Archive for the ‘government’ Category
Conflict of Interest for Mayors (and Other Committee Chairs)
Filed under: accountability, boards, CEOs, conflict of interest, ethics, governance, government, politics |
Leave a comment This is a blog entry ostensibly about municipal politics, but with real lessons for the world of business.
I was on CBC radio yesterday (along with corporate governance expert Prof. Richard Lelblanc) to talk about conflict of interest case involving Halifax’s city council (technical the Council for Halifax Regional Municipality).
To make a long story short: the Mayor was involved in some financial irregularities that may (I honestly don’t know) just be a matter of either poor judgment or poor understanding of proper procedures. Whatever. The interesting part came when some members of Council wanted to reprimand the Mayor for his role in those decisions. The Mayor insisted on chairing the discussion, and indeed even voted on the matter when it came up for a vote. (Here’s an article about the fiasco, by Michael Lightstone for the Chronicle Herald: Halifax council won’t suspend mayor.)
Needless to say, in participating in the vote over his own fate, the Mayor was in a rather significant conflict of interest. He had an official duty to exercise, one that required the exercise of judgment. And he clearly also had a very significant personal interest in the matter, one that any reasonable outsider would be justified in suspecting of influencing the Mayor’s judgment.
Now it always bears repeating: conflict of interest is not an accusation. It is a situation one finds oneself in. There’s nothing unethical about being in a conflict of interest. (If a lawyer finds out that one of her clients wants to sue another of her clients, she is in a conflict of interest, through absolutely no fault of her own.) What matters is how you deal with the conflict.
The best thing for the Mayor to do would have been to:
- recognize the conflict,
- put it on the table, and
- recuse himself (i.e., hand over the gavel, decline to vote, and preferably leave the room so that the rest of Council could have a full and frank discussion).
What’s really at stake in conflict of interest has very little to do with the integrity of individuals. Rather, it has to do with the integrity of a decision-making process, and of an institution. So the worry is not that the Mayor would necessarily have been biased in how he chaired Council that evening. Maybe he bent over backwards to be fair in his chairing duties. Who knows? And that’s the point. We don’t know, but for important institutions we need a high level of certainty that key decision-makers are exercising their judgment in the interests of those they serve, rather than themselves.
And there, of course, is the lesson for the world of business, and in particular for corporate governance. A Mayor, effectively, is the CEO of a City. In addition, he or she also is “chair of the board of directors,” where the board here is City Council. In the world of municipal politics, it is relatively rare for Council (normally chaired by the Mayor) to sit in judgment of the Mayor as chief executive. But in the corporate world, such judgment is a big part of the job of a board of directors. And that is precisely why it is widely considered “best practice” for the CEO not to also serve as Chair. One of the Board’s key roles is to advise and oversee the CEO. Doing so requires that the Board be able to deliberate in a way that is reasonably independent from the CEO’s own influence. Any organization that has the CEO act as chair of the very body that must regularly deliberate over his or her own performance is not just “finding” itself faced by a conflict of interest, but is actively constructing one.
Business Ethics Lessons from G20 Cop’s Arrest
Filed under: crime, government, protest, trust, Uncategorized |
Leave a comment What lessons can we take from a story about police brutality and apply to the world of business?
As many readers will know, the meeting of the G20 here in Toronto last summer was not, on the whole, a happy experience. Protestors, both peaceful and otherwise, were plentiful, and there were serious questions about the way the Government, and in particular the Toronto Police Service, conducted themselves. No one came out looking very good. Protestors torched cop cars and broke shop windows. Some of the tactics used to quell the riot resulted in accusations of police brutality.
Nearly a year later, after a fraught investigation by Toronto Police’s Special Investigations Unit, one police officer has been charged with assault. See this story by Jennifer Yang, for the Toronto Star: Toronto police officer charged in G20 assault:
After nearly one year, two closed investigations, and a public squabbling match between Toronto police and the agency tasked with investigating them, criminal charges have finally been laid in the case of Dorian Barton.
On Friday, the Special Investigations Unit charged Toronto police Const. Glenn Weddell with assault causing bodily harm in connection with Barton’s arrest during the G20 summit last June. The charge came on the same day the Toronto Star publicly revealed Weddell was the previous unnamed officer photographed during Barton’s violent arrest….
