Assessed Blog 1 - Shareholder wealth vs Stakeholders: Business’ Biggest Battle

Shareholder wealth vs Stakeholder legitimacy

The age old theory surrounding a corporation’s primary financial objective dictates that a company must only use its resources and engage in activities designed to increase its profits, so long as it engages in open and free competition without deception or fraud. This notion was initially proposed by Adam Smith in 1776, but has since been advocated and developed by numerous scholars - most noticeable of its enthusiasts being Milton Friedman (1970). This concept has been widely accepted amongst Anglo-American organisations, and various organisations operating in free-enterprise and private-property social systems.

However, as time has progressed, the pluralism of western societies has increased and technology has advanced substantially; consequently the power and legitimacy held by numerous stakeholder groups within the business environment has grown exponentially. Many academics have noted the amplified scrutiny society places on corporate social behaviour and the ease of exploiting any controversial business activity via limitless media outlets (Coleman et al., 2010; Freeman, 2004; Magness, 2008).

Tax avoidance

Corporation tax avoidance has become one of the more heavily scrutinised business practices within the media, especially amongst Anglo-American companies within western societies (e.g UK and USA). With the aim of maximising shareholder wealth, a multinational company may use the management of tax payments as one strategic manoeuvre of controlling and minimising the firm’s financial outgoings.

This could be achieved through the strategic structuring of an organisation. Apple Inc. is one of the (more than few) companies which have been heavily scrutinised for such organisational structuring. For example, an offshore subsidiary of the company (Apple Operations International) “which from 2009 to 2012 reported a net income of $30bn, but declined to declare any tax residence, filed no corporation income tax return and paid no corporate income taxes to any national government for five years” (Peston, 2013). Another Apple partner, conveniently based in low-tax Ireland, Apple Sales International, purchases Apple’s finished products from a manufacturer in China and then re-sells them “at a substantial markup” to other parts of Apple’s territory. This Irish-based subsidiary generated around $74bn in profits but may have paid little income taxes to any national government on the bