Ethical Performance
inside intelligence for responsible business


Why the executive pay experience gives useful pointers on taxation

March 2009

The worldwide backlash against ‘fat cat’ pay, particularly in the part-nationalised financial sector (see page one), offers a salutary lesson for those who have tried to locate certain corporate governance issues in a silo away from the field of corporate responsibility.

The warning bells on executive pay have been ringing for many years, and it’s not just with hindsight that we can argue that the bonus culture has been truly ‘unsustainable’. There was never a robust business case for such high levels of pay, yet for the most part the topic has rarely been seen as a mainstream CSR issue. Few, if any, large companies have had a strategy of viewing executive pay as part of their corporate responsibility programmes, and the topic has not even  been mentioned in most sustainability reports. As politicians now begin to act while investors, especially in the US, make executive pay a target of shareholder resolutions, business may now be regretting that it assigned the topic to a corporate governance pigeonhole.

On executive pay, companies’ scope for largesse is narrowing  – but the damage has been done. However, there are other, similar, areas where lessons can be learned from this scenario. Chief of these is tax avoidance. There is little if any moral justification for companies avoiding tax in the main jurisdiction where they operate.  Such policies certainly have little public backing. Yet ‘offshoring’ is still seen by many businesses as a purely corporate governance issue – a practice that, if it can be achieved without breaking any rules, is therefore acceptable. Because it is viewed in such terms it has become commonplace in the corporate world. If, however, taxation was looked at through the lens of CSR then this might no longer be the case. Corporate responsibility is about going beyond the letter of the law and therefore at least presents the possibility that tax avoidance can be seen in a different light.

The difficulty of bringing about change in this area is that tax strategies – like remuneration policies – are determined at the highest level of businesses. If there is no leadership at this apex, then it is difficult for CSR managers, on their own, to effect change. However, there is more room for manoeuvre on taxation because it impinges less on the personal fortunes of top managers. CSR advocates can therefore make the case for proper payment of taxes without treading directly on the toes of their bosses. In alliance with investors and consultants, there is no reason why CSR practitioners can’t take taxation out of its corporate governance quarantine and bring it into the corporate responsibility domain.  Now is the time to do so, before another horse bolts.

Peter Mason | Global | Executive Remuneration

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