The Corporate Paradox

 Chimeric Corporations

This week, Danny Alexander has announced that the UK government will not allow companies that have proposed tax schemes that have been found to be unlawful to bid for government contracts.

The G20 announces that governments across the world will work together to ensure that companies pay the proper rate of tax in the countries in which they do business.

Why now, after over 500 years of the joint stock / limited liability company are governments beginning to attack the privileges of the multinational – companies that operate across borders but ask us to believe that what they do is for our good as consumers and for the good of their shareholders?

Paradox: any person, thing, or situation exhibiting an apparently contradictory nature.”

Company: “An entity, usually a business, created by a legislative act or by individuals who have agreed upon and filed articles of incorporation with the state government. Ownership in the corporation is typically represented by shares of stock. Furthermore, a corporation is legally recognized as an artificial person whose existence is separate and distinct from that of its shareholders who are not personally responsible for the corporation’s acts and debts. As an artificial person, a corporation has the power to acquire, own, and convey property, to sue and be sued, and such other powers of a natural person that the law may confer upon it.”

(www.yourdictionary.com)

Worldwide, the campaign to properly tax companies hots up. 500 years after the Dutch East India Company issued shares (and joint stock companies can be said to have been formed well before that date), the part that companies play in society is still not resolved or even understood by most. Many argue that companies should not even be seen as independent entities for tax purposes but, rather, we should see the people behind them (shareholders and staff, mainly) as due for tax on receipts from companies.

That argument treats society as a game – where the simulated rules can be played out on a computer (a bit like econometricians think of economics). It is not credible in reality as businesses make decisions as businesses and act as independent entities as complex adaptive systems within the overall societal environment. Those calling for zero tax for companies ignore the fact that the biggest fund providers to politicians are businesses and business coalitions. Business (through companies) may well be the main instigators of economic progress in a market-oriented world. We now believe that the market (the nearest equivalent in economics to biological evolution) works better than the alternatives. Companies, which are provided with risk limitations through joint-stock ownership, are central to the market.

But….Is the Company Real?

Well, companies can be defined as a collection of people joined together for a business enterprise. Under laws such as the 2006 Companies Act in the UK, companies of various types are given legal definition in their own right. They have privileges and obligations under the law – even though directors of companies may also have individual responsibilities should the company not perform within the law.

The paradox is that companies are (in law) independent and “living” but, in fact, are, of course, artificial. This proves a difficult concept for individuals in society and for lawmakers, but the history of humankind is bound up with people joining together in groups and governments (from dictators to democracies) trying to legislate for them.

Companies are merely an artificial group legislated into being amongst many others that operate directly with individuals and other artificial and legislated groups (such as other companies and trading with governments). They represent a part of our social fabric as a paradox of society – an artificial group which binds together its individuals into group decisions and group impacts on the rest of society.

A company is a complex adaptive system (CAS)

Initially, a company is formed by key individuals that are hard to separate from the company itself – it may be one person who sets up a business. The business is formed to provide a good or service to society and to reap certain rewards in return. John Kay wrote in 1998  about why a company exists and his thoughts on what makes a good company (these days, a sustainable business).

It is estimated that 70% of companies fail within five years of start-up. Those that survive, become in a relatively short period, very different from the individual that started them. As soon as managers are brought in to assist, the company becomes more “complex” and decision-making is more group oriented but not centralized. The company becomes a system unto itself where most decisions are taken by its staff at all levels and continuously.

If a company goes “public” (with its shares traded), then there is also a divorce between the owners and the managers. Owners operate in the stock market casino – with little or no relationship to the company except insofar as it pays dividends or the share value rises or falls. This separation of ownership and management (and the rewards due to each – a special problem in the finance industry where employees at the top level have usurped the risk parameters and receive high returns for no capital risk) is a potential friction and another level of complexity that society still wrestles with (see John Kay’s more recent work for the UK government).

