Colin Mayer is Professor of Management Studies at the Saïd Business School in Oxford. He believes that “the corporation is failing us” and that dramatic changes in the rights and obligations of those who control corporations are needed. Firm Commitment explains why and makes proposals for change.
Mayer uses the term “corporation” to refer to the kind of limited company that is commonly used by large businesses. He recognises the huge benefits that corporations have brought but he considers them to be seriously flawed. Indeed, he describes his book as “both a tribute to and a condemnation of this remarkable institution that has created more prosperity and misery than could have ever been imagined”. He perceives the main problem to be that corporations are seen as the creatures of their shareholders, rather than as independent entities, and this leads to the pursuit of shareholder value over the interests of stakeholders other than shareholders. In support of this, he cites numerous well-known corporate scandals.
The primary focus of his book is the UK and Mayer appears to believe the position here is worse than elsewhere. However, he is not starry eyed about any currently available option. Notably, he recognises that family and other tightly owned companies may have their own problems and scandals (citing Parmalat) and, in any event, family ownership “is not the resolution to the 21st–century corporation’s problems”. He is also dismissive of the attempts that have been made in recent years to correct problems through regulation (which, he asserts, “promotes immoral conduct”) or through enhanced corporate governance (which, he suggests, may promote increased shareholder control to the further detriment of other stakeholders). He suggests that what we need is “to find mechanisms by which companies can demonstrate a greater degree of responsibility themselves without relying on others to do it for them”. Specifically, he suggests that “we need to establish the means by which corporations can demonstrate more commitment to their stakeholder community”.
Salvation is in what he calls “trust firms”, which would be like existing corporations subject to three adaptations: entrenched within their constitutions would be corporate values (which might reflect the values of their founders, public policy or other things); there would be trustee boards to act as custodians of these values; and the corporation would have “time dependent shares” whereby the voting rights of shareholders would depend upon the extent of their commitment to hold their shares for the longer term (e.g. a share which its holder is committed to hold for a further ten years would have ten times the voting rights of a share which the holder is only committed to hold for one more year).
Mayer does not want any compulsion to be applied in relation to this. He argues that diversity in corporate forms should be permitted. He does, however, suggest that there be tax incentives to encourage the use of trust firms.
There is a lot to applaud in this book. In particular, there is depressingly little evidence that increased regulation or the focus on corporate governance in recent years has materially improved the corporate world and, against this background, Mayer’s stress on the importance of “commitment” as opposed to “control” deserves serious consideration. It links with ideas derived from the work on “relational thinking” that has been undertaken in recent years by, amongst others, the Relationships Foundation and Tomorrow’s Company. Furthermore, the concept of a “trust firm” is an interesting one that could contribute to the development of a broader view of corporate purpose and responsibility.
Unfortunately, however, this is a flawed book. Perhaps Mayer has tried to cram too much into 250 pages. Whatever the reason, almost every page contains contentious statements or statements that require significant qualification. Although there are plenty of footnotes referring to past research, there are also many ex cathedra statements as well as many assertions and assumptions with which specialists will take issue. For example, some of the statements of law are, at best, partial and Mayer seems unaware that much of what he proposes can already be achieved through existing law (as, for example, the entrenchment of editorial independence within the constitution of The Economist Newspaper Ltd illustrates). He also accepts dubious interpretations of past events. In particular, his long description of the Cadbury takeover accepts the views of its former chairman, Sir Roger Carr, without examination. This is a pity because others involved in that takeover (including former Cadbury directors) have different views and consideration of these might have led to Mayer modifying some of his suggestions.
More seriously, Mayer’s analysis of the objective of corporations is unhelpful. He states that “shareholder value is an outcome not an objective” and even quotes former GE CEO Jack Welsh in support of his views. However, his argument only addresses the use of short term share prices as the test of shareholder value and his suggested alternative as a corporate objective is demonstrably inadequate. He asserts that a corporation’s “first and foremost objective is not to its shareholders, or to its stakeholders. It is to make, develop, and deliver things and to service people, communities, and nations”. It is unclear from where he derives this overarching normative assertion and, in any event, it is no more useful than saying that the objective of corporations is “to do things”! It does not help a corporation’s management to decide whether they should remain in heavy engineering or move to IT or whether to be a volume manufacturer or a niche player.
