At Hult International Business School and elsewhere he teaches programmes covering corporate governance and other related topics including CSR (Corporate Social Responsibility) corporate finance, international finance and international trade and development.
The British Conservative Government has just declared a remarkable policy interest. It aims to abolish tax credits which support people who are employed by companies at less than the living wage. Though it is yet not clear how the plan will work the Government argues that tax credits, in many cases, arise because otherwise profitable companies are simply not paying enough in wages to some of their employees. Strong stuff. What this means is company employees who are paid below the living wage are entitled to tax credits. The tax credit makes good the difference between what they are actually paid to work and the living wage – a welfare metric based on what people need to receive in order to enjoy a decent living.
Rightly the Conservatives argue that companies should seek to pay their employees a living wage and are committed to bringing this about. The huge subsidy from the taxpayer to the corporate sector is unsustainable. It also a reward for what can only be described as anti social corporate behaviour. The question which then arises is what will cause companies to say – “we must pay more for our labour to diminish the burden that will otherwise fall on taxpayers in the form of tax credits”. This is very big step for some companies to take. It may also have unintended consequences.
In Anglo American jurisdictions, the tax credit issue is a major problem. We need to consider why so many companies exploit the fact that low paid employees can rely on the state to raise their take-home pay to a living wage through tax credits. The business model of successful companies like Walmart explicitly acknowledges and relies on this fact. Many Walmart employees are unable to earn a living wage in a highly profitable company. In order to help these low paid employees Walmart helps employees to attain a living wage by applying for tax credits and other benefits. There is evidence that similar practices also occur in the British grocery sector. The problem is widespread and affects other sectors.
The only way this issue can be successfully addressed is if the boards of companies are structured in a way which ensures that the debate about the living wage takes place. Relying on executive director-dominated unitary boards, common in Anglo American jurisdictions, will not take us forward. Until we adopt independent supervisory boards whose role it is to represent a broad range of stakeholder interests – serious debate about these issues will not take place. This most serious breach of corporate responsibility will continue unchallenged.
The Institute of Directors (IOD) has roundly criticised British industry for failures in terms of corporate governance. Too much reliance of box ticking we are told. Directors “ignore the nuance of corporate governance”. What exactly this term is supposed to mean is not clear. But it might mean that corporate governance in Britain “fails to involve and engage directors – executive and non executive alike – in proper and effective supervision”.
We are informed that the IOD is constructing an index of “boardroom behaviour” in the wake of an ever groing list of corporate scandals including some of the largest banks and other non bank corporations. The benighted Tesco gets a special mention. Mired as it is in financial scandals there are new issues concerning food and Tesco’s food chain supply management simmering.
Sadly what is missing from the IOD proposals is any willingness to explore how far unitary boards – which mix execution with supervision – can ever operate effectively. Board structures have to change in Anglo American jurisdictions. Independent supervisory boards may offer a way forward. Directors’ duties have to be tightened in law and made enforceable. Until this happens directors will continue to ignore their proper responsibilities in the sure knowledge that they will never be challenged.
The European Commission is negotiating the Transatlantic Trade and Investment Partnership (TTIP) with the US. We are informed that 97% of EU citizens told an official consultation on TTIP that they didn’t want private trade courts to decide on social and environmental standards.
The Commission says it’s listening, but it hasn’t committed to prevent companies challenging laws they don’t like, or demanding compensation if their “future anticipated profits” are affected by democratic decisions. The TTIP is yet a further example of pervasive, unseen, unaccountable corporate power.
The aim of the TTIP is to remove the regulatory differences between the US and European nations. The US is less regulated than the EU in areas like food safety and other areas of consumer protection. Will regulatory harmony mean that EU citizens will be expected to make concessions? Nobody yet knows. Once ratified the treaty would enable the largest corporations to sue governments who take legal action to defend their citizens against perceived wrong doing. This will happen through a secretive panel of corporate lawyers not the courts. They will be empowered to overrule even the will of parliaments.
Citizen protection will inevitably be undermined. The mechanism through which this is achieved is known as investor-state dispute settlement. It is already being used in various parts of the world to the detriment of citizens. Yet there has been no thorough, open, public debate within Europe. One asks why? Might the answer be another example of Orwellian indifference? Time will tell.
The latest extraordinary disclosures on the LIBOR rate fixing scandal confirm a clear pattern in the judicial blame game. The culprits are rounded up and punished for their actions: the corporate entities are fined heavily. Shareholders pay the price and business continues much as before.
But what happens to management – including the most senior levels of management – and the directors in all of this? By all appearances – not very much. This fact exposes afresh fundamental weakens in corporate governance arrangements. Once again those in charge at the highest levels are excused from being unaware of criminal acts being carried out under their watch.
What happens to directors ‘duties in cases like this? Answer because of the difficulty of identifying clear responsibility in such cases the law has evolved to embrace the concept of corporate liability. Corporations which are mindless, inanimate entities are now fair play when it comes to allocating blame. Hence individual rogue dealers and brokers convicted of illegal activities are punished, the corporation is heavily punished financially and the directors remain untouched. How can this be right? It prompts two key questions:
How should the laws determining directors’ duties be reformulated to ensure that senior management do not escape censure?
How do we expect directors – especially independent directors – to handle these challenges? .
Might this be a looming Nike moment in the battle to protect corporate reputation? McDonalds, the fast food operation, faces mass protest in the US about low pay. This recently involved 3,000 staff. Their complaint is that they are paid below the minimum wage. They also complain that they are not allowed to unionise. These are both matters protected by American law but not enforced.
There is another twist to this tale. Whilst MacDonald’s has agreed to raise pay in the restaurants they own – this accounts only for around 10% of those that are employed throughout MacDonalds franchise restaurants. The vast majority of MacDonald’s employees are not covered by the deal. What will surely happen is that MacDonalds will face reputational damage if those independent businesses that operate he MacDonald franchises do not meet these demands.
This raises important corporate governance issues.
How do independent directors respond to the fact that minimum wage laws are being abused by MacDonalds along with their rights to unionise?
How do independent directors react to the challenge of being directors of one company whose brand is affected by decisions taken by other companies exploiting the same brand over which they have no control?
Of course companies have secrets. A lot of commercial information is, understandably, kept out of the public eye for sound practical reasons. But there is evidence that energy companies in particular are not just protecting secret information from prying eyes. They are secretly pursuing policies which are at odds with official British government policy. This has surfaced in respect of both Shell and BP. In the case of Shell a secret policy document reveals that it is following policies which imply that Shell’s top management are climate change deniers. In the case of BP a related issue has arisen. BP has lobbied hard to secure government support for projects which fly blatantly in the face of government policy on climate change. Can that be right?
Being realistic – given the size and importance of the two energy giants and their importance as sources of income for UK pension funds – these companies are not just key players in energy markets: they play a key role in the British economy. Yet evidence of the entanglement of both companies with the state – and the manner in which this compromises official climate change policy – raise key questions on corporate governance.
These are the questions we should be seeking answers to:
What is the responsibility of independent directors in actions taken by the executive directors which compromise the democratic accountability of the state and undermine government policy?
Should independent directors be called upon to ensure that such conflicts of interest are properly declared if they are to meet their fiduciary duties as directors?