The complexity of a company’s make-up does not hide the fact that a company operates as a distinct entity – a complex adaptive system (CAS) made up of individuals but (like a City) operating without central direction in ways that impact those around it in a multitude of ways. Companies impact through enterprise and innovation, through motivation, through marketing, through involvement with other companies, through its customers and the environment. It does not operate as individual activities of each of its staff individually but as a collective – as a CAS.

Companies and Society

This has been recognized for centuries and most now understand that anything like a company – despite the corporate paradox – has to be treated in law and taxation as if it had a life of its own. Such treatment includes taxation as much as health and safety, labour laws, environmental laws, trade description laws (e.g. not supplying horse meat instead of beef), data protection and customer protection. Society’s interaction with companies means that staff, consumers and suppliers and anyone else affected by companies (such as people those impacted by companies located in their area, those who oppose the lobbying of companies etc) require that companies are treated like the rest of us – society demands that companies face legal requirements and that includes taxation.

The G20 has now committed to proper tax treatment but our governments need to go further. Companies provide innovation and are the mechanism that a market economy uses for prosperity – at least in pure GDP-related terms (another issue).

To make this real, we have to understand that society sees companies as real entities that have a full part to play in the society of the 21st century – not an artificial entity set up but a full system in itself that has legal and moral authority and responsibilities.

To tax is not an issue – of course companies have to be taxed and taxed fairly and properly in the same way that companies should be held to account over natural resource exploitation, health and safety laws and over reputation (no horsemeat in products unless advertised as such). Only in that way will the rest of society (increasingly aware of its rights) enable companies to reap the benefits of their success and be enabled to continue to innovate sustainably.

Charities – Trustees and CEO’s

Should CEO’s of Charities in the UK be Trustees?

Some are very uneasy about the situation in most charities where CEO’s are not automatically a Trustee / Director. This situation is unusual – it is not found usually in business, where the CEO is almost always on the main board; it is not found in the Public sector (e.g. education – where the Head is an ex-officio member of the Board and other staff are on the Board); it is not normal in the US Charity sector where non-profits are expected to have the CEO on the board (a “heads on the line” approach).

This seems to be a singularly British charity approach which somehow confuses the fact that a CEO is paid with the fact that (in the UK) Trustees are not, as a reason not to have a CEO on the Board. In fact, as long as the Trustee is not paid for being a Trustee, there is nothing in UK law which prohibits the CEO from being a Trustee as long as Articles of Association do not prohibit it.

CEO unease

The reason that a CEO should be a Trustee is the same reason that everywhere else CEO’s are on the Board – to ensure that the person entrusted with the operational responsibility and much of the strategic responsibility is pro-active and party to decisions that impact that work, has an equal say and equal responsibility and is part of the team that is legally responsible. This is true in almost all other organisations and should be the same in the Charity sector in the UK.

The time many CEO’s take to make the decision to accept the CEO position is often at least partly due to this issue. Is there any sense whatsoever in the separation between the board and operational / strategic management? It provides in many charities with a “them and us” (which the separation makes real) and many CEO’s suffer (according to ACEVO – the Association for Chief Executives in Voluntary Organisations) as a result of the separation (apparently, 27 are receiving counselling from ACEVO!). In other cases, CEO’s, not part of the team, operate independently and can be seen to be control fixated as a result of the separation – ignoring the Board and attempting to run roughshod over it. Both situations are not tolerable.

Unease stems from the fact that no charity should operate in this way ……. but isn’t it time that the Charity sector wakes up  – gets up to date?

Charity Commission / ACEVO viewpoint

The Charity Commission seems to want to defend the status quo (where, according to an ACEVO report from 2007, around 5.2% of CEO’s were Trustees of their Charity).

The CC will, when asked, usually point out in a defensive way, the dangers of conflict of interest over salary and similar issues. This is overcome everywhere else where committees are set up independently of the CEO as required and where CEO’s are asked to leave the room if there is a conflict (as conflict would be dealt with for anyone in such a situation).

