Sunday, June 09, 2013

The first time I have disagreed with John Kay ... (he's still the dude though)

The Companies Act has in recent years been revised to incorporate a broad stake-holder focus. The over-riding objective is still shareholder value, but now decision making must also give due consideration to wider stakeholders such as suppliers, employees and the environment.

In a recent article, John Kay refers to this broader stake-holder approach as a basis for arguing that aggressive tax avoidance strategies pursued by directors may not fit as an appropriate behaviour.

I am probably missing several pieces of the puzzle but my instinct tells me that since our tax regime operates not on a principles based approach but on a rules based approach (as do all tax regimes, I imagine), it is the rules that need to be tightened, not the behaviours or companies. I believe the modus operandi for companies remains and should remain profit maximisation. By all means give a nod to all the stakeholders in this context, but it is a nonsense to pander to them at the expense of profit. Paying less tax enables the company to distribute more wealth to shareholders or to reinvest more capital into the business. It's true that if you were the only entity aggressively avoiding tax the ramifications on profitability could be severe if there was a massive public backlash. However, so long as multiple conglomerates are in on the wheeze, the damage to reputation is likely to be negligible.

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