The Centre for Enterprise, Markets and Ethics (CEME) is pleased to announce the publication of The Challenge of Social Welfare: Seeking a New Consensus by Richard Turnbull, Brian Griffiths, Maurice Glasman and James Perry.
In July 2015 the Centre for Enterprise, Markets and Ethics, an independent think tank dedicated to research into enterprise and the economy from an ethical perspective for the good of society, held a symposium at the House of Lords.
The purpose was to ask questions about how we might seek a new consensus in the areas of welfare and social justice. The contributors were deliberately diverse. However, our conviction was that something had gone wrong in the debates about welfare that was preventing collaboration towards solutions. We were united in our conviction that poverty was not acceptable in a civilised society. However, we also felt that new ideas, new thinking, some hard but honest questions about morality and responsibility needed to be brought to the table. Similarly we felt that business and enterprise were part of the solution to the equation, but that new models of approach and structure were needed.
The essays that follow have been gathered together by the Centre’s Director, Richard Turnbull. Two of them, those by Maurice Glasman and James Perry, represent their contributions on the day. Brian Griffiths has added some further reflections to his work and Richard Turnbull has contributed a piece putting the debate into context.
We are very grateful indeed for the support of CCLA Investment Management Limited for their sponsorship of the original event and this publication.
Moral Questions by Richard Turnbull
A Welfare Society by Brian Griffiths, Lord Griffiths of Fforestfach
Welfare and the Common Good by Maurice Glasman, Lord Glasman of Stoke Newington
The Role of Business in Social Welfare by James Perry
Lord Griffiths of Fforestfach
Lord Griffiths taught at the London School of Economics, was Professor of Banking and International Finance at the City University and Dean of the City University Business School. He was a director of the Bank of England from 1983 to 1985. He served at No. 10 Downing Street as Head of the Prime Minister’s Policy Unit from 1985 to 1990. Since then, Lord Griffiths has been Vice Chairman of Goldman Sachs International and an international advisor to Goldman Sachs. He is currently a non-executive director of Times Newspaper Holdings Ltd.
Brian Griffiths has written and lectured extensively on economic issues and the relationship of the Christian faith to economies and business, and has published various books on monetary policy and Christian ethics.
Lord Glasman of Stoke Newington
Lord Glasman has been a Labour member of the House of Lords since 2011. He was brought up in a Jewish family. He studied at the University of York and then undertook a PhD in Florence on the German social market economy. Lord Glasman was Reader in Political Theory at London Metropolitan University, where he was also Director of the Faith and Citizenship Programme. Maurice Glasman pioneered the development of ‘blue labour’, emphasising the conservative and communitarian values of the Labour Party.
James Perry
James Perry co-founded Cook Food, which now employs around 650 people and is committed to the role of business in creating social value. Through the Panahpur foundation James has also led an extensive programme of social impact investment and finance. James also sits on the Advisory Council of Big Society Capital. He is also co-founder of B Lab UK, the charity co-ordinating ‘B corp’ activity in the UK – the movement that seeks to encourage business to incorporate social objectives into their constitutional documents.
Revd Dr Richard Turnbull
Richard is the Director of the Centre for Enterprise, Markets and Ethics. He studied economics and then spent eight years as a chartered accountant with Ernst and Young. He holds a first-class honours degree and a PhD in Theology from the University of Durham. Ordained in the Church of England, Richard has served as a member of the Archbishops’ Council, the Chairman of the Synod’s Business Committee and has chaired church working parties. Richard served as a minister for ten years and was Principal of Wycliffe Hall, a Permanent Private Hall of the University of Oxford from 2005 to 2012. He has authored several books (including an acclaimed biography of the social reformer Lord Shaftesbury), is a member of the Faculty of Theology of the University of Oxford, Visiting Scholar at Campion Hall and a Fellow of the Royal Historical Society.
The full publication can be downloaded here.
Alternatively, a hardcopy can be ordered by contacting CEME’s offices via email at: office@theceme.org or by telephone at, (+44) 0186 5513 453.
The Centre for Enterprise, Markets and Ethics (CEME) is pleased to announce the publication of God and Enterprise: Towards a Theology of the Entrepreneur by Edward Carter.
The publication can be downloaded here. Alternatively, hardcopies can be ordered by contacting CEME’s offices via email at: office@theceme.org or by telephone at, (+44) 0186 5513 453.
The Tides of Life is impossible to categorise: it is not an autobiography, although the majority of it comprises autobiographical material; it is not a business leadership and management manual, although it contains a lot about leadership and management; and it is not a systematic work about Christian living, although it is full of guidance about just that.