Finally, Mayer’s evident confidence that the trust firm does not suffer from serious flaws and is the solution to the myriad of issues that he has identified is not backed-up by careful analysis. He appears to recognise this since he says that his ideas need to be “subject to careful scrutiny”. They certainly do and, whilst they are undoubtedly worth such scrutiny, it may be seriously doubted whether they are the “cure all” that Mayer appears to believe.
That said, provided that the book is read critically, it is well worth reading.
“Firm Commitment” by Colin Mayer was first published in 2012 by Oxford University Press (ISBN-10: 0199669937).
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.
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 Brian Griffiths, Richard Turnbull, James Perry and Maurice Glasman.
The 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.
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 an excerpt of a speech given at the GSM Annual Conference on the 12th May 2016.
I would like begin by saying it is an absolute pleasure to be with you today. I was originally born in Timisoara but I have lived for most of my life in the UK – so it’s always great to come back home and see my family and friends.
In the brief time that I have at my disposal I hope to convince you of the importance of ethics and moral behaviour in our Globalised world of Business.
Most economists and news agencies like to claim that we are currently living in the “post-financial crisis era”.
But I would like to argue that at heart of the financial crisis was not just a crisis of finance but a crisis of morality – with reckless behaviour driven by greed and the pursuit of ever faster and larger profits. This was well illustrated in the gross and artificial subprime mortgage bubble in the United States.
Despite this challenge, the free market remains the most effective form of wealth creation: more people have been lifted out of poverty in the last century than any other time in recorded history. The United Nations reports that extreme poverty has been reduced by over 50% since the early 90s. A market economy gives people hope, purpose, and a genuine sense of achievement – but clearly we have a remaining problem: human greed and misconduct.
What would a solution to the problem of greed look like? Should the Government impose higher taxes and regulations on the private sector? Should the penalties be so high that no company would risk illegal or corrupt activity? Would a highly regulated market protect consumers without slowing innovation and growth? These are approaches that have been tried and tested, and failed time and time again.
It is my belief that we need a free market economy, but one that is built upon a foundation of ethics and moral values.
In business we are often encouraged to look forward – And rightly so. Whether it’s planning for a new product or service, it is crucial to be forward-looking in the world of business.
However, we must also be aware of the past. History is a blessing because it shows what works, and what doesn’t.
If we are not aware of the events that have occurred in the past, we end up repeating the same mistakes over and over again – And sadly, that is often the case.
It is for this reason that I would like us to take a look at the Quakers of 17th Century England. Here we will see how deep-rooted values played a critical role in business success.
But who exactly are the Quakers?
The Quakers were a group of English Puritans that emerged in the midst of the Civil Wars of the 17th Century. It was a time of fertile ground for the emergence of new ideas in the political, social and religious spheres.
One man named George Fox was a substantial provider of such new ideas. Very much a product of his time, George Fox became deeply disconnected with the teachings of the Church and its approach to faith. More specifically, the fundamental clash with the Established Church came when he advocated the notion that each individual can have a direct relationship with God without the need of ordained clergy.
Born in a ‘middle-class’ family, Fox grew up in an environment of tough religious discipline and Christian teaching. However, Fox went beyond the formalities of doctrine and his faith a deeply personal affair – one that would dictate his path in life.
But how did the Quaker’s faith shape their business values??
Equality of value should not be confused with uniformity. Clearly, human beings are different, each unique in their own traits. However, historically Quakers believed that “There is that of God in everyone”.
This belief effectively translated into a practice of equality and respect within the workplace in stark contrast to the customary hierarchy of the time. A ‘flat’ organizational not only allowed Quaker businesses to be effective organizations on the inside, it also enabled them to build long-lasting relationships on the outside.
The reputation Quaker businesses established in society would go before them in the marketplace, almost guaranteeing their success in building a network of trust and ultimately, ensuring profitability.
In claiming that each individual can have a direct, personal relationship with God, the Quakers found themselves under systematic persecution from the Church and State. However, it was their personal faith that guided their moral business code of conduct.