The CC seems to have no proper view on this issue but also points out bureaucratically to watch out that the Articles don’t prohibit the change – which most don’t and can easily be changed.

ACEVO is supposed to promote the views of charity CEO’s. I have not yet been impressed with its ability to properly do this formally and forcefully on this issue. It is OK to be a help group for CEO’s in trouble and to promote good governance but the limit of ACEVO’s efforts on this is to state the following on its website:

In a 2007 report:

There was support for the following initiatives:

1. A code of good practice on governance (98% chief executives, 95% chairs).

2. Regular review of governance practices by external experts (68% chief executives,58% chairs).

3. More flexibility with respect to board structures (50% chief executives and 33% chairs thought that chief executives should be voting trustees).

 It goes on with an article:

The role of the chief executive as a bridge – by Paddy Fitzgerald

In the third sector the general practice is for trustee boards where normally trustees are non-executive, chaired by an independent and with the chief executive, who is rarely a trustee, in attendance. Here the primary concerns of the trustees are the mission and future of the organisation, while shorter term issues are for the most part dealt with by a management committee chaired by the chief executive.

If this model is to work, the chief executive becomes the bridge between the future concerns of the trust and the short term issues of the management committee. Most importantly, the chief executive will be responsible for overseeing the journey from short to long term and in deploying management resources to explore this and identify the issues along the way. In this way the chief executive brings to the attention of the trust shorter term questions requiring resolution, and engages the executive staff in the consideration of longer term matters.

This is a much more powerful vision than one of the chief executive as a nontrustee passively awaiting the instructions of his or her board. The bridge role requires positive engagement with the ability to exert powerful advocacy in both trust and management committee, and as leadership becomes less and less a matter of autocratic direction and more and more a matter of persuasion and shared endeavour, so it becomes vital that the chief executive is an inclusive member of both trust and management committee.

 Trusts too should value the extra dimension provided by the sense of a unified team, and should welcome the chief executive as one of their own, for it is under these circumstances that the chief executive is most likely to engage other trustees most, chief executives cannot escape legal obligations placed on trustees since they will be judged as shadow directors with the same penalties in the event of any major problem, so it is in their interests to don the mantle of a Trustee and participate wholly.

 The conclusion may be that the formal appointment as a trustee aids the chief executive in this bridge role and is one of the defining characteristics of the third sector. Recognition of this role for the chief executive is essential to staff appraisal and through this to the management and leadership programmes aimed at staff development and management succession.

 On its FAQ’s – current – ACEVO lists the types of Board structure:

Q: What is the appropriate level of executive involvement in governance?

A: This relates to the structure of organisational boards. Board structures fall into four categories:

  1. The wholly executive board: found most often in small commercial companies. For obvious reasons, such boards usually struggle to offer any independent scrutiny of executive decisions. Such boards are rarely found in the non-profit sector, and it is unlikely that the Charity Commission would permit such a structure for registered charities.
  2. The two-tier board: found in parts of Europe, comprises a ‘supervisory board’ to represent stakeholder interests, and an ‘operational board’ to drive the organisation’s performance. Some charity boards may in practice resemble this structure, delegating operational decisions to a ‘senior management team’. However, a genuine operational board, unlike a senior management team, has a legally recognised governance role.
  3. The unitary board: classic model for business in the UK and Commonwealth countries, includes both executive and non-executive directors, with equal status. Despite the ambiguity concerning executive directors’ role, this model is recommended by many experts on corporate governance. The structure embodies the tension between conformance and performance. If working properly, it can combine executives’ detailed knowledge of the business with the more detached scrutiny of non-executives.
  4. The wholly non-executive board: found commonly in commercial companies based in the USA as well as in the British third sector. Third sector board member are usually, but not always, unpaid.
  5. Recognising that no one model will be perfect for every organisation, ACEVO recommends that its members conduct an audit of their governance arrangements, which should include an examination of governance structures as well as good practice.