Bill Pollard was for many years the CEO of ServiceMaster, the much studied and admired former Fortune 500 Company. Prior to that, he was, for a time, a practising lawyer in private practice and, for a brief period, an academic. Throughout his life he has been involved in educational projects and charities. He has seen much success, including the extraordinary growth of his company, but has also experienced the varying “tides of life”, including the early death of his father and, recently, the death of an evidently much loved grandson (who appears on the cover of this book). Now, in the evening of his life, he has written a book about what he calls the “lessons and choices in life”. Essentially, it is an overview of what he has learned through his many and varied experiences.
The result is a structured miscellany: there are reflections on what “our humanity is all about” and on God’s ordering of the world; thoughts about responsibility and stewardship; discussions of the nature of work of and purpose of business, the role of leaders and managers and how God may be served by those in business; and, last but not least, reflections on the importance and nurturing of relationships. In all cases, Bill Pollard teaches by means of stories from his own life, which are placed within the framework of a biblical world view.
Happily, in recent years there has been a considerable upsurge of interest in the calling of Christians to serve God throughout their everyday lives rather than through some detached “Christian service” element of them. Bill Pollard believes passionately in this calling and wishes to pass on what he has learned about how to put the theory into practice. He is clearly a man who has never stopped learning and, judging by the number of times he quotes what others have said to him over the years, a man who never forgets advice that he has been given. Above all, he is a man who believes in providence and who lives his life in the light of Proverbs 19:21 (“Many are the plans in a man’s heart but it is the Lord’s purpose that prevails”), which is quoted at the head of one of the chapters of his book.
Arguably, he tries to cram too much into the space available. For example, the seventeen pages devoted to good corporate governance include matters as diverse as the ideal size for a corporate board and comments regarding what went wrong in the banks in the run up to the global financial crisis. Some business people will find this section of the book superficial. However, this is a quibble rather than a serious criticism.
More significantly, even having read Bill Pollard’s fierce criticism of the results of the absence of morality in the market place, some Christians may question the merits of the market economy to which he is committed and may be disappointed that he largely asserts these benefits rather than arguing for them in an academic manner. He similarly asserts his Christian world view rather than seeking to defend it. This, however, merely reflects the nature of the book: it does not purport to be a work of free market or Christian apologetics. It is thus unlikely to persuade a reader to accept its basic premises. However, it demonstrates how these premises may be lived out in practice and may cause sceptics to ask themselves whether this might indeed be the way that we should live our lives. Furthermore, if like me you agree with the premises, you will find here a mine of practical Christian teaching and advice.
This is not a book to read quickly. It is worth reading in short sections over a prolonged period of time, reflecting on each part of it before moving on to the next part. It may be impossible to categorise but it is none the worse for that.
“The Tides of Life” by Bill Pollard was first published in 2014 by Crossway Publishing (ISBN 1433541742, 9781433541742).
Richard Godden is a Lawyer and has been a Partner with Linklaters for over 25 years during which time he has advised on a wide range of transactions and issues in various parts of the world.
Richard’s experience includes his time as Secretary at the UK Takeover Panel and a secondment to Linklaters’ Hong Kong office. He also served as Global Head of Client Sectors, responsible for Linklaters’ industry sector groups, and was a member of the Global Executive Committee.
It is often argued that taxation to promote the position of the poor is somehow a moral act on behalf of those that are better off and paying taxes to finance the transfers to those who are worse off. It is not.
It is not an intrinsically moral act for the same reason that, if I go out this evening with the intention of beating up my brother and I am stopped from doing so because he is with two muscly friends, I have not committed an act of moral restraint. If I am put in prison for not paying taxes, I have not committed a moral act as a result of paying those taxes. There is no moral equivalence between paying taxes because you have to and the self-sacrifice that comes with philanthropy. Indeed, taxation can exhaust our ability to make moral choices to help our families, our neighbours and society more widely.
The moral problems that people often feel exist with a free and prosperous economy such as selfishness and an individualistic mindset are no less inherently present in an economy with high taxes. Self-interest can be every bit as present in the political system as it is amongst individuals. The idea that we have two natures – a selfish one in the private sphere but a better, more refined, less self-interested nature that is present in the public sphere has no justification in moral philosophy or empirical evidence. After all, when did you ever see a demonstration in a town calling for the local hospital to be closed down so that the neighbouring town could have more resources? Indeed, the zero-sum-game nature of public sector activity promotes selfishness and conflict – witness the lengths people go to in order to obtain places in good state schools, including fraud. In the private sphere, co-operation and providing something of value to customers tend to be rewarded.
The moral limits of taxation
So, there is no credible moral case for a high tax economy. But we can go further. Ultimately, taxation is an issue of how we view property rights. As Pope Leo XIII noted, property (the money that we have) is just wages in another form. To take another person’s property through taxation is to deprive a person of his justly earned wages.
Of course, the state does need resources and it is legitimate to tax people’s earnings in relation to their ability to pay in order to provide those things that are needed for the protection of society as a whole (defence, police etc.). It is also legitimate to tax people to ensure that all in society can have the resources to live in dignity if they are not provided by charity (through the provision of housing, food, healthcare etc.) – though these things do not need to be provided directly by the state.
This might justify taxation of between 5 and 20 per cent of national income – nothing like the 46 per cent of national income that the state spends in the UK today.
Practical aspects
In many practical ways, our tax system is morally problematic. It discriminates against family formation – with results that we see very clearly and, of course, it discourages work. A tax system that undermines family and work cannot be thought of as moral.
And, of course, when the state is spending nearly half of national income, there can be no general agreement about the morality of the things on which it spends money. In spending over 46 per cent of national income, the state finances all sorts of other things with my money that I think are morally wrong – and probably different things that you think are morally wrong.
A tax system in a nation of 65 million people, mediated by a huge bureaucracy controlled by a government called to account in elections every five years, cannot possibly replicate the true personal human compassion and philanthropy that is necessary if we are to provide the poor with genuine help. The individual, in this context, becomes a small cog in a giant wheel whose right of initiative has, in large part, been taken away and who has been encouraged to delegate his genuine societal responsibilities to those in need to the state. As Pope Benedict has said: solidarity is the responsibility of everyone to everyone and it cannot be delegated to the state.
This does not mean that the state should not provide for the poor. However, a low tax economy is conducive to social co-operation, individual initiative, the flourishing of families and high levels of employment. Furthermore, it is also conducive to the genuine voluntary assistance that the better off must give to those who need it. Society is not more moral when we discharge our responsibilities to those in need by voting for a party that will form a government that will manage a bureaucracy that takes money from one group of people to give to another group of people with neither group ever meeting each other.
Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. He is also an Associate Fellow with the Centre for Enterprise, Markets and Ethics (CEME).
Sports Direct’s founder and Chief Executive, Mike Ashley has admitted to paying staff below the minimum wage. The consultancy firm Mckinsey & Co. has been found to have a ‘secretive’ £5bn proprietary investment fund for its partners and BHS, the high street retailer has filed for bankruptcy in a downward spiral of events that would put most soap operas to shame.
What a week it has been!
It sure does feel like the year’s business stories have all been compressed in the space of one week.
Here are some thoughts:
1. There will always be a few bad apples
In the ‘free’ marketplace there will always be those that play so close to the legal line that they sometimes trip themselves over. Such was the case with Mike Ashley’s Sports Direct where staff were required to go through excessive security checks during which time they were not paid. In the parliamentary enquiry, Mike Ashley admitted that staff were paid below the minimum wage and also that the company “outgrown his ability to manage it”.
I remain rather sceptical.
Within a free market economy there will always be some (especially at the low-cost end of the spectrum of any given industry) that are so ruthless in minimizing costs that they sometimes, intentionally or unintentionally, dip into illegal territory.
Alongside Primark, Sports Direct is effectively the Ryanair of the sports retail industry. And like Ryanair, Sports Direct operates with an iron fist on efficiency.
But financial efficiency should not come at the cost of employee fairness and the well-being of staff. Indeed, the two are prerequisites for the long term stability of a company (see also point 3 below).
Perhaps of even greater moral concern is the widespread use of zero-hours contracts by Sports Direct as the normal means of employment.
There is a case against the minimum wage and there is a case in favour of zero-hours contracts. However, for wages to be so low as to breach (even on a technicality) the law and for zero-hours contracts to be the norm rather than the exception does not give confidence that the directors and senior executives of a business are aligning the interests of all rather than just some of their stakeholders.
Mike Ashley’s admission that the company has got too big for him to run raises very deep questions about governance.
2. Not all businesses are evil
We must not assume that all businesses are run in this way. The majority of businesses, and therefore people, involved in the private sector are upright and strive to do well in the workplace as well as their private lives.
It’s difficult to believe this when you hear stories like BHS owner Dominic Chappell giving death threats to Darren Topp, then CEO of BHS. When Darren questioned him about an unannounced £1.5 million withdrawal from the company’s accounts, Mr Chappell reacted by saying that “If you kick off about it I’m going to come down there and kill you.”
As atrocious as these events may sound, we must not lose hope in the good that business can bring.
Yes, the collapse of BHS was ugly beyond imagination and yes, the 11,000 people that are now unemployed is a tough pill to swallow – but despite all this we must not paint the entire private sector with the same colour.
