When Governments operate through Tax havens

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Should the market emulate the state or should the state act more like the market? This has become a hot issue as the became apparent that the new African Guarantee fund will be established in the tax haven rather than in Kenya were it will operate in practice.

The African Guarantee Fund or AGF is supported by Denmark, Spain and the African Development bank and contains around 50 million USD at the moment this figure is however expected to grow to 300 million in three years time. It is expected that AGF will invest in small and medium size companies (SMEs) who need access to credit. The back will operate through other banks in the region and not have direct relations to the customers.

The controversy comes from the way that the bank is going to e operated as AGF is set up as a company limited by shares under the business law of Mauritius, a country that have no urgent need for a access to the bank services. A branch of AGF will be established in Nairobi, Kenya, from where the staff of the company will conduct the business. A second branch is likely to be set up in a West African francophone country within a few years. AGF will operate as a non-bank financial institution with a Board of Directors responsible for the overall management and a Chief Executive Officer heading the operations.

With its headquarters in Kenya it would be natural that the bank would be a legal entity there but this is however not the case. The reason is that the corporate tax on Mauritius is 3% while it in Kenya is 25% (inline with the Danish tax on companies) and therefor it is cheaper to operate offshore maximising the return.

These types of legal set-ups are not uncommon in the world of global business were there the boundaries of companies are fluent and business is conducted on a global scale. Companies have for years been criticised for their tax practices as they often avoid high-tax countries for regions that have lower tax and a more relaxed approach to legislation. The most famous (or infamous) tax havens are Bermuda, The Bahamas, Cayman Islands, Panama, Monaco and Switzerland. The companies that are currently operating through tax havens are big multinationals like Citigroup, Pepsi, Morgan Stanley, Bank of America and Oracle.  Quite a few of these were heavily involved in the financial scandals that lead to the global recession that we are currently experiencing.

The main question is if a Civil Society organisation like AGF, should operate the same way and under the same ethical codex as multinationals that politicians frequently criticise?  One government official from the Danish Liberal Party Integration Spokesman Karsten Lauritzen has rejected criticism that Denmark, which regularly complains about the use by international companies of tax havens, should itself choose to place a financial institution where it pays least tax.

As he puts it “We are not in Mauritius to earn money. The goal is to channel as much money as possible to poor people in Africa, so I cannot see that there is a problem,” He added that the predominant reason for the location was because it was easier and less bureaucratic to set up a financial institution in Mauritius. Which goes without saying when one of the main income sources for the country is to provide cheap and easy access to building offshore companies.

At the same time he basically stamps the Kenyan government and business environment as corrupt and unnecessary bureaucratic.

While some of the stakeholders continue to support the bank project there are critical voices starting to be heard, who really does not like to be associated with this form of speculative thinking. The NGOs are more critical of the banks lack of focus on the poor and people in real need of aid rather than credit than the more complicated tax system in which it will operate though.

But the central dilemma remains the same. If AGF is going to operate on market terms it needs to function as everybody else on the market basically levelling the playing field so to speak. And in this line of business it means that one operate through places were the tax is low and the relative bureaucracy is small translating into less cost and more profit.

On the other hand if one wants to do the ethical ‘thing’ it means that AGF needs to operate outside the market and therefor will not be subjected to the conditions that a only a market can provide. This means that it will not be able to have the same return on investment that other investment banks will be able to provide and therefor it will properly not be financially sustainable in the long run.

The ethics is clear to most. There is a huge difference if a company pays 3% or 25 % in tax and most of us have been critical of big corporations that for years have paid minimum tax while at the same time having huge profits. So when the government does the same by operating a company through a tax haven we perceive this as being unethical and to some extend hypocritical. On the other hand we would like to see that our tax money is put to good use and not eaten up by taxes and other forms of fees along the way.

I think this case highlights a huge dilemma that we are faced with. To what extend should we have an overlap between Government and Private business. With CSR we have already seen a move from regulation by law to self-regulation, self-monitoring and self-reporting. This case shows that the move also goes the other way when governments and CSO starts to operate like business and under the same conditions. While we ‘expect’ companies to some extend to be unethical and hypocritical we maybe in the future that even governments will act in much the same way. The question is if this is really what we want? and does the aim really justify the means even when its for the ‘greater good’?

