Tax evasion part of corporate culture

Image representing Steve Jobs as depicted in C...

Image via CrunchBase

Most people would think that countries like Spain, Greece and Portugal would rank among the very top of countries for tax evasion schemes. But even though the US has a relative low tax rate the country tops the list of places where tax evasion seems to be part of corporate culture.

So how big a problem is tax evasion? Take a look at the table below from Tax Justice Network, a London-based watchdog that fights against tax havens and for more transparency.

America’s “black” or “shadow economy,” represents 8.6% of GDP, while the percentage is by far the smallest of any of the countries on the list it does represent a significant monetary post and represent roughly the GDP of Denmark the 32 biggest economy in the world according to the IMF.

How does the companies in the US manage to avoid tax? Well, one suggestion is that companies like Google, Apple and Amazon manage to cut their tax bill by one third through a series of moves that involves countries in Europe and in the Carrabin, a system is also used by big European companies to transfer funds to tax havens. My friend Sarah Wenger has created the infograph titled “The master of Tax Evasion” that explains how the system works.

Masters of Tax Evasion
Created by: www.MastersDegreeOnline.org

Advertisements

Mapping the components of Social Risk

There is no doubt that companies are faced a level of scrutiny that the world have never seen before. Almost on a daily basis are companies being exposed as fraudsters, environmental culprits, tax evaders or child labour abusers. No company can know what or who will be next to be exposed in the media as the biggest unethical corporate abuser of the worlds resources.

One side effect of this trend have been the numerous standards and quality management systems that focuses on different approaches to reducing the risk of poor decision making and unethical corporate behaviour. There is no doubt that companies need a systematic approach in order to keep their managers and decision makers on a leach. However, there are limits to how comprehensive a given system can be and still be relative effective. Just think of the Sarbanes-Oxley or BASEL 2 frameworks, which did little to prevent the biggest financial downturn with an epicentre in the very industry that they were put in place to regulate.

As I see it is traditional risk management programs such as the above mentioned narrowly focused on operational and compliance risks and consist of short-term point solutions. Which are narrowed down to mitigation actions specific to particular sources or impacts of risk. But what happens when risks are rising from multiple sources and places within all the corporate entities? Point solutions can work well for pinpointed risk areas, where the main objective of the risk management effort is to avoid or prepare for a particular event and in so doing reduce the associated cost. However, focusing on one point or case cannot work for strategic risks, where complex origins demand an integrated management approach across entities, borders and levels of authority.

One dimension of social risk’s complexity is that it is often a function of strategic or operational decisions companies have made that affect issues that stakeholders care about. So instead of being a “one system fits all”-approach it encompass a wide range of areas which overlap and are integrated into each others systems in order to create a fine masked network which enables organisations to catch issues as they arise and before they become a crisis.

In the coming weeks and months I will try to explore the different parts of the Social Risk wheel that I have developed in order to better understand the organisational impact these individual elements might have on the positive developments of corporations in a global context.

 

A Measure of Success – CSR Business Intelligence

It would seem that we have been over this a thousand times before… What gets measured gets managed. It was true when we invented TQM in the 80’ties and LEAN in the 90’ties and while we seem to forget about basic management skills when we adopt network organisation and self-empower our employees it is still true that if you can stick a number to your performance there is a much better chance that improvements follow close behind.

My good friend Michael Koploy have for a number of years been working with evaluation and documentation of CSR performance. As I he has realised that with CSR comes complexity on a scale that is mind-blowing. For TQM, LEAN and other quality management systems there were at least boundaries that was relatively narrow outlook defined by customers, suppliers, competitors and employees, but with CSR there are no scope.

So how do you work with CSR data, how do you get your hands on it and how can you present it in a way that gives meaning to decision makers and stakeholders. Michael has adopted an approach that might work and builds on some of the fundamentals of TQM and at the same time takes into account that the world (and organisations with it) is always changing. Build on three basic principles with data as “King”.