Simon Walker from the Institute of Directors recently said in an interview that “… [the BHS case is] completely inexcusable and outrageous, and what worries me is that it makes people think that’s what British business is like and it’s not. British business is about hard working people who have often mortgaged their houses to get businesses going, this is as far from the world of normal businesses in this country as anything can be” (BBC Newsnight).
We need to hear some good stories.
3. It all comes down to Ethics
I have said it before and I will say it again: A company’s genuine commitment to a set of core moral values is crucially important to its long-term financial and reputational stability.
A strong commitment to a set of moral values will impact the entire business. From staff pay and working hours to the firm’s products and services, the senior management should strive to ensure that their decisions and actions are aligned with the firm’s core values.
Businesses that fail to instil a sense of morality and wider responsibility will sooner or later, have to pay the consequences of their actions.
It’s people’s livelihoods on the line so the stakes couldn’t be any higher. Let’s hope businesses are listening.
Business needs to argue its case.
Andrei Rogobete is a Research Fellow with the Centre for Enterprise, Markets & Ethics. For more information about Andrei please click here.
This is a transcript of a speech given as part of a debate on the EU Referendum. The event was organised by James Cowper Kreston and held at the Oxford Union.
The EU Referendum – some moral and economic perspectives
Thank you for the invitation to speak this evening, and thank you also for putting on this event.
How, then, will we decide between the competing visions for Europe, for the future of the United Kingdom and our relationship, not only with Europe, but with the world? Will we decide on the arguments about economics, borders or sovereignty? Will we make our decision on the basis of statistics? And if so, which particular statistics will we rely upon? Or maybe we will decide on the basis of propaganda – but who’s propaganda would we trust; the government’s, the Brexit campaign or some other vested interest?
My initial observation is that larger businesses, especially those with a significant export market to Europe, tend to be more swayed by the economic arguments for remaining (that is, primarily the argument of access to markets) than smaller businesses that tend to be more exercised by the impact of regulation (that is, the control of markets)
So, this evening, I want to open up a different kind of question, to try and bring a moral economic perspective into the debate, or perhaps two questions, one about the nature of markets, access to markets, trade and employment and another about regulation, control, business development, entrepreneurship, innovation and creativity.
The most depressing argument in this debate is….the EU costs us £55m per day (gross amount, no account of rebate or EU payments to the UK) or £35m a day (net of the rebate and closer to the amount actually paid over) or £23m a day (net of EU payments for farming and poorer areas support – but not counting the payments to universities for research). Cash and economic costs and benefits are not the same thing. We must go deeper in our analysis. And we should ask questions about purpose, the long-term economic costs and benefits, not just cash payments.
The most significant economic argument is concerned with access to markets. The reason it is the most important question is that economic growth is a necessary condition for individual, family, community and national welfare. This is a moral question. Without economic growth we damage employment prospects, reduce the tax base and stifle innovation. Economic growth is not a zero-sum game and is also a prerequisite for the political debates around wealth and income creation and distribution. In other words, unless we bake the cake in the first place, we cannot debate how the cake should be divided.
So, we should ask how best, then, to bake the cake. Access to markets means trade and exchange, import and export, competition and so on. The freedom to trade has shaped and transformed the world we live in. So, we know the EU represents the largest single market in the world (with the US being second). The UK is the largest market for exports from the EU (though only at around 16% of total EU exports), but for the UK around 44% of our total exports go to the single European market, though that percentage has been falling.
Does this mean that the UK couldn’t negotiate its own free-trade agreements with other countries, or that either new or even traditional markets could not be opened up or expanded? No, it does not mean that, but it does mean that we need to take very seriously indeed, the opportunity for access to the world’s largest single market and surrender that only after very careful thought. To lose that access is not irreplaceable, but would certainly damage short and medium term growth prospects, and there would be a cost to the negotiation of multiple trade agreements which may, or, more likely, may not, obtain equally favourable trade terms.
And we certainly need to be wary of naivety; the oft-quoted Norway model is illusory; Norway pays 90% of the UK per capita payments, they have to observe the single market regulations, and, indeed, it is worth quoting The Economist reporting a Norwegian minister as follows, ‘if you want to run Europe, you must be in Europe. If you want to be run by Europe, feel free to join Norway’ (Economist, 4th March, 2016, p20).
So, let me turn to the second question, that of regulation. The impact of the EU on the regulation of the market is undeniable. Part of the problem stems from the fact that what we read about in the newspapers is the silly stuff – the size of a vegetable, bendiness of bananas and cucumbers, regulations on washing-up gloves and so on. In reality the regulative impact of the EU extends far and wide into employment, market regulation, discrimination, health and safety, and into industry sectors from investment management to transport and shipping.