ACEVO has not formally proposed a major change and has not acted on this serious issue – although it has a Reform Group which highlights the issue – http://www.acevo.org.uk/Policy+Advocacy/Activity/Governance . However, it is clear that the practice of CEO’s not being on the board is a serious deficiency and one that should be rectified across the board.

Sir Stephen Bubb is generally supportive and, in a recent note from him to me, he wrote the following:

“I absolutely agree with you on this issue. The Acevo board has appointed me to the Acevo board ex officio. It is the right approach and we have encouraged members to do this. Indeed it is part of our arguments and discussions with the CC that charities who want to take this approach should be enabled to do so. You are right on the legal issue as well , in my view. 

 

We will be pursuing this further as we are in the process of setting up a governance Commission to look at how the sector improves it structures and practises.

 

I feel strongly on this myself and indeed the potential chair of the commission is himself on his charity board. I am sorry this is not clearer on our website, though there are those members who take a contrary view when we last asked; but it was ever thus.

 

This issue will be addressed in our work and you can be sure that as the CEO I take the view we must sit on Boards for all the reasons you outline.”

Stephen Bubb

 

So, Charity CEO’s should work to get themselves on their Boards and start to campaign that this makes sense not just for themselves but for good governance and for the best interests of their Charities. As Paddy Fitzgerald wrote five years ago, Charity CEO’s probably already have the responsibility as shadow Directors in law – but, they do not have the legal power as Trustees to even enter into a vote on the issues closest to them and the charity.

CEO’s being outside the Board of Charities is a nonsense. Shouldn’t we change it?

I am a CEO of a Charity but not on the Board as well as a Chair of a large Academy in London where the Head is on the Board and I am involved in setting up a Charity where I will be a Trustee and where the CEO will be on the Board. It is for each Charity to decide, but if ACEVO is supportive, then the Charity Commission should be persuaded to change its basic antipathy to this issue and be supportive of CEO’s becoming Trustees. This would provide the confidence to Trustees of existing Charities who are currently reluctant to support this.

Politics – the battle lines between citizens and the state

 

Why the party system is breaking down

Communications leads to changes

 

Types of government have changed with changes in communications. When communications was by word of mouth, strong central government through despotic leaders was the norm.

 

With the advent of the printing press, information could be made more available and (certainly in the West) education could be obtained more widely, leading to different forms of government and wider emancipation.

 

Now, with the dramatic communication changes wrought through mobile telephony and the internet, information (of all types, good and bad, intelligent and unintelligent) is made available throughout the world and the strains in our current governing structures are made worse.

 

The Arab Spring erupted for a variety of reasons but spread through new communication devices and systems. The organization of mass campaigns becomes easier and the attempts to stifle protests by shutting down websites and demanding changes to other, online capabilities is progressively harder.

 

Is the Party over?

 

Political parties are now finding it tougher to piece together coherent and wide-ranging policies that appeal to more than a small percentage of a nation’s population. In a word of communication possibilities, single-issue lobbying is becoming the norm. Politicians in the west continuously argue for choice but the choice that is now on offer, between major political parties without a cause (such as labour rights in the early 20th Century) is not welcomed.

 

As wealth increases (as we develop into the Affluent Society of Galbraith – see:   https://jeffkaye.wordpress.com/2012/05/06/the-affluent-society-and-social-balance/

 

so do the opportunities to connect with a wide range of issues – be they environmental, health, sport, education, self-help, business, charitable or whatever. The numbers of people that engage with politics becomes less because people are engaging with single issues. Parties rarely have a key message that intoxicates any more and are driven to compromise on a wide range of issues that appeal to no-one in particular. This means that voting may be on single issues or they are watered down to choose a party that is less bad than the others.

 

 

 

 

Greece – democracy’s floundering founder

 

In Greece, so dismally rent by bad government and economic disaster, the situation is playing out. Here, the people cannot elect a majority party to power and are being forced to vote again until they do. The party system is broken in Greece and single-issue politics dominates to the extent that the people have made their choice but the politicians don’t like it and tell them to do it again.