This core Quaker belief is rooted in a strong sense of community with other human beings – all sharing together in God’s creation. This led Quakers to organize in fellowships and large groups where they would meet regularly and share in the faith that united them.
For business, it translated to a great sense of responsibility and stewardship toward their entire business ecosystem. Whether work or private, a sense of collective responsibility and respect entered all aspects of life.
So were the Quakers successful in business?
Highly Successful. Here are some examples..
Barclays – UK’s largest retail bank
Lloyds – Major UK bank
Clarks – UK’s largest shoe manufacturer
Cadbury – Major chocolate manufacturer
And others…
However, what happens when companies forget about upholding the ethical values the proclaim to believe in?
CASE : Volkswagen
One example that I’m sure you are all familiar with is the Volkswagen Emissions Scandal.
Although not a Quaker business, the Volkswagen emissions scandal was arguably the defining corporate story of 2015. It came as a shock not only because millions of customers were deceived (11 million according to VW), but rather because the culprit was the ‘peoples-car’, Volkswagen.
The Volkswagen group has over 550,000 employees and a presence in more than 150 countries worldwide. Over the decades the Volkswagen brand has established a global reputation of reliability, robust ‘German’ engineering, and value for money.
VW built a reputation of being a brand that you can wholeheartedly trust. The company prided itself on upholding the very highest ethical values and business practices.
The Emissions scandal caused colossal damage to the Volkswagen Group. Like the Barclays LIBOR scandal, the damage was both financial and reputational.
If on the Friday, the 18th September 2015 VW’s shares were trading at 161 euros per share; by the end of Monday, the 21st September Volkswagen’s share price dropped to 111 euros per share, losing almost 30 per cent of its market value. That’s close to a 30-Billion-euro devaluation in one day of trading. Fig. 1.2 illustrates the share price plummeting.
It is a big price tag to pay for something that other car manufacturers like BMW, Toyota and Mercedes have been able to comply with. Therefore, we can only conclude that it is not an issue of technological knowledge but an attempt to maximize profit through illegal business practices.
As damaging as the financial costs are, the reputational damage even worse. It will take years for Volkswagen to win back trust from its customers and the general public. As Warren Buffet once said, “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently”.
The Volkswagen Emissions scandal is a clear example of a company failing to uphold an ethical culture and paying the price for it.
So then, what are some lessons that we can learn from the Quakers and the example of Volkswagen?
Purpose trumps profit. The successful business of the 21st Century is one that sets its aims above profitability. While profit is crucially important, the objective of financial profit should become the result of a purpose-driven business model. The Quakers set up businesses in obedience of God and fair treatment of others. Their main objective was not just profit.
But it is not only Quaker businesses that were successful because they were driven by purpose. Arthur Guinness, the founder of Guinness Beer wanted to help alleviate the severe alcoholism in Dublin so he introduced a lighter beer as an alternative to gin or the other strong spirits. Henry Ford envisaged a nation on wheels and in 1908 he introduced the first mass-production car, the Ford Model T.
The vast majority of long-term, successful businesses have one thing in common: they are driven by a purpose that goes beyond profit.
Companies must truly uphold a set of moral values in the pursuit of achieving their purpose. In the global marketplace of the 21st Century, a company’s set of values must be seen as a critical part of the long-term business plan.
Values must be practiced, not just preached. They must be truly lived out in the day-to-day activity of the business.
Chief executives and senior managers have the responsibility to influence the rest of their staff and employees. They must strive to embody of the company’s culture and shared values.
Businesses that fail to implement a sense of morality will sooner or later, have to pay the consequences.
This is mainly due to two global forces: globalization and the widespread use of social media.
In this sense the rapid growth of social media can be seen as an effect of technological Globalization. Social media has become a global platform of discussion and sharing of information at lightning speeds. It has brought millions of people closer together regardless of geographical distance. It has democratized information, giving tremendous collective power to online communities – A power that can expose morally corrupt companies.
I would like to end on saying that ultimately, a business should not promote a moral culture simply out fear of social media or the online backlash – it should because it is the right thing to do: for the long-term prosperity of the business, as well as the wider society it operates in.
Thank you!
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.
Photo Gallery:
Dr Richard Turnbull is the Director of the Centre for Enterprise, Markets & Ethics (CEME). For more information about Richard please click here.
This is a transcript from a speech given at Clare College, Cambridge on Friday 11th of March, 2016.
It is a great pleasure and honour to be invited to address you today at this service to commemorate the benefactors of the College, and in particular its founder, Elizabeth de Burgh, Lady of Clare.
When the Master, Lord Grabiner, invited me to speak I was delighted to accept not least because of my own involvement in higher education. For the first 20 years of my career I first taught and did research in the field of monetary economics at the London School of Economics (LSE) and then moved to a chair at The City University where I was appointed Dean of the Business School.
One interesting aspect of this Commemoration is that we are celebrating it in a College chapel, using Christian liturgy, readings from Solomon’s Book of Wisdom, in the Apocrypha and the Gospel of Saint Mark and with prayers being said. Not all of us here today may be believers but the place we are in and the form of this service recognises that there is a mystery to be explored which goes beyond our academic pursuits. We recognise it in music, in paintings, in poetry, in the beauty of nature and we see it today in the readings we have heard. This is in complete contrast to the environment in which I studied and then later taught, namely the LSE. We had no chapel and in the whole of my sixteen years as a student and then member of staff I never attended a religious service in the School simply because to the best of my knowledge there were none to attend.
So I am delighted that this service provides an opportunity for us to recognise that in this country our understanding of benefaction is deeply rooted in our Judaeo-Christian heritage. Ever since I was an undergraduate I have been interested in the relevance of Christian social ethics to economic life and over the years one thing which has struck me is the Jewishness of Jesus. A question I have often found myself asking is whether there is any aspect of Christian-social ethics which is not found and rooted in Judaism?
Over the centuries the Judaeo-Christian understanding of human dignity, the rule of law, social justice, rights to the ownership of private property, the importance of the family and care for the disadvantaged have shaped our society. So it is with benefaction. Our heritage has placed great emphasis on charitable giving to help others in need and to promote the common good. And In this respect Jewish and Christian communities have over the centuries set an outstanding example.
Today we are remembering the former and current benefactors of this College and in this context I would like to explore three aspects of benefaction which I hope, given our common heritage, will resonate with people of all faiths and none.
Gratitude
One of these is the importance of gratitude.
Gratitude is recognised as a virtue in all major religions. Even for a humanist such as Cicero, gratitude was “not only the greatest of the virtues but the parent of all others”.
For myself I owe a great debt to those who provided the means for my own education, first at a primary and then at a grammar school in Wales and later as an undergraduate and post-graduate student at the London School of Economics. I am sure that everyone attending this service today will have certain individuals and institutions to whom they will forever be grateful.
I should add that I am grateful not just for the financial support I received as a student but also for the encouragement of teachers who took a personal interest in my development. In this respect the benefaction of time can be just as important and demanding as the benefaction of money.
Incidentally gratitude has more recently been shown to have unintended benefits. Over the last fifteen years or so psychologists have undertaken research to explore the impact of gratitude. The evidence suggests that a correlation exists between gratitude and increased well-being. Gratitude is positively related to life satisfaction, hope, optimism, empathy and the willingness to provide support to other people. In the field of behavioural economics research has found that gratitude is correlated with generosity and increased monetary giving. In addition the evidence also suggests that grateful people are more likely to sacrifice individual gains for community well-being.
In the ‘me-centered’ spirit of modern society a life of gratitude does not come easily. A culture of consumerism alongside the relentless striving to be the best and win, in highly competitive global markets can so easily foster a constant state of dissatisfaction with our material well-being, with the result that we neglect to recognise gratitude as a virtue.
Generosity
Gratitude is a great virtue. So is generosity.
Elizabeth de Burgh was an outstanding example of generosity. In the Commemoration address we heard how at a difficult time in the life of this county, following the Black Death, when I feel sure there would have been many requests for charitable giving she was generous and took a long term view. She gave money to ensure that the College would provide for the education of poor Scholars of ability. Not only that but in her will of 1335 she singled out that money be left to a number of other good causes: the poor religious, women who had fallen on hard times, poor householders and merchants, poor parish churches and poor prisoners.
