When compliance with the law and morally acceptable behaviour are two different things, we have taxing questions to address, says Mallen Baker

Activist group the Tax Justice Network has secured a legal opinion in the UK stating that companies can’t claim it is their “fiduciary duty” to avoid tax. This, apparently, was a major response to the recent criticisms of high profile corporations such as Google and Starbucks that they paid too little.

I’ve read a few right-wing commentators who trot out the old line that “directors don’t own the assets of the company, and they can’t give them away”. I wasn’t aware many chief executives genuinely believed this, but if they do then it is a wider conversation than just tax.

It is one of those misconceptions that have often dogged the debate around the take-up of corporate responsibility.

The starting point is that there is actually no fiduciary duty to maximise returns to shareholders. Chief executives may come under pressure to generate short-term results, and they may find themselves in a precarious position if they fail to deliver. But that is not the same thing as a legal duty.

Fiduciary duties are really intended to avoid conflicts of interest between the personal benefit of executives and the interests of shareholders. Courts tend to uphold these duties when it has been shown that a director took rewards to which they were not entitled, or which were otherwise not disclosed.

This is an important distinction, because not only is the target of maximising returns to shareholders not a legal duty – it’s also a pretty dumb objective.

Companies that have performed best in building the value of the company have tended to focus on building great products, or otherwise pursuing a mission that gives a purpose beyond profit. Those whose missions focus on maximising profit have historically been poor at achieving them.

Not only that, but all companies seeking exceptional returns, rather than simply a fair return, is what has led us into an increasingly precarious situation. It has fed consumption, as companies find new ways to get more life out of already-saturated markets. It led the formerly “safe and boring” industry of banking into risky investments the consequences of which will be with us for some time to come.

Everyone above average?

If all companies are told they must achieve above-average returns, that has a guaranteed built-in failure mechanism for half of all companies – by dint of the definition of the word “average”.

And it becomes an upward spiral that leads more and more companies to cheat, and to find tricks to give the illusion of value. And these things are all destructive to real economic stability and social value.

So it’s not a surprise that companies ended up wandering so far over the line in terms of attempting to pay as little tax as possible when motivated by this zero-sum game.

But where exactly is the line between legal and illegal? Campaigners are blasé about how easy it is to identify it, but it really isn’t.

After all, we want successful businesses to create wealth and employment – hopefully in an increasingly sustainable way.

So we want those companies to make profits, and to feed some of those profits into investment for future solutions and development.

We have a legitimate debate at hand. It used to be the case that it was an established legal principle that individuals and companies could order their affairs – within the law – to minimise their tax liability.

Companies found ways to be too good at that process, and they made us realise that a new principle has to be established. But at present the terms of the debate are crude in the extreme.

They lie chiefly in bashing the worst offenders for being immoral, and making general, sweeping statements about how people should pay their fair share.

If that is to become something firmer that will stand up in the courts, it needs to be better defined – and done by people that will balance the interests in an even-handed way between companies being successful and adding value to their owners and to society, and the need for profits to feed into the social foundations via the tax system.

I’m not quite sure who those even-handed folks might be.

Mallen Baker is a contributing editor to Ethical Corporation and managing director of Daisywheel Interactive.

Corporate tax  ethical companies  Sustainable Companies  tax avoidance