 

This makes a mockery of democracy in the home of democracy – an irony that is surely not lost on anyone but a potential disaster. The problem is that even if the Greek people are forced to make a different decision in a few weeks’ time, there is no guarantee that the result will be accepted by them and the demonstrations will begin again. The parties need to adapt to the will of the people by ensuring that the single-issues are wrapped into an acceptable set of policies that the majority are willing to accept – they should have done this first time around and it speaks volumes about the paucity of leadership in Greece that this has not happened.

 

Centralisation no longer works

 

A problem with the European Community which has been exacerbated by the Euro is that political judgements made after the end of the Second World War are not relevant to the 21st Century. While trading blocks are an economic decision, a political block (aimed at tying Germany into a framework which would prevent it from the belligerence of two world wars and providing Europe with a seat at any political table for many years to come) becomes a heavy weight to bear in a world that is likely to eschew centralization.

 

Vastly improved communications (including air travel) means that real globalization is the norm. Opportunities are now in place for a dramatic de-centralisation of political power in many countries and between them. Even if we need the UN, the WTO and other world-wide organisations, they are based on a 19th Century division based on the nation-state. We witness daily the huge challenges that this brings in places like Sudan or Iraq – nation states drawn by the pencils and rulers of 19th Century European civil servants, where older affiliations strike at the heart of the state philosophy.

 

In developed nations, the struggle is less severe but the economic stresses that are beginning to tear at countries like Greece, Spain (where half of the young people are unemployed), Ireland (the scene of a mass exodus after so many years of its reversal) are leading to a disenfranchisement. Italy, with an unelected government of “technocrats”, is surely not the model for the future – where votes are wasted and bankers rule from the centre.

 

A New Model needed?

 

New Model politics has to take into account the needs of a better-educated and often single-issue motivated people who need politicians that are there for them.

 

The political parties have to show themselves to be free from corruption and independent of being in politics for what they can get out of it.

 

The parties have to work together where needed and confront the problems of the past that means that each party opposes each other.

 

In the UK, this has been shown very clearly when, after a hundred years of parties being set up to oppose others, the Coalition of Tories and Liberal Democrats is set upon by many (especially a quixotic press) because they are trying to work together!

 

This is likely to be the norm. It means that coalitions will be the norm. This will be the political “new normal” to go with the new normal posited for our economic future.

 

Single-issues dominate our thinking and generate enthusiasm more than any political party in the developed world. It is only where democracy is new that parties with major and wide-ranging programmes gain real enthusiasm – which is usually dissipated quickly. Elsewhere, massive disenfranchisement is continuous and leads to a dissatisfaction with politics and politicians.

 

Parties are now the vested interests that need to change. We should see a situation where each party’s manifesto shows clearly what they would do together if that is the way it turns out – not be scared of the prospect because it may lose some votes early on. This is a big change but essential as voters’ (citizens’) needs over single issues dominate and they have no way to select a range of issues from those on offer – only a range of parties with massive ranges of policies.

 

In a world of perceived “choice”, the parties need to change to excite and enthuse or we will suffer the continued estrangement of citizens and political parties that will not result well.

Good Global Citizenship and Tax Havens

Barclays was cornered this week in the UK by Her Majesty’s Revenue and Customs into paying back around £500 million for entering into a tax avoidance scheme – despite signing up to a Government scheme not to do such things. Bob Diamond now looks foolish after his vow to make Barclays a good citizen.

For many years, it has been “OK” for companies and high income earners to shield their earnings behind tax avoidance schemes. Since the introduction of welfare states across the world, companies and individuals have sought to minimize the tax that society needs to work through the system. They have systematically sought to challenge the efforts of democracies to manage the tax base. In some countries like Greece, there has been a tacit buy-in by Governments (and those in Government with their fingers in the till) to allow tax to go unpaid. This leads inexorably to financial chaos and, as we now see in Greece, to progressive civil strife and poverty. This is what has happened in Africa for so long – the wealthy shield their income from the State (who are paid off to look away).