How are we to assess the nature and impact of this regulatory regime? Let’s start with the negative impact. There is little doubt that there is a ‘regulatory bureaucracy’ about the EU which rather reinforces the observation of Andrew Bailey, formerly the deputy-governor of the Bank of England, that ‘the main consequence of an increase in regulation is an increase in the number of regulators.’ Similarly, I think there is a cogent argument that EU regulation is an easier burden to bear for larger firms than smaller and medium-sized enterprises; and, in my view, it is SMEs who are the powerhouses of innovation, entrepreneurship and growth, indeed, collectively also of employment. Perhaps the Working Time Directive is an example of that. The directive, with the laudable aim of protection, is, however, an example of the different cultural mind-set between the UK and a Europe that sees the control of working hours as a governmental responsibility. You can see how, with a regulation like the Working Time Directive, a larger organisation with the resources of an HR department, would find those rules easier to manage and implement than an SME. Some of the industry-specific regulation is of a similar outlook – so, a significant number of effective, focussed, co-owned and co-invested small investment management firms find the burden of the regulatory regime focussed and geared towards the larger investment management firms, with their resources and capacity – all investment management firms with funds under management of more than £100m are treated the same, subject to the same requirements, reporting and regulations. So, I am persuaded that there is a negative impact of EU regulation.
However, there is a ‘but.’ First, I believe, morally, that the freest access possible to markets should be encouraged, but as we know, the free market is never quite as free as we think or might like. So, the single market itself is surrounded by a tariff wall; free Europe or fortress Europe? And in addition to tariff walls around the single market, because a free market is never entirely free, and indeed is populated by participants and players who do not possess perfect information, and, I might add, are not perfect and flawless characters, a degree of regulation is necessary. Second, therefore, the idea that leaving the EU means we can simply sweep away all of this regulatory regime is neither right nor appropriate. Even if we left the EU, and abandoned the more bizarre or restrictive regulations, the reality is that any independent UK government is going to impose the overwhelming majority of the current regulatory regime. So, although, I too would like changes, I too find the bureaucracy and extent of EU regulation irksome, it is naïve in the extreme, to think that leaving the EU would enable all of this regulation to be simply abandoned.
So, where have we got to? We have, I think, established the importance for economic well-being of the single market; with the challenge that we might lose other opportunities, but with much uncertainty. We have also argued that there is a negative impact of a regulatory regime bearing heavily on SMEs; yet with the reality that it would not all be swept away by leaving.
How to decide? I remain sceptical of the campaigns and the propaganda from both directions! Rather, ask this question, what will best enable the maximum flourishing of the economy which in turn will enable the flourishing of individuals, families, communities and the nation? Is access to the single market and its benefits too significant to surrender? Is the regulatory regime of the EU sufficiently oppressive and burdensome that it prevents SMEs from flourishing? Of course, there are other considerations, non-economic arguments about borders and sovereignty, but as business people, we need to assess fairly the moral imperative of ensuring a successful business environment for the country. The answer to that question might vary from person to person, but let us at least ask the right questions.
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Dr Richard Turnbull is the Director of the Centre for Enterprise, Markets & Ethics (CEME). For more information about Richard please click here.
Poor old Google. Well, not so poor actually. According to their SEC 10-K filing group profits amounted, in 2014, to $17.26bn. Google’s UK sales (mainly internet advertising), based upon the billing address of customers, were around $6.5bn in 2014. Lots of sales, but, apparently no profits. Google themselves told the Public Accounts Committee in 2012 that they don’t actually make UK sales. Of course, that is true. To suggest otherwise, might imply a permanent residence for tax purposes and trigger all sorts of consequences – such as paying more Corporation Tax. There are, though, sales from a Dublin registered company to people in the UK. The basic corporate tax rate in Ireland is 12.5%, in the UK 20% and in the US, 35%! So, Ireland get the business. If I buy a product from an American company or an Irish company then the sales and profits are generally accounted for in the country of origin. A British company selling in the US would account for and pay tax on the transaction in the UK. Well, that’s the easy bit. It gets much more complicated when subsidiaries are involved and there are transactions between them…as we will see.
So, what’s the problem?
Mind you, for a Professor of Accounting, Prem Sikka, seems rather naïve. He estimated that rather than the £130m settlement Google reached with HMRC the figure should have been nearer £1.8bn. I have no idea if he has the right figure. And neither does he. HMRC said that they collect the full amount of tax due on profits and no less.
Why the discrepancy?
Before, rushing to judgement (John McDonnell described the payments as ‘derisory’), let’s try and be objective.
Most of its corporate taxes are paid in the US (approximately $2.5bn in 2014). The company also pays corporate tax – at a lower level ($0.8bn) – in Ireland. Google also pays a lot of tax in the UK and collects even more on behalf of the government. Google has around 2,400 employees in the UK (though I cannot confirm the exact figure). Let’s assume that the average salary approximates to that of the Top 100 companies in the UK, namely, £31,929. So that is an annual tax bill of, say, £7.9m per annum in National Insurance Contributions (NIC for employers is 13.8% for all remuneration above £8,160). Not to mention business rates and all the taxes on consumption and irrecoverable VAT the company incurred. It might be that the tax burden on Google and other companies should be higher. Or not. But we must remember the total tax bill that companies face, not just Corporation Tax.
It’s odd how tax campaigners always seem to know how much tax companies should pay. It is a very strange morality. Google can be forgiven for, perhaps wrongly believing that the taxes they are due to pay should be determined by the rule of law, the tax provisions set in Parliament. We do not know what Google’s UK profits are, should be, or should not be, unless there are some rules to determine the calculations.
George Osbourne introduced the Diverted Profits Tax in order to deal with large multi-nationals potentially diverting profits. Google, we are told, would not have been caught. I read the Diverted Profits Tax legislation. Like the rest of the tax code it is not straightforward, complex and requires interpretation to determine whether a company is caught by its provisions or not. This was a simple reminder of the complexity of the tax code, a point quite simply overlooked by many campaigners. Elections, claims and, indeed, judgements are invariably required.
Parliament has the ultimate responsibility to legislate. There are ways in which the tax provisions could be simplified. However, we are naïve in the extreme if we think it is straightforward to enact a national tax regime for multi-national companies. Even multi-nationals need to be protected from double taxation (the same income taxed twice in different places) and there are many provisions to prevent cost and value shifting. Indeed, there are moral issues about depriving Ireland (say) of its tax revenue from Google, when they have been attracted there by a transparent and public lower rate of tax. If a UK subsidiary pays a US parent (or a Bermudan subsidiary) for the use of the brand, what is a fair price?
We do not know the actual, precise amount of tax liability, if any, in dispute between Google and HMRC. It is possible that Google and their advisors believe this to be Y and HMRC believe it to be 4Y. So, HMRC could seek to impose 4Y. And Google could stand firm on the grounds that their interpretation of the law produces Y. HMRC could go to court. They might win. They might lose. It will cost millions of pounds in direct costs and even more in opportunity cost. So, a deal is done at 2Y. Except it is not a deal, but an agreement that 2Y is the amount of tax that is due.
So, we should not join with the so-called tax justice campaigners who display a false morality about tax. The campaigners seem to think that they should be the arbiters of Google’s and other companies tax liabilities. I prefer the law to determine the liability.
And yet, my sympathy for Google is limited.
First, let’s spell out the roots of the accounting problem.
The core of the issue lies in what sales and what costs should be booked in the UK. Only then can the level of profits be determined and appropriately taxed.
If I buy a product from the US, the income and costs will be recorded by that company in the US. If that US company sells so much in the UK that they set up a subsidiary to sell those products here then the sales and costs will be accounted for and taxed in the UK (with relief given in the US for double taxation).
Problem 1. Google (and others similarly) do not officially ‘reside’ in the UK, but Dublin, or Bermuda, the Netherlands or Switzerland, where depending on the precise corporate structure corporate tax rates are lower.
Problem 2. Google sell internet advertising, but almost certainly there will be payments between subsidiaries which have the effect of transferring costs and revenues. So for example, London may charge Dublin for, say, ‘sales and marketing services’ so that the income in Google UK more closely matches it costs (employees, rent etc), and hence reducing the profits in Dublin which are then subjected to the (lower) rate of corporate tax. It also seems likely that a subsidiary in Bermuda (even lower tax) makes charges to Ireland for the use of intellectual property. There are existing rules about ‘transfer pricing’ (effectively it must be an ‘arms-length’ transaction) but what precisely would be a fair or reasonable price?.
Other issues might involve inter-company loans, charges for use of the brand and (probably not in Google’s case) payment for raw materials. The pricing of these transactions is complex and can generate very different outcomes.
In essence a low corporate tax regime should encourage investment, employment and transparency. Google should not be targeted or demonised for meeting its obligations, nor HMRC for agreeing past and (more importantly) future arrangements.
Yet, at the same time, Google is being disingenuous. There is, without doubt, substantial economic activity in the UK by Google and it is not unreasonable for a corporate tax liability to arise. The OECD is encouraging national governments to change the tax arrangements of multi-nationals so as to reflect this economic activity. In reality this cannot be achieved by individual nations.