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Scandinavian work on CSR is reduced to how well you present your sustainability report

Ones the Scandinavian countries were among the very best performers with field of creating initiatives for how business and society could work together for a greater good. But now it is more about how you present your activities than it is about what the company is actually doing that matters.

I would love if I could say I live in a region were we have some of the best socially conscious companies in the world, but if I did so I would properly be lying to myself. What I see is that it’s all about presentation and squeezing all the advertising and PR blood out of every bit of activity that even have the smallest scent of social impact.

A few examples can be found in the partnership between IBIS (A NGO) and Toms (A chocolate producer). They have found each other over the child-labour issue and have partnered up to create programs that will educate farmers and their children in Africa. This is all well and I it is very well that a company tries to do something about the very problems it self is causing. But the issue I have is that it has become a marketing machine, which tries to inflate a relative small project (about 15000 people is effected by the program) into a commutative platform, which almost seems to proclaim that they are eradicating child-labour in Ghana all together.

Another example can be found around the leading company in Denmark Novo Nordisk (A medico company producing insulin) that have been leading within transparency and stakeholder engagement. But now seems to be preoccupied with their own reporting and creating so-called ‘shared value’ rather than engaging in activities that really integrate social and environmental concerns in the business operations. There is no doubt that Novo Nordisk have fantastic reporting and does a lot to promote a sustainable agenda, but in my mind they have taken the ‘eye of the ball’ and forgot what really matters is what you do not what you say about it.

Actually was the former chair of Novo Nordisk quite critical of the current CSR climate when he said that “Danish companies are not global leader in corporate responsibility. If we look at the various indices, which rates companies according to their efforts on CSR issues – such as the Dow Jones Sustainability or Sustainable Asset Management (SAM) – so there is no index, where Denmark was leading. There are four, five Danish companies, which occasionally are high, but it does not justify to-call ourselves leaders. Denmark is an average performer, despite the fact that our self-understanding in this area is very high.”

While the indexes should not be seen as a measurement in it self I think he is quite right when he points to the Danish self-understanding as being ethical and socially conscious.

So when Ingrid Schullström CSR manger for H&M in Sweden claims that “I think we are traditionally very Scandinavian in being fairly modest that we’d rather do things first and talk about it later”.

She says that while H&M has been active in this area for as long as 12 years, she feels customers do not “know enough about what we actually are and have been doing”, and identifies the communication of its CSR activities as “an area where we should maybe improve” she is actually kicking in a open door. CSR activities in Scandinavia have become a Communicative exercise rather than an activity that companies and organisations engage in for reasons of ethics and morals.

When I from time to time meet business leaders and professionals, and talk about there company they often refer to themselves as the ‘good girl in the class’. Implying that there specific company is better than the average and that they have a clean record on social, governance and environmental issues. But when I ask how they know this it is often because they have not bothered to ask some very straight forward questions about their own performance and not least the impact of their operations. When I for example ask about corruption they often refer to the Scandinavian way of thinking as being free from the idea of corruption. The just by being from this part of the world make the company somehow free from dishonesty, fraud and bribery like some kind of force field. Even when confronted with overwhelming evidence to the contrary we seem unable to change this worldview. In relation with the food-for-oil program scandal in Iraq they’re where several Scandinavian companies involved including Novo Nordisk who was heavily fined we do not change our self-perception.

They will rather boost their communication with half-truths and semi-investigated activities than really actively engage in social responsible activities. And when we invite for seminars, talking about The Scandinavian CSR model, we pat each other on the shoulder about how good we are and how stupid everyone else is acting when they do see us as the center of the universe.

So lets challenge our-self and the image we have created and start dealing with the real issues that we have in front of us and not dwell in what we ones were really good at, creating real sustained social change.

Transocean the Unethical Company of 2010

The drilling company behind the 2010 BP disaster has issued the agenda for their annual meeting (Transocean_2011)and it is somewhat of a horror to see. The executive committee thinks that they did such a good job in 2010 that they have granted themselves over 43 million USD in compensation. Based on the 9,3 billion USD the company had in revenues in the same year. On top of that they took a substantial amount of money out as part of their long-term incentive plan.

