The fig leaf of shareholder value covering corporate tax avoidance, removed
Do company directors have a duty to their shareholders to avoid tax? We have written plenty about this: most recently, in a blog looking at two articles by Philip Stephens in the Financial Times and by Lee Sheppard in Forbes, exposing the flawed thinking of the likes of Eric Schmidt of Google and those who defend Apple's offshore tax shenanigans. Now John Kay in the Financial Times has an article complementing these ones. We've noted this before, but it's worth repeating his basic point.
"Under the 2006 Companies Act, directors of British companies are required to promote the success of the business for the benefit of its members (the shareholders). In doing so, they must have regard to six specific factors: the long-term consequences of their decisions, the interests of employees, relationships with suppliers and customers, the impact of corporate activities on the community and the environment, the company’s reputation for high standards of business conduct and the need for fairness between different members of the company."(You can see this spelled out in detail on the Tax Research blog, from 2011.) In short, Kay summarises, the law that was created
"intentionally struck a middle course between those who argued that the law should simply say that the job of directors was to make lots of money for shareholders, and those who favoured a broader – stakeholder – view of the role of the corporation."And he concludes:
"When companies adopt tax-avoidance measures, it is not because they must, but because they choose to do so."Though it focuses on the UK, these points have wide international application. A recent New York Times story about the May 21 Apple tax avoidance hearings in the U.S. notes this, for example:
No taxpayer is obliged to pay the government a penny more than the law requires, the Supreme Court said in 1935. But the court also said no corporation was permitted to use “elaborate and devious” means — known nowadays as “gimmicks” — for the express purpose of evading taxes.(And boy, did Apple use some gimmicks: one expert testified that 'I about fell off my chair' when Apple claimed not to be using them.)
Kay also cites a recent book -- The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations and the Public -- which argues that US law is less friendly to shareholder interests than that of the UK. A blog by the book's author, Lynn Stout, notes that
"The ideology of shareholder value maximization lacks any solid foundation in corporate law, corporate economics, or the empirical evidence. Contrary to what many believe, U.S. corporate law does not impose any enforceable legal duty on corporate directors or executives of public corporations to maximize profits or share price.She asserts, too, that new theories of corporate purpose focus on the possibility that shareholder-value thinking harms many shareholders themselves.
. . .
As a theory of corporate purpose, it is poised for intellectual collapse."
So let's put Eric Schmidt's nonsense behind us, continue to hold those corporate CEOs' feet to the fire, roasting them in public for their actions -- and also put pressure on governments and international organisations to change the system.