First – Automate and improve data collection to get a better picture of corporate sustainability;

Companies generate millions of data points every day and as time of progressed much of these systems have been integrated into various systems like SAP or other Business Intelligence (BI) structures. Finance, HR and operations have for a long time used these systems in order to improve their processes and it is high time that CSR professionals do the same.

Second – Use analytics applications to find trends and make informed decisions;

The graphic integration that comes with advanced BI systems can prove to be even more useful when it comes to sustainability performance. Often we see fragments of a total effort displayed in the CSR report or through corporate announcements and newsletters. But what we really need to specialised and specific information that is valuable to the individual stakeholder. For instance if I’m interested in anti-corruption issues I would like to be able to access the policies related to the issue but also audit reports and key performance indicators tracked in real time. What I do not need is a general understanding that this or that company is working actively to reduce corruption in its supply chain I want to know the “how”.

Third – Develop sustainability teams that are data-minded and accountable for business decisions.

The Crap-in-Crap-out principle is of cause also applicable when it comes t CSR Data gathering, reporting and presentation. So when data have to be managed it is done by people who know what they are doing and not by some random employee who have little or no knowledge about a given subject. A team approach works because it forces us to articulate our assumptions about how the world works and enables us to be challenged on our views. Within the field of CSR there are many opinions about what is the right thing to do and how its should be done, so instead of just having one person deciding a team of people agree and are accountable for the approach.

Data is not only king when it comes to CSR it is central, but not without the right people and approach to come with to terms with sometimes difficult to comprehend facts about the organisations that we work with. Data and data processing can unveil truths about an organisation which calls for hard decisions and sometimes for managers to change their perception of right and wrong. But without a common BI platform we will never get close to realising the knowledge that we can gain from systematic and comprehendible CSR data approach.

Doing “good” also means taking hard decisions and being accountable for ones actions

Some people tend to think that if you are doing good you somehow do not have to be accountable for you actions. It would seem that it is like that ones you are “goodness industry” it is automatically a license to bypass the normal channels of communications and scientific standards. But with the growing number of stakeholders there is however an urgent need for more transparency also on the other side of the fence.
Very few of the stakeholder groups like NGOs or CSOs that I know of have a standardised method and understanding of how to report findings. Most often they god for a headline approach where what ever fits the main thesis is included in the reporting and all that contradicts will be left out. It is not that I think that they do this to be evil or that they are trying to twist the facts in a conscious way it is just that they are unaware that for anything to be true it needs to be transparent and capable of being reproduced. Unfortunately this is frequently not the case.
We often hold the most transparent companies accountable for their actions and dig into their annual and sustainability reports in order to find inconsistencies that we can explore but it rarely is the other way around. The possibility are explored that there is a discrepancy between what the company says and what they are actually doing. And when a flaw is found we make sure that everybody knows about it either through the press of using dedicated campaigns.
The Haitian earthquake disaster provides a good case for. NGOs and to some degree CSOs came under fire from locals who claimed that not enough had been done to transform temporary shelters into permanent homes, or to provide access to drinking water and sanitation services. In some camps run by NGOs, people were still dying from cholera a year after the disaster struck and by that actually doing more harm than good. Of cause it is not all NGOs that are active in Haiti that did wrong but it goes with the case that they cannot be left without some form of control and accountability for their actions.
Another example comes from Cambodia where international NGOs actively contributed to corruption, which was documented in the documentary “The Trap of Saving Cambodia”.

The film puts a spotlight on some of the troubling issues facing this country: government sponsored forced evictions; corruption on a massive scale; the underground trafficking of women and children. And maybe even as disturbing is that local NGOs with the finances of the World Bank, joined by huge donor countries are contributing to the continuation of these problems by providing access to billions of dollars in aid where most of the money is going to officials rather than to the people in need.
There are still NGOs that think the accountability is not for the “Goodness”-industry. Or as Mango a UK based NGO puts it “Research has shown that results-based management is not an effective way of managing and reporting most NGOs’ performance.” And Goes on to list why they should not held accountable for the results that hey produce. To a large extend reminding me of the discussions in the private sector in the 80 ties and 90 ties about quality management.
NGOs need to shape up if they are to continue to be the beacons of truth and uprightness that we have come to know them. They will need to shape up their processes and weed out the organisations that does not live up to the basic criteria of accountability, transparency and good governance or the whole sector will be dragged down into the mud from where it will be difficult of not impossible to escape.