Strictly speaking, this isn’t a story about business ethics, but still it provides plenty of fodder for discussion of issues that are centrally important to business ethics. Issues such as:
- Who watches the watchers? Any regulatory system — whether a system of policing criminality or a system of vetting new pharmaceuticals — requires safeguards to make sure that those who wield regulatory power wield it wisely. That’s why police forces have systems for hearing complaints from citizens and for investigating wrongdoing by their own officers. And it’s also why regulatory decisions are typically subject to parliamentary oversight and judicial review.
- With great power comes great responsibility. Self-regulation is crucial for those given the power to enforce rules. Such self-regulation can take many forms. First and foremost, it needs to include individual self-regulation and the adoption of principles of integrity and good conduct. But individual ethics needs to be bolstered by an informal system of peers reminding each other of their obligations. When one regulatory bureaucrat or police officer edges too close to crossing a line, it is essential that colleagues be ready to point out that “That’s not how we do things around here.”
- What are the limits of team loyalty? It is no exaggeration to say that modern civilization is built on something akin to teamwork. And the number one challenge in literally every organization involves getting a number of people with different personalities, talents, and points of view, to work together effectively. Fostering loyalty is a key part of that. But loyalty must have limits. Lawyers are supposed to act as zealous advocates, but are not allowed to suborn perjury. Police and soldiers and firefighters often depend on teamwork for their very lives, but they jeopardize their social value if they put fraternal loyalty above the public good. And corporate employees are expected to help build shareholder value, but not to break the law in doing so.
One of the worst mental habits that can be adopted by people who proclaim an interest in business ethics is that of thinking that the ethical issues found in business are categorically different from those found in other walks of life. Commercial contexts do raise a number of special issues, but we can learn a lot about those issues by thinking about the ethical issues that arise in seemingly quite different domains.
The Earth is Flat (and Regulation is Easy)
I’m currently attending a workshop on Regulatory Design, hosted by Duke University’s Kenan Institute for Ethics.
As a philosopher, I’m often at pains to remind people of the distinction between ethics and law. But there’s also no denying that there are important interrelationships between ethics, on one hand, hand law (and the regulations pursuant to various laws) on the other. When done well, regulations are shaped by good ethical reasoning, aimed at promoting the public good while at the same time respecting individual and collective rights. And it’s very likely that ethical standards are, in turn, influenced by existing legal/regulatory standards.
Regulation of course attracts a lot of attention — arguably a lot more than ethics does — both from industry and from critics, as well as from all points on the political spectrum. It’s a frustrating topic for just about everyone. Just about everyone can name regulations or regulatory agencies that they think are dumb or ineffectual or too powerful or not powerful enough.
The problem — and the reason that makes knee-jerk criticism of particular regulations or regulators perilous — is that regulation is in fact incredibly difficult. Here are just a handful of complicating factors that have arisen during our workshop discussions, so far this morning:
- People generally don’t like to be regulated. That means that people (and the organizations they populate) tend to push back when you try to regulate them.
- Regulated industries have the capacity to push back, not just by means of political contributions and advertising campaigns, but also by means of court challenges that can be costly and time-consuming for regulators. This means that the regulatory process must very often be a process of negotiation.
- Good regulations should be based on evidence, but that poses problems when what you’re trying to regulate is a danger that is very large in scope or severity but that is either unprecedented or that cannot be measured in advance.
- Regulatory agencies face challenges in attracting and retaining smart people. This is true for two reasons. First, it’s hard for public-sector organizations to compete with the private sector in terms of salaries. Secondly, in order to take seriously the idea of a career at a regulatory agency, young people need to have the sense that they are going to be able to make a difference, which is not always the case.
- Perceptions of new regulatory efforts, even when those efforts originate with experts within regulatory agencies, can be coloured by perceptions of the government of the day. Those who are critical of the government of the day are likely to be skeptical of regulatory efforts that come about during that government’s reign, regardless of whether it is actually driven by the government’s policy platform or not.
- Effective regulation requires detailed understanding of the thing being regulated. Very often that means that regulators must rely upon those being regulated as a key source of information. The conflict of interest there is clear.
- There are genuine and sincerely-held ideological differences about the desirability of regulation, both regulation in general and particular kinds of regulation. Crudely, effective regulation means finding the right balance between the beliefs of the tree hugger and the beliefs of the free-market ideologue.
- There is a fundamental strategic challenge involved in designing regulatory frameworks. In the abstract, one option is for the legislature to pass highly specific legislation that puts in place detailed regulations governing the minutiae of, for example, the operation of some industry. This can result in concrete results very quickly, but it can limit the ability of regulatory agencies to adapt to changing circumstances and to new technologies. The other option is to pass very broad legislation that merely sets rough objectives and empowers regulators to figure out how to achieve those objectives. This approach has the advantage of flexibility, but also puts a lot of power into the hands of unelected bureaucrats.
- Nothing is free. All regulation involves trade-offs. Tighter environmental regulations can cost jobs. Gathering the data needed for effective consumer protection regulations can have implications for consumer privacy. Win-wins are few, and certainly not automatic.
- Regulation is part of a political process. Regulators are part of the executive branch of government, and the executive branch relies upon the cooperation of the legislature (both to pass the relevant legislation and to provide regulators with funding). And even if we are optimistic about the dedication of our legislators to the public good, we have to remember that the key goal of politicians is to get and keep power. That inevitably has an impact on the way they facilitate, or frustrate, efforts at passing and enforcing regulations.
So, think about your favourite regulatory issue. Now re-read the list above. If you can think through each of those problems and solve them, well, after that getting the right regulation should be easy.
(Thanks to Duke’s Edward Balleisen for the invitation to attend this workshop.)
Wage Negotiations, Transparency, and Justice
Ontario’s public-sector unions are up in arms, over a secret deal granted by the government to one particular union. All of the province’s public-sector unions were to receive just a 2 per cent raise for 2012, part of an austerity plan aimed at taming the province’s multibillion-dollar deficit. But one union, the Ontario Public Service Employees Union, was secretly given a 3 per cent raise, “in exchange for non-wage concessions.”
See the details here: Employers up in arms over Ontario’s ‘secret’ wage deal, by Karen Howlett for the Globe and Mail.
The generosity of the deal is in sharp contrast to the McGuinty government’s pronouncements on the need to rein in spending in the public sector as it grapples with a multibillion-dollar deficit. Its flagship restraint measure consists of a voluntary two-year wage freeze for public sector workers who bargain collectively.
Against this backdrop, revelations that a sweetened deal was reached in December, 2008, for a union that often sets the benchmark has upset many employers in the sector….
For my purposes, the fact that the employer in question here happens to be a government is entirely beside the point. An employer is an employer, and this story could in principle have happened in the private sector.
Now, there’s an interesting side-issue here about whether limits expressed in terms of percentage points ultimately make much sense: we don’t know what “non-wage concessions” the government got from OPSE in return for the extra 1%, but it is entirely possible that it is something better for provincial coffers, in the long run. The non-wage benefits that unionized workers enjoy often amount to a large portion of their total compensation. But as I say, that’s a side issue. Wages per se have a special salience in labour negotiations, both because of their immediate impact on workers’ pocketbooks, and because of their symbolic significance.
The key ethical issues here have to do with transparency, and whether other unions have a right to know the details of one particular kindred union’s negotiations with the employer they share in common. There are reasons for and against transparency. On one hand, a reasonable level of transparency is essential for benchmarking, and knowing how much other groups are earning is a precondition for seeking wage parity. In that sense, transparency serves justice. On the other hand, wanting to know how much someone else makes is not the same as having a right to that information. An argument needs to be made that having such information serves an essential purpose. Also, more generally, such benchmarking can have a tendency to ratchet salaries upwards, sometimes pushing compensation higher than is warranted either by performance or by the law of supply and demand.
Equally interesting is the government’s (i.e., the employer’s) rationale for the secrecy:
“By bargaining hard, the government protected taxpayers,” said Geetika Bhardwaj, a spokeswoman for Government Services Minister Harinder Takhar. “That has one union upset because they wanted more from taxpayers and didn’t get it. We make no apologies for that.”
Two things are worth noting about this rationale:
The first is that, taken seriously, it justifies entirely too much. No behaviour is beyond the pale, so long as it saves taxpayers a few bucks.
The second thing worth noting about this rationale is that it makes plain an important truth: spending a budget is a zero-sum game. Many people treat “a good deal for the working man” as an unqualified good. But in government, as in business, every dollar in an employee’s pocket is a dollar taken out of someone else’s pocket. That’s as true for Walmart or GM as it is for the Government of Ontario.
Who Else is Too Big to Fail?
Filed under: banking, complexity, corporations, disaster, economics, finance, government, risk, sustainability |
Comments (13) The notion that some companies are “too big to fail” — too large and too interconnected with the rest of the economy for their failure to be permitted by government — is lamentably familiar to most of us in the wake of the 2007-2010 financial crisis. The term has most famously been applied to the biggest American banks (e.g., Bank of America) and insurance companies (e.g., AIG), and it motivated the multi-multi-billion-dollar government bailouts of 2008/2009. In some ways, it’s a radical notion: for most of modern economic history, the assumption has been that the economy could operate according to something like survival of the fittest. If a company is so mismanaged that it fails, so be it. That’s life in a competitive market. Of course, governments have from time to time propped up companies seen as particularly important employers, but such moves are always divisive. There has seldom been such widespread agreement that certain companies really are so big, and so important, that they cannot be allowed to fail.
But outside of the financial industry, what companies might reasonably be thought of as “too big to fail?” Are there companies the failure of which would be truly catastrophic? What companies are there such that, if they suddenly ceased operations, the result would be disastrous not just for individual customers, employees, and shareholders, but for society as a whole?
I’ll mention a few possibilities, and then open the floor for discussion:
BP, Chevron, and the other very large oil companies. As unpopular as they are, it’s hard to deny that their product is utterly essential, at least for the time being. Any one of the biggest companies going out of business would, I suspect, have a terrible impact on the reliability of supplies of gasoline and heating fuel, and would most certainly result in increased prices. On the other hand, most of the world’s oil supply flows through the big state-owned oil companies of the middle east, rather than through private companies like Exxon and Shell the others, the ones that come most readily to mind for North American and European consumers.
Big pharma. Again, not a popular industry. And much of what they produce — treatments for baldness, erectile dysfunction, etc. — is far from essential. But some of their more important products, including things like antibiotics and vaccines, truly are essential and an interruption in their supply could have catastrophic consequences, from a public health point of view. But then, that industry has enough players in it, with overlapping product lines, that it’s unlikely the collapse of any one company would have a huge impact. But really, I’m guessing here. Perhaps the collapse of the maker of whatever the single most antibiotic is would be catastrophic. (Does anyone know?)
What about UPS? That one may surprise you, but the company handles something over 5 million packages per day, which I’ve heard adds up to a non-trivial percentage of American GDP. If UPS disappeared tomorrow, of course, Fedex and the USPS would take up some of the slack, but the short-term effect on American business (and hence consumers) would be significant.
Locally, surely, there are lots of companies that might be considered essential. Companies involved in ensuring the quality of municipal water supplies might count (including the ones that provide the chemicals needed for water purification). And in places where fire departments are privately-run, those would obviously count. But really, I’m looking for examples of companies the failure or disappearance of which would have widespread effects from a social point of view.
Of course, the phrase “too big to fail” isn’t just descriptive. In the world of finance, it is seem as having immediate policy implications. In 2009, Alan Greenspan, the former chairman of the US Federal Reserve (and no fan of government intervention in the economy), said “If they’re too big to fail, they’re too big.” Are there companies outside of finance where such an argument could be made?
Regulating Wall Street Bonuses
Filed under: accountability, competition, decision-making, employees, finance, government, pay, regulations, wages, white collar crime |
Comments (5) The U.S. Securities and Exchange Commission has just announced its intention to exercise oversight over levels of pay on Wall Street. Is this an example of overreaching regulation, or of justified intervention in the public interest?
Here are the details, from Ben Protess and Susanne Craig, on the NYT‘s DealBook blog: S.E.C. Proposes Crackdown on Wall Street Bonuses:
Lavish Wall Street bonuses, long the scorn of lawmakers and shareholders, have met a new foe: the Securities and Exchange Commission.
The agency on Wednesday proposed a crackdown on hefty compensation awarded at big banks, brokerage firms and hedge funds — a move intended to rein in pay packages that encouraged excessive risk-taking before the financial crisis.
The proposal would for the first time require Wall Street firms to file detailed accounts of their bonuses with the S.E.C., which could then ban any awards it deemed excessive. The rules would be aimed at top executives and hundreds of rank-and-file employees who receive incentive-based pay….
In general, we should probably have as our starting point a healthy skepticism about government attempts to regulate pay in particular industries. Remuneration for high-level jobs is typically based on some combination of rewarding past performance and incentivizing future performance, in addition to sensitivity to things like skill, experience, and the scarcity of the particular talents the job requires. And it’s highly unlikely, again speaking in generalities, that government agencies are going to have the right information and motives to allow them to determine with any degree of precision and efficiency just what a private company’s pay structure should be. Now of course governments aren’t the only ones who could err in setting up compensation schemes; private companies are perfectly capable of screwing that up pretty badly themselves. But for the most part, if private companies screw up in that regard, it’s their shareholders that should hold them accountable, just as it is shareholders who ought to hold them accountable for any other foolish spending.
But there are likely to be justified exceptions to the general presumption in favour of the government taking hands-off approach to compensation. If it is the case — and this seems to be the S.E.C.’s conclusion, here — that compensation schemes in a particular industry are seriously and chronically causing harm beyond the walls of the organization, that seems to be a pretty good argument in favour of government action. This is especially true when the damage being done is not “merely” damage to particular individuals or groups, but to the stability of the economy as a whole. And as Protess and Craig point out, “The move by regulators to have more say on Wall Street pay highlights the huge role financial institutions play in the economy.” That is what arguably makes the harm done by Wall Street compensation not just a matter of private wrongs, but of public ones.
But of course, this argument doesn’t mean the S.E.C. should rush in like a bull in a china shop. All of the concerns mentioned above still apply — there are reasons why Wall Street firms have the compensation policies they have, and it’s pretty likely that at least some of those reasons are pretty good ones related to the necessities of the industry. Indeed, the S.E.C.’s chairwoman, Mary L. Schapiro, says that “This is an area where we want to be very attuned to unintended consequences.” The S.E.C.’s objectives here, seem to be good ones; the question will be whether the quality of the agency’s methods live up to the nobility of its goals.
Ethics of Doing Business in Libya
Filed under: corporate citizenship, ethics, government, international, risk, trade, workplace safety |
Comments (1) 
Amidst the upheaval in Libya, questions arise about foreign companies doing business there. Many firms, of course, are pulling out and evacuating any employees currently on the ground, for obvious reasons related to safety. But there are apparently still a few reasonably safe places in Libya, places far from the major cities that are the focus on the current fighting. And certainly business done from afar is still an option. So, that leaves companies with choices. Should Libya be considered entirely off-limits? At this point in the conflict, various governments have issued orders that put restrictions in place. But that doesn’t mean that Libya is, from a legal point of view at least, a no-go zone. (Canada’s government, for example, has clarified that Canadian firms are still allowed to do business in Libya, generally, but not with the Libyan government or with the Libyan Central Bank.)
I’m sure many will be tempted to say that foreign companies should pull out entirely. But then, it’s not clear that such a blanket prohibition does much good for the people of Libya as a whole. Note, for example, that Libya currently imports about 75% of its food. Stopping doing business with Libya would mean starving its population.
Of course, even before the current crisis, Libya was a dubious place to do business — at least some kinds of business. Note, for example, that a Canadian company has faced questions about its role in building a fancy new prison for the Gadhafi government. (From the Globe & Mail, see: SNC-Lavalin defends Libyan prison project.)
(An interesting side-note: SNC-Lavalin was recently ranked as one of the best-governed corporations in Canada. Note also that the companies shares are down, apparently because of worries not just about Libya, but about the entire region. About a quarter of the country’s income comes from the Middle East and Africa.)
Building a prison for use by a dictatorship is exactly the kind of project that is likely to draw fire. But that’s not entirely fair, either. As the G&M notes, Libya has been under international pressure to modernize its prisons. And if it is a legitimately good thing for a dictator to upgrade his prisons, then it’s hard to claim that it’s unethical for a company to make a profit by helping him do so.
Utility Monopolies: Who Pays for Mistakes?
Filed under: consumers, corporations, energy, ethics, excuses, government, pricing, profits, shareholders, stakeholders |
Comments (3) Naturally, when any organization suffers unanticipated expenses, it’s going to have to find ways to make up the shortfall in its budget. That’s exactly what happened to Ontario Power Generation (OPG), the provincially-owned power company responsible for generating about 70% of all the power consumed in the Canadian province of Ontario. A legal battle with customers ended up costing the company nearly $20 million. So, where did the company turn to recoup that amount? Well, to its customers, of course.
Here’s the story, via the CBC: Ont. electricity rates expected to rise next week
Electricity ratepayers in Ontario, already reeling from soaring prices, should brace for more increases.
The Ontario Energy Board agreed Tuesday to let utilities raise rates to recover $18 million they paid in fines and legal costs after charging consumers excessive interest on late payments….
Now most companies could only dream of passing along such costs to their customers. Some might even succeed. But most wouldn’t. Most would be hindered by the fact that, if they raise the prices they charge to customers, customers would simply buy from someone else. But electricity in Ontario (as in most places) is a monopoly: an organization called Hydro One has a monopoly on distribution of electricity throughout Ontario, and the power it distributes is produced by a small handful of organizations, the most significant of which by far is OPG. So, with the consent of the Ontario Energy Board (the relevant regulatory agency) all OPG has to do is raise its prices, and the company’s customers end up paying for the consequences of its legal tussle with…the company’s customers.
I don’t know much about the original lawsuit, but I do know that this was a predictable result of it. And that puts customers of utilities in a strange position. Sure, customers can sue the a utility when they screw up, but all the utility is going to do is turn around and raise your rates to get the money back out of you.
Now, just to be clear, I generally have nothing against this sort of monopoly. Electricity distribution is what economists call a “natural monopoly.” It’s crazy to have multiple competing sets of power lines running down to street. And, for that matter, it might well be crazy to let many multiple competing companies all run nuclear power plants (OPG runs several of those). But at any rate, it’s worth recognizing the effect that this monopoly (or quasi-monopoly) situation has in the event that the company screws up (say, by overcharging customers). The expenses incurred are entirely likely simply to be passed along to their captive customers.
By the way, Ontario Power Generation (whose only shareholder is the government of Ontario) had a profit of $333 million for the 4th quarter of 2010.
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Thanks to NW for the story.
Ethics & Corporate Taxes
Filed under: corporate citizenship, corporations, ethics, finance, government, profits |
Comments (7) 
How much tax do corporations pay? Ask most people and I’m guessing they’ll say “not enough.” But seriously, how many people know what the actual corporate tax rate is? And then complicating things, there are the loopholes, those little tricks o’ the accounting trade that — as “everyone knows” — allows most big companies to pay next to nothing. Right?
For insight into these questions, see this useful piece by David Leonhardt, for the NY Times: The Paradox of Corporate Taxes.
OK, so a few answers. In the US, the federal corporate tax rate is 35%. (For comparison: in Japan it’s just over 40%, in Germany it’s 29.8%, and in Canada it’s 16.5%. In Ireland it’s just 12.5%.) So, on an international scale, the US corporate tax rate is actually fairly high. (For more, see Taxes Around the World.)
What about those loopholes? Sure enough, there are American companies that manage to dodge almost all taxes. The most egregious examples are from the cruise-line industry. As the NYT story points out, Carnival Cruise Lines is a prime example:
Over the last five years, the company has paid total corporate taxes — federal, state, local and foreign — equal to only 1.1 percent of its cumulative $11.3 billion in profits. Thanks to an obscure loophole in the tax code, Carnival can legally avoid most taxes.
That’s an extreme case, but lots of other companies manage to avoid paying anything close to the full 35% too. According to the NYT:
Over the last five years, on the other hand, Boeing paid a total tax rate of just 4.5 percent, …. Southwest Airlines paid 6.3 percent. … Yahoo paid 7 percent; Prudential Financial, 7.6 percent; General Electric, 14.3 percent.
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What’s more surprising, though, is how much tax corporations pay, in total, on average:
The average total tax rate for the 500 companies [in Standard & Poor’s stock index] over the last five years — again, including federal, state, local and foreign corporate taxes — was 32.8 percent.
So while some corporations pay very little tax, there’s also considerable variation.
From an ethical point of view, is this situation fair? Do corporations, in general, pay enough? Too much?On the face of it, that’s a basic issue of distributive justice: is 35% (or some fraction of that, after deductions) the right share of the overall tax burden for corporations (as opposed to individuals) to bear? That’s obviously a big question.
Fundamentally, corporations are a conduit, facilitating the flow of cash from consumers to employees and investors. To some, this implies a fundamental criticism of current patterns of taxation in the corporate world. Such critics point out that there’s a sense in which the money that flows through corporations is taxed twice: corporate profits are taxed, and then any dividend (i.e., a portion of after-tax profit) that is payed out to shareholders is taxed, too. In principle (as far as I can see) the same could be said about the money paid out to employees in the form of salaries (though the tax on profits is paid on the amount left over after expenses, including salaries, are paid). To the extent that I understand it, this criticism seems odd to me: after all, money flows around (and around and around) the economy, and is taxed at various points along the way (and is then injected back into the economy, of course, in the form of government spending). The point is that we (via government) levy taxes at specific points in this flow, and at specific rates, based on whether we want to encourage or discourage particular behaviours. If you tax a behaviour, then, other things being equal, people will do less of it. And if you offer a tax deduction for y, you are encouraging people to do more of it. We tax at various points in the corporate “process”, if you will, in order to encourage or discourage particular activities like investment. So in a sense, there is no “corporate share” of the tax burden — there’s just the question of whether various taxes and deductions operating in the corporate world broadly understood are effective in achieving our goals. (Although there is a question of justice regarding any difference in the way dividends are taxed as opposed to employment income.)
But again, back to the issue of loopholes as a way of reducing a corporation’s tax burden. Now, it’s worth considering the point of loopholes, from a public policy point of view. In some cases, at least, “loophole” is just the pejorative term for a tax exemption or deduction that a government has put in place to encourage or deter certain kinds of behaviour: deductions for investments in equipment or buildings are an example of this. But you don’t have to be either a tax lawyer or even a keen observer of politics to guess that some such mechanisms are astute ways for government to mould the economy, whereas others are almost certainly boondoggles resulting from savvy corporate lobbying. Then, of course, there’s also the question of gaming the system. A particular incentive (or loophole) might have been put in place for sound public-policy reasons, yet be abused by corporations as a way of dodging taxes (say, by investing in new equipment in order to reap a tax benefit and then selling the equipment off as soon as it can within the letter of the law). The most obvious ethical litmus test here is the “intent-of-the-law” test. It is prima facie unethical to misuse a tax deduction that is intended to be socially beneficial in a manner that is cynically aimed at simply minimizing corporate tax burden.
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p.s., I’m not an accountant or tax lawyer. If anyone with relevant expertise can correct any of the factual assumptions above, please do help out. Thanks.
Wikileaks & Mastercard: Should Companies Do Government’s Bidding?
Filed under: accountability, corporate citizenship, corporations, CSR, environment, government, law, politics, values |
Comments (4) 
The controversy over Wikileaks has raised the question of whether companies should do government’s bidding. One popular suspicion is that Mastercard, Visa, and PayPal stopped acting as conduits for donations to Wikileaks not on principled grounds, but rather due to government pressure. If that’s true, is it ethically acceptable for business to act that way, as a tool of government? I’m not talking about government contractors, including military contractors like Blackwater, though I suppose the comparison is not entirely ridiculous. I’m thinking broadly of companies (ones not in the employ of government) helping to enact public policy or to implement the will of government more generally.
From a moral point of view, the question has to hinge in part on the moral quality of the particular thing business is being asked to do, and that may in turn hinge in part on the moral character of the particular government involved. Think, for example, of the controversy over Google participating in censorship in China. Many people thought it was wrong for Google to implement government policy in that case because they believe the Chinese government’s censoring of its citizens’ internet access to be morally problematic.
It’s worth pointing out that there are times and places where participating in implementing government objectives has been seen as unobjectionable, even patriotic. During both World Wars, companies were expected to participate in the ‘war effort’ by ramping up production, by shifting production to products needed for the war, and by conserving key raw materials. And that sort of active, corporate civic responsibility isn’t limited to times of war. Note that the US Department of Homeland Security expanded its “If You See Something, Say Something” to…
…hundreds of Walmart stores across the country – launching a new partnership between DHS and Walmart to help the American public play an active role in ensuring the safety and security of our nation.
I think it’s also instructive here to consider the relationship between “the state” (roughly, the government) and society. Many people are happy to think of corporations as instruments of society — that’s what motivates much of the CSR movement. We think it right for businesses to be environmentally responsible because we, as a society, value the environment. We want to conserve our resources, and we expect business to do its part. But the democratic state, like it or not, is a legitimate instrument of society. Now, government (including democratic government) is notoriously imperfect. As Churchill said, democracy is the worst system in the world, except for all the rest. But it’s hard to see how you can approve of (or insist upon) corporate implementation of social objectives and at the same time object entirely to corporate implementation of government objectives when those objectives are the reasonable objectives of a relatively-legitimate government.
In the end, it seems to me that if the behaviour in question is not intrinsically unethical (as Microsoft and Yahoo helping China’s government spy on dissidents arguably was) and if the behaviour doesn’t violate the firm’s fiduciary obligations to its shareholders, then it is at least permissible (though not necessarily obligatory) for a business to help implement public policy.
The Business Ethics Blog 