In those countries which do make a real effort to collect taxes, the best tax avoidance comes through the use of tax havens and the real killer for economic equity is the way the world accepts tax havens as a reasonable and acceptable part of our global economy.

David Cameron and many others talk a lot about fairness: the fairness that makes bankers bonuses almost a criminal offence. But, this is two-faced. While George Osborne says that the HMRC will work towards killing off general tax avoidance schemes, we have in our midst a main centre of tax avoidance – the City of London.

Nicholas Shaxson wrote brilliantly in his book “Treasure Islands” about the tax havens that bedevil the world of finance and economics. Tax havens distort, they do not equalize.  Tax havens provide the wealthy (individuals and corporates) alongside the wealthy criminals and wealthy terrorists with the ability to shield themselves from legitimate taxation. Providing a legitimacy to tax havens (and allowing them to proliferate worldwide – even shielding them as the UK does the Cayman Islands and elsewhere) creates massive market distortions and inequalities. Legitimate and democratic tax collection is continuously stymied by the tax havens – just a step from the wealth-grabbing in Angola or the tax avoidance mentality that is Greece.

Taxation is a central plank of democratic society.  While the Tea Party and similar libertarians might rage against central government tax and tax collections as a scourge of society, we know that society is centred on a democratic ideal of the wealthy properly financing the society on which it depends to provide a basic source of welfare to the poor and sick, for defence, for infrastructure. Society is more than just the wealthy and privileged creating an elite life. Angola is a good example of how fortunate elites manipulate the wealth of a nation to appropriate its total wealth and Sonangol (its so-called publicly owned oil company – really commanded by its country’s leadership who reap its financial benefits) has been built to achieve the grabbing of oil and energy wealth from the citizens.

The nations that democratically elect their leaders (and, it is to be hoped the new rich of China and Brazil and others) should take heed to the dangers posed by the examples of the wealth grabbers in the energy-rich nations. It is here, in the UK (City of London, Jersey), the USA (such as the state of Delaware) as well as the better known haunts of the Dutch Antilles or the Cayman Islands, where huge financial flows (from the legitimate wealthy alongside the illegitimate) travel in order to reduce the legitimate tax take of the countries in which the wealth is created. Tax havens are wealth destroyers.

Wealth is destroyed by tax havens because they eat away at the main body of a nation – its mass of people, its true wealth creators. Education and education systems suffer dramatically because taxation is unavailable to finance schools. Health systems suffer for the same reasons – in the UK, where we have moved vast sums to the NHS in the last Government, cut-backs are now biting as the tax take is diminished along with economic growth. In poorer countries, the wealth shift is much more dramatic.

Ambassador Nancy Soderberg (appointed by President Obama earlier this year) was in London this week to campaign for Argentina to live up to its duties in economic areas. She mentioned its lack of adherence to the Financial Action Task Force  (FATF) requirements for responsible national supervision of illegal financing – Argentina was placed on FATF’s grey list over corruption issues. But, FATF and other international bodies have failed to oversee a sustained reduction in how financial flows travel the world and to institute a level of good citizenship on a worldwide scale amongst our companies and wealthy individuals.

While steps have been taken to reduce terrorist financing and, to a much smaller extent, the benefits of illegal drug trafficking and gambling and prostitution, very minor shifts have been made in (a) defining what global good citizenship means (b) reducing tax havens and the financial flows through them.

The G20 states from time to time that tax havens are to be reduced in scope but the battle against them has hardly started. Tax avoidance on a grand scale is as bad as grand corruption (maybe bigger in scale): two sides of the same coin. Good global citizenship requires a new definition to be made – where a global consensus is sought to reduce hugely the ability of companies and individuals to create their wealth in one place and move it offshore to save tax. This simple example of good global citizenship is a cornerstone to increasing wealth creation on a wider scale. It is not socialism but realism and pragmatism. It is good citizenship.