A gift does not have to be large however to be worthy of being a genuine benefaction, because each gift however small is itself an expression of generosity.
Generosity was highlighted for us in the story from Mark’s gospel, which is an account of an occasion when Jesus and his disciples were in the Temple at Jerusalem sitting opposite the treasury and watching people making their donations. The rich put in a great deal of money. The poor widow puts in just two small copper coins worth very little. Yet she is praised by Jesus for contributing more than the wealthy, “this poor widow has put more money into the treasury than all the others. They gave of their wealth; but she, out of her poverty, put in everything – all she had to live on”.
For me the greatest argument for generosity in the New Testament is that of St. Paul in his second letter to the church at Corinth, which extends to two whole chapters. Paul was highly intelligent, well educated, restless, argumentative but also a great campaigner for the cause of the poor. The first century church at Jerusalem had fallen on hard times and it is clear from his letters that wherever he went he not only proclaimed the Good News but encouraged generosity in giving in order to help the poor in Jerusalem. In doing so in his second letter to the Corinthian church he held up as an example the Macedonian church, which although extremely poor gave generously – in fact the words he used were that they gave “even beyond their ability”.
His clinching argument was “for you know the grace of our Lord Jesus Christ, that though he was rich, yet for your sakes he became poor so that you through his poverty might become rich” (2 Cor. 8:9)
Wisdom
Gratitude, generosity and finally wisdom.
Before Elizabeth, Lady Clare, gave generously to establish this College she first showed very clearly in the Preface to the Statutes of the Foundation of 1359 the value she attached to learning: “experience plainly shows”, she wrote that “learning is no mean advantage in every rank of life”: she made it clear that she was concerned to “further the public good by promoting learning”: her purpose in founding the college was that “students should discover and acquire the precious pearl of learning”.
Learning in the Abrahamic faiths is invariably associated with a book, a body of sacred texts. We read this evening from The Book of Wisdom by Solomon. From this and more generally from the Wisdom Literature of the Old Testament (Job, Psalms, Proverbs, Ecclesiasties and the Songs of Songs), it is clear that wisdom is about more than acquiring knowledge and information.
Canon David Atkinson, former Canon, Chancellor and Missioner, Southwark Cathedral expresses it succinctly in his Commentary on Proverbs;
“wisdom is no abstract concept; wisdom is personified: she is described as a woman…This personification of wisdom is not a (mere) literary device; it reflects the essential nature of biblical wisdom. Wisdom is embodied. Wisdom is for living”
Wisdom is something practical. It relies on knowledge but is more than learning. It is based on experience and common sense. The lady Wisdom possesses widely respected qualities: honesty, fidelity, integrity, love, justice, modesty. Taken together they might well be regarded as the marks of a ‘person of character’. Wisdom is a manual for living.
Wisdom begins with awe, the recognition that there exists something greater than ourselves. However awe is also the beginning of wisdom, in that it is not acquired in a moment but grows throughout a lifetime.
In today’s highly competitive market place in higher education and certainly something I found as Dean of a Business School, is that it is far easier to provide knowledge and information than to grapple with fostering the development of those qualities which together characterise a wise person.
In the opening stanzas of his poem, Choruses from the Rock, T.E.Elliot after noting the constant innovation and unending 24/7 activity of an industrialised society poses challenging questions,
Where is the life we have lost in living?
Where is the wisdom we have lost in knowledge?
Where is the knowledge we have lost in information?
Let me conclude on a personal note.
When I was made a life Peer I was invited to put forward a design for a Coat of Arms and a motto, something I did some years later. I choose a pair of ospreys the symbol of Swansea where I was born and grew up, a brewin (a play on Brian) holding in his forepaw a leek and two red gryphons not unlike dragons to signify Wales, a stack of books because of my interest and commitment to learning, three trees representing my three children and a motto which read in Welsh:
Ofn yr Arglwydd yw dechrau doethineb
The fear of the Lord is the beginning of wisdom
I chose it because I believe it and I commend it to you.
Lord Griffiths is the Chairman of CEME. For more information 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.