Removing Cash is effective Anti-Corruption management

scott-schaefer-politics

scott-schaefer-politics (Photo credit: ScottSchaefer)

How do you systematically combat corruption when it seems to be found everywhere? In many countries around the world corruption is part of how business is being done, how you deal with officials and how you get things done. In a lot of places you will hear that it is part of the culture that there is nothing one can do about the phenomenon because the system as a whole would not work if there were no one to skim the cream so to speak.

In my mind there is at least one successful way that will insure the reduction of corruption significantly and that is by removing cash as the main means of payment from society. Cash is the fuel that ensures that corruption can flow freely and if one is able to reduce the amount of cash one can combat the most visible forms of corrupt behaviour and maybe even affect other forms of corrupt behaviour higher up the favours-for-cash food chain.

Corruption is operationally defined as the abuse of entrusted power for private gain (Transparency International) and can be found in two forms:

  • “According to rule” corruption – Which is corrupt behavior that ensures that people of power uphold the laws and rules that they have been entrusted with because to their position in society. F.eks. getting permits within a reasonable timeframe or speeding up bureaucracy.
  • “Against the rule” corruption – Is when a member of the public is able to ensure that a government official does not enforce rules. f.eks. A fine or penalty.

The cost of corruption is four-fold: political, economic, social, and environmental and the more advanced society becomes the more advanced is the corruption that one finds. From police officers taking small bribes to make up of the lack of adequate pay to election fraud through paid ballots.

It is my argument that societies that are not very advanced and therefor have a high degree of cash or natural economy, will be more prone to the two forms of corruption that ones where electronic transfers are more common. Another argument for removing cash in order to reduce corruption is that cash is most common at the bottom of the “food chain”. By cutting off the supply to higher levels in the chain and more damaging types of corruption one is able to reduce the impact as a whole.

We now have low-cost technological systems that can ensure that there is a less of a need for cash in society but more importantly these systems can be made available in developing and emerging markets thanks to telecommunication and improved systems of control. Systems like the ATM or home banking have found its way into the mainstream of all societies around the world and at affordable prices for everybody. Especially if one takes into account that a more transparent system will ensure that the cost of a credit card, interconnection and security systems are covered by the positive impact.

There are of cause challenges to reducing cash and as a technology it cannot be replaced in some parts of the society simply because it is the cheapest alternative. But by strategically targeting government and educational institutions, banking and international business there will be significant gains to be had through relative small investments for all parties involved.

Directions of the CSR movement

For the past five decades we have seen a tremendous development within the CSR movement from a few hippies in the sixties shouting curses at Dow Chemicals to businesses build on the idea of sustainability such as the Body shop and Starbucks. This blog is about what I think will happen in the next few years. The list is far from complete but gives an overview of some of the trends that will shape CSR in the coming years.

Codes of conducts as a “license to operate”. Code of conducts was, a few years ago, seen as a source of competitive advantage, and to some businesses a method to organise its philanthropic efforts. Today they are seen as something that most international businesses have as part of their normal business approach and more a given than an extra feature. Even companies like A.P.Møller-Maersk that until recently did almost nothing within sustainability is now implementing Codes of Conduct and have become member of the Global Compact.

Moving from a fragmented approach to CSR companies now work strategically with philanthropy and stakeholder engagement/management. As described by Porter and Kramer there are real advantages to be gained by working strategically and long-term with the company’ philanthropic activities (Porter & Kramer, 2002). And companies are using philanthropy to gain access to students and other important resources that they will need for their future growth. Apple computers have successfully engaged with university students as part of their strategy, which has moved the company from being marginalised in the market to be directly comparable with Microsoft.