Mr. Newman (President and Chief Executive Officer) . . . . . . . . . . .$5,400,000

Mr. Rosa (Chairman of the board). . . . .  . . . . . . . . . . . . . . . . . . . . . .$1,500,000

Mr. Brown (Executive Vice President, Legal & Administration).  .$1,500,000

Mr. Bobillier (Executive Vice President, Asset and Performance). $1,500,000

Mr. Toma (Executive Vice President, Global Business). . . . . . . . . . $1,200,000

Ms. Richard  (Senior Vice President, Human Resources and Information

Technology)…… . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ……$1,200,000 

For the compensation of non-employee directors for 2010 was 4,254,066 USD.

A long-standing reputation for safety

So did Transocean learn anything in the past year? Well when investigating the document they issued it could be interesting to look at how they precise themselves in the area of safety. And behold there is a paragraph in the executive summary on the high lights of 2010.

“We are the world’s largest offshore oil and gas drilling contractor and the leading provider of drilling management services worldwide. We provide drilling services, including the equipment and personnel for operations, to our customers—the oil and gas companies throughout the world. We have a long-standing reputation for safety and for being able to manage and deliver on extraordinarily complex offshore drilling projects in challenging environments. Our vision is to be universally recognized for innovation and excellence in unlocking the world’s offshore resources.”

I think that the people they asked about safety can’t have been the US government, all the residents along the Mexican gulf including the local fishermen nor can they have asked all the scientists, experts or NGOs that have been involved in the clean-up.

This statement just shows displays the complete arrogance of Transocean and its executive board about the people they are affecting. In my mind (and I think in a lot of others) they should be sued until the end of days for what they have done.

Keeping your money safe

But luck-be-hold the board and executive committee have already taken this into account by proposing that shareholders should not be able to sue them for their activities in 2010. Or formulated as an agenda point it look like this:

“Agenda Item 2: Discharge of the Members of the Board of Directors and Executive Management from Liability for Activities during Fiscal Year 2010.

As is customary for Swiss corporations and in accordance with article 698, para. 2, item 5 of the Swiss Code of Obligations, shareholders are requested to discharge the members of the Board of Directors and our executive management from liability for their activities during fiscal year 2010.

The pending shareholder derivative claims allege the breach by our directors of their fiduciary duties based on allegations that our directors failed to monitor safety risks, including risks related to the Company’s blowout preventers, and made misleading statements regarding the Company’s safety risks, the safety of the blowout preventers, and the Company’s financial condition. In addition, other allegations have been made against us in investigations and other contexts that are publicly available and could form the basis of similar claims against our directors and executive management.”

So if any critical shareholder world be out there thinking about sue the company for its mismanagement and poor governance in 2010 then forget about it.

A final insult

These statements just underline the ethical perceptions that the top of the company has on all its stakeholders.

“We will never forget the brave crewmembers of the Deepwater Horizon, nor will we cease in our efforts to ensure such an incident never occurs again. The lingering pain of the Macondo tragedy reinforces our efforts to conduct operations in an incident-free environment, all the time, everywhere.” And “It remains our view that Transocean is contractually indemnified against all claims stemming from the environmental and economic impacts of the hydrocarbons spilled into the Gulf of Mexico from the Macondo well after the sinking of the Deepwater Horizon.”

I hereby nominate Transocean management and its executive board of directors as the unethical company of the year for their outstanding performance in avoiding all decency and totally ignoring, and disregarding their key stakeholders.

Can you be unethical when you made no promises?

According to the definition of ethics you are ethical when you live up to the explicit or implicit expectations and norms of society. But what if you made no such promise? What if your only promise to your stakeholders that you would be greedy within the frames of the law and nothing else, what then?

The propagandist of the CSR movement would claim that the organization would hurt its own brand and risk losing its ‘license to operate’ but is it worth taking that risk? Much research have gone into figuring out of there is a business case for CSR and at most the results are ambiguous pointing in different directions. The issues seem to a large extend unsettled depending on what parameters that you choose as your benchmark for ‘good performance’.

