact that many people can’t change to take advantage of lower rates due to not having enough equity in their properties following the decline in values. And don’t forget that homeowners repaid a record additional £24 Billion on their mortgages last year – getting their mortgage values down ahead of any possible rise to cushion the impact.

So who benefits from higher inflation?

  • In a word: government. It comes back to the massive government debts that have been rung up in the past 10 years. One way to reduce the effective value of them is to allow moderate inflation into the system – simplistically, 5% inflation over 5 years reduces the effective size of the debt by 25%. Couple this with the increased tax receipts that come with inflation and you have a model to get government debt down much more quickly than would otherwise be the case.

So, given that inflation won’t respond to a rise in interest rates as this is not caused by high demand, and that the government and banks are the primary beneficiaries of having a slightly higher inflation rate and a sustained low bank rate, is it likely we’ll see an interest rate rise soon?

I think not – although I suspect the impact of a rise in bank rates may be felt less than generally expected. In fact, it might well lead to lending rates not going up at all as the banks would use this as a way to try to woo customers from each other, keeping lending rates where they were before – let’s face it, they have more than enough room in their margins to absorb a few modest rises in the bank rate.

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