So, the deal with HMRC is central. Confidentiality in taxpayer affairs quite reasonably prevents disclosure of the arrangements for the past. However, assuming HMRC will seek to apply consistent principles to others for the future payment of tax, it is not unreasonable to disclose those principles. It is not good enough for Google to say they will book more sales to the UK (perhaps more costs too, so there will still be no profits) nor for HMRC to hide behind confidentiality when what is needed is not details about an individual company, but details of the principles which will be adopted going forward.
Google should not be demonised. They pay a lot of tax and arrange their affairs accordingly and legally. However, it is reasonable for there to be a tax regime which does bear some relationship to economic activity. What that regime is to be, we should be told.
And, maybe, just maybe, what is at fault is the whole approach to corporate taxation. To introduce a new tax allowance or restriction is easier than to remove one – long-term consequence, less certainty and more complexity in the tax code. If a company employs more people due to it competitive advantage there are tax gains for government, economic growth, more employment and so on. Maybe we should abolish Corporation Tax and all its associated reliefs and allowances. Make the profits, invest the profits, remove the profits (duly taxed as income in the hands of the recipient), improve employment, pay and so on. Just a thought.
Dr Richard Turnbull is the Director of the Centre for Enterprise, Markets & Ethics (CEME). For more information about Richard please click here.
First coined in 1984 by R. Edward Freeman in his book, Strategic Management: A Stakeholder Approach, Stakeholder Theory brought a new and somewhat radical approach to the study of organizational management and business ethics. Radical in the sense that it became the first theoretical framework to secure a prominent position for the interplay of values, responsibilities, and ethical decision-making in managing a business.
In contrast to the traditional shareholder view, stakeholder theory promotes a way of business conduct that takes into account all the parties that come into contact with a company’s ecosystem . From shareholders and employees, to customers, suppliers and the local community. A ‘stakeholder’ is a person or group that can affect or be affected by the business in question.
Here are three key lessons that we can learn from Freeman’s Stakeholder Theory:
- – Businesses that effectively manage all stakeholder relationships are more likely to succeed in the long-run.
- – Stakeholders must be considered together and not in isolation, working together in the same direction.
- – In the long-run, all stakeholders are equally important for the future of a business.
At the end of the day, both internal stakeholders (such as employees, management, shareholders) as well as external stakeholders (customers, the local community and even governmental or non-governmental organizations) – all have the power to significantly damage, and in extreme cases, bring down a business that mistreats them.
Wise companies must recognize the value in a stakeholder-driven management approach.
Andrei Rogobete is a Research Fellow with the Centre for Enterprise, Markets & Ethics. For more information about Andrei please click here.
CEME will be publishing a ‘theology of work’ in late 2015 so it was particularly helpful to listen to Yves de Talhouet, senior Vice-President of Hewlett-Packard on the subject.
Work is essential to human flourishing. All sorts of implications flow from that including for government welfare policies. However, work is not necessarily in the state it should be in. Gallup have shown that 16% of workers are actively disengaged from their work which has enormous cost in terms of productivity, community and the collective intelligence within a workplace.
Yves described work as under attack from two sources, both of which need to be resisted. The first is the classic ‘work is a necessary evil,’ or simply viewed as a prison to escape from. Actually work delivers well-being, defeats poverty and dependence and so needs to be encouraged. More interesting was Yves second point about work being under attack. In this case work was under attack from management systems driven only by numbers, productivity, targets etc, key performance indicators – all of which had the effect of disguising real work.
Work has three aspects:
A proper understanding of work involves all three of these aspects to be properly recognised. The problem is that the objective side (measurement, targets) has grown to the extent that nothing else seems to matter. Work is reduced to process and the consequence is disengagement. More value needs to be put into the subjective side (recognition, encouraging self-esteem) and the collective (team work, solidarity, community).
It seems to be me that we either over-emphasise the objective as Yves suggests so that we become obsessed by outputs and targets, or we ignore that productive side altogether in pursuit of some vague collective ideal. Work both dignifies humanity and is essential for producing goods and services. Work enables us to flourish and provide for our families. Work, for the Christian, reflects God’s purpose for us. Work is important.
If work is conveys both dignity and economic productivity then its lack destroys both. So unemployment is not a good thing and we should encourage policies which encourage enterprise, growth and hence employment. At least part of the purpose of a firm is to provide employment in the process of producing economic surplus. However, discouraging work also damages human dignity and purpose. CEME is strictly independent and works with people across the political spectrum. Nevertheless, if minimum wages are imposed at too high a level for all jobs, or welfare benefits set at too high a level, the consequence could be to discourage work. Equally, in order to encourage work there is surely a case for a degree of wage subsidy at the lowest points of the wage scale to encourage people into work. However, if tax credits potentially subsidise the proper wages employers should be paying then there is an even stronger case for a lower introductory rate of income tax which would encourage work, avoid subsidies and indeed the impact on take-home pay as income rises.