Looking at the lessons that we are still learning in the wake of the financial crisis it would seem that CSR is expanding its reign. From being primarily an environmental focused understanding of the impact of organizations it has developed to encompass social and labour issues with the help of Global Compact and other UN or international standards. Recently CSR has also morphed into having a clear stake in governance, risk and compliance (GRC) an area which have been dominated by accountants, lawyers and risk management consultants.

 If one look at the definitions of CSR that has been argued for over time most of them agree that it encompass organizations or business and their relationship with their stakeholders in a broader sense.  And while there is a certain degree of voluntariness included in the activity there are strong norms that tries to pressure organizations to explicitly engage in some form of corporate sustainability endeavour.

But as the original question proposed is it really worth the effort to engage whole heartily in CSR activities or is are you better off if you keep a low profile and keep to you core activity of providing the business owners with a reasonably high return on investment. To a large extend this statement seem to be true as long as you 1) don’t have to many owners, 2) that your brand value does not constitute the majority of your market capitalization (CAP) and 3) that your activities are not being target by groups that could get attention by using your company or industry as leverage.

1)      The fewer owners you have the fewer will have an interest or stake in the strategic development of the organization. Companies like PWC (formerly PriceWaterhouseCoopers), Cargil that distributes food and agricultural wares. Also companies like Toys’R’us who is in the Toys industry but under much less scrutiny than companies like Mattel which I have submitted a post about.

2)      For some companies the value of their brand does not constitute a major part of its total value. These companies have either used a branding strategy with diversified sub-brands or are in a business were the brand is not valued as high. Companies like ArmorGroup who specialize in security and protection with activities in Iraq and other high risk places. The ArmorGroup can be seen as an example where the brand value is not essential for its business as it dealt in what many would consider an unethical enterprise to start with. Having a low brand value makes the AmorGroup a relative unattractive target for critical stakeholders. Or at least until this was the case until it was bought by G4S, who do have both a great deal of owners and a relative high brand value as it deals directly with private customers. The ArmorGroup have actually created a code of conduct in order to have ethical guidelines for its employees but only did so when the whole industry came under attack in the wake of the well publicized Blackwater incident in Iraq. Another company that had relative success within this category have been A.P. Moller-Maersk that until a month ago did had not disclosed any information about the ethics. The trick is to know at what point you need to react (maybe based on a thorough risk analysis) and then implement change with the greatest possible impact on the whole organization.

Many small or medium size companies (SMEs) find themselves in a situation where it is their image rather than a brand strategy that creates the basis of a sustainable business model. Often they will deal directly with their stakeholders and will be in a constant dialogue about their ethics and morals. For SMEs one can say that the impact of their ethics on brand value is direct and harsh as customers move their business to other places and can do so with relative ease.

3)      Some industries are just targeted more often by critical stakeholders than others. If you are in the oil industry, forestry, food production, and medico or biotech industry then the likelihood that you will attract critical attention higher than if your organisation is into pluming, software design or architecture. So basically, if one understands the reputation risks that are in the industry an organisation will be able to evaluate if it is worth the effort to actively communicate CSR efforts.

NGOs or other critical stakeholders are not much different from the rest of us and they will try to pool their resources in areas were they already have a competency. This means that as an organisation one will be able to analyse and investigate what critical stakeholders are within ones own field of operation and use that information to either target the specific stakeholder. This can be done either through none-communication or by tendering to the stakeholders needs in the form of industry specific information, partnerships, lobbying, etc. 

If an organization wants to operate under the ethical radar of critical stakeholders it would seem that the best response would be to ‘not-communicate’. By this I mean that if you do not have that many owners (as described in point one), your brand is not tied to much to the value of the company or at least the risks are not great (point two) and/or if you are in a industry that is not targeted as being ‘unethical’ it could make sense to just keep quiet.

This does not mean that the company should not prepare response strategies, but rather like a submarine keep under water for as long as necessary and be ready to strike at moment notice with a well planned attack.

I will not argue that companies or organisation should not be ethical. But the reality is that some organisations use a disproportional amount of time and funds on ‘would be’ ethical issues that they properly will never have to respond to. Instead of creating elaborate organisational systems for ensuring ethical behaviour they should instead focus on creating a working environment where sound business ethics is part of the organisational DNA and not put in as a afterthought.