The further evolution of sustainable and social risk management into real tools for business. Where companies engaged with stakeholders because they represented a business risk they would in the future also be part of business development. Globalization have meant that business have expanded its scope and reach significantly. Fuelled by waves of liberation in developing and emerging markets have initiated a significant increase in contact with countries and regions that can be categorized as difficult to do business in. The increased sphere of contact and influence have spread to every coroner of the world and is to a large extend fuelled by the prospect of high returns, first mover advantages and market shares (Haufler, 1997, Mehmet, 1999, Banfield et al., 2003, Gouldbourne, 2003,

Jamali & Mirshak, 2010). According to the World Bank some 1,5 billion people are affected by organised violence or conflicts (World Bank, 2012), this number constitute roughly one fifth of the total population of the world making it one of the world’s biggest social issues. Conflicts are present in all parts of the world and have a direct or indirect impact on the lives of everybody on the planet either through social ties or as part of our professional lives. For people who are directly affected it is an ever-present threat that invades all activities and decision making processes, for the societies involved it puts social lives and development in a state of suspended animation. To a large extend the issues that business needs to confront are outside what can be considered the norm within traditional risk management strategies (RMS) because the issues are socially embedded and complex (Holzman et al, 2003). As seen in the case with Starbucks NGO and companies can work together on areas of common interest and create new products and services (Austin & Reavis, 2004).

Social responsible investments or SRI will become more and more influential on driving investment decisions and thereby the choices of management. It is not argued that investment companies will become more social conscious but customers like institutional investors will become more and more concerned about how they are growing their portfolios (Hawken, 2004). This will not happen because they suddenly become aware that they have a significant social or environmental impact but that the customers of instructional investors are starting to wonder how their pensions are growing.

The raise of the corporate citizen. The idea of corporate citizenship was first seen a few decades ago (Crane & Matten, 2010). The idea of corporations as citizens with obligations and rights really saw its emergence with several big international finance scandals such as scandal around Enron and Arthur Anderson around the turn of the century. The idea of a corporate citizen comes from the notion that companies like people have an obligation to the community they are part of. This means that they are obliged to behave in accordance with ethical norms formulated by society. In many ways the corporate citizen come from the idea of engagement with salient stakeholders and acting in accordance with their expectations and wishes. While there are many companies that claim corporate citizenship a very have moved beyond mere rhetoric.

The inter-linkage between CSR and development studies. Will further develop and as we will see in this book gender will be one of the lessons learned from the field of development studies that will define corporate behaviour in the years to come. For decades development practitioners have known that economic growth, democratisation and security does not happened in a vacuum and that development a sustainable business climate is linked to society and governance structures. As companies increasingly becomes global even at very early stages of business lifecycle so does the issues that they have to confront. But as older companies have had time to cope with different cultures and business environments young entrepreneurs does not have the same privilege. In essence this means that they will have to experience a much steeper learning curve of they are going to survive on the global marketplace. The tools that have been refined through years of development studies will be an integrated part of creating a sustainable business platform for the future.

Since the 80’ties have seen large-scale privation of traditional state enterprises in areas like transportation, communication, healthcare, energy and infrastructure. Mostly influenced by neoliberal thinking in United Kingdom and United States were large-scale privatisation programs were implemented under Margret Thatcher and Ronald Reagan (Bhagwati, 2007:98, Harvey, 2005:57ff). As this happened private business also found its way into areas traditionally controlled by the state and as time have progressed more and more areas have seen either total takeover by private business as we have seen in telecommunication, part privatisation with majority state ownership as with railroads or private companies in direct competition with or as a alternative to state institutions as we have seen in Healthcare and Private security companies (Harvey, 2005, Dicken, 2003, Klein, 2000, Friedman, 2007).

The concept of CSR have found it’s way into the business world largely due to the weakening of the state and as a result of pressure by stakeholder groups to act as information have been more widely available from even the most remote part of the world. Word like ‘Sweatshop’ and ‘child labour’ would not have found its way into everyday language if it had not been for the increased transparency and persistence of stakeholders who have come forward within the last two decades.