Whatever the policy prescriptions work not only must pay, but work must also be valued and invested with true worth, value and dignity in all its fullness.
Dr Richard Turnbull is the Director of the Centre for Enterprise, Markets & Ethics (CEME). For more information about Richard please click here.
The inspiring session of the day came from Daniel Servitje, Chairman and CEO of the Bimbo Group, Mexico.
Bimbo is one of the world’s largest baking goods industry firms with a capitalisation of US$12bn and around 129,000 employees.
The company was described as ‘rooted in long-standing values,’ shaped by strong corporate governance and a determination that businesses and society must work together for human dignity and the common good. The company, he said, was both highly productive and deeply humane.
The aims of the company where shaped by a matrix:
| Economic | Social | |
| External | Providing valuable goods and services to society | Contributing to the development of society in a sustainable way |
| Internal | Compensating employees, members, investors | Contributing to personal and professional development of employees |
This was a powerful reminder that profitability and sustainability are not incompatible. However, it is entirely reasonable for a company to have aims and objectives that are not simply defined by shareholder value maximisation. Of course, a successful and sustainable company may well do just that.
Daniel pointed out that his company was involved in sectors of the economy which attracted criticism – baked goods and health. The companies social responsibility platform was built on four areas:
All employees were encouraged to take part in the 3-day company sponsored off-site development event, covering person, family, work, society, culture and spirituality.
The fascinating thing about the presentation was the holistic and integrated nature of the approach to sustainability. Social responsibility was not an add-on, but fully part of the company and its objectives – and not as an alternative to profitability. At the heart of the company’s purpose was providing goods and services at profit. Alongside that came creating jobs, investment, promoting a formal economy (in a country, Mexico, where much of the economy is ‘informal’ which denies extensive tax revenue to the government), developing and sharing knowledge and skills. The outcome was better people, companies and countries.
It would be great if more companies, large and small, thought about their aims and objectives, the role of profit and sustainability, with the same degree of intent.
Dr Richard Turnbull is the Director of the Centre for Enterprise, Markets & Ethics (CEME). For more information about Richard please click here.
I am passing through Rio de Janeiro en route to Belo Horizonte to attend the XXV World Congress of UNIAPAC (The International Christian Union of Business Executives) on the theme of “Business, Government and civil society working together for the common good.”
This is my first visit to South America and Rio has presented me with a capitalist conundrum.
What a great city. The beach at Copacabana is wonderful (well, it looks marvellous, I have not yet had opportunity to explore!). The setting, the mountains, the water, the statue of Christ the Redeemer are exceeded only by the friendliness of the people.
I know well that many cities and metro areas like Rio throughout the Americas and Africa present contrasts and poverty and wealth mingle together. My driver took me past large swathes of ‘shanty town’ like housing. It was not that I have never seen anything like it before (I have visited Cape Town in the past), but the capitalist conundrum struck me again.
The quality of the housing was shambolic. Half-built buildings, many exposed to the elements, seemingly built one on top of the other stretching back from the highway into the hilly areas behind. The conundrum is this. Almost all had satellite dishes and air-conditioning units. So on the one hand there seems to be poverty (at least as represented by poor housing) and on the other the poor exercising consumer choices in a capitalist economy that would reflect many more affluent priorities.
Are these apparently irreconcilable priorities reconcilable? Can capitalism provide a solution to the poverty of housing and indeed poverty more generally as well as providing such consumer choice?
Here are a few thoughts:
The problems which I think arise are when wages are so low they are unable to sustain the basic infrastructure (housing) yet provide some opportunity for consumer choice. I cannot believe how cheap the taxi fares are.
According to the Economist Brazil is in a hole and still digging. One of the largest economies in the world has seen GDP contract, deficits grow and government corruption is rife. A country the size of Brazil, of course, and in its regional setting, faces many difficulties of environmental issues, inclusion and so on. The 2016 Olympics is seeing significant infrastructure investment, though, once again, government corruption damages the inclusivity of the growth which is generated. All of these things are likely to enhance the capitalist conundrum rather than solve it.
Capitalism does lead to some unintended consequences. I am not one who believes that equality per se is necessarily a desirable objective; but poverty (in absolute terms) surely cannot be acceptable to any decent human being? Yet, a market economy built upon ethical principles can be the solution to many of these problems.
Capitalism generates conundrums. Long live capitalism. Oh, but take poverty seriously and let’s use our business and economic opportunities to help.
Dr Richard Turnbull is the Director of the Centre for Enterprise, Markets & Ethics (CEME). For more information about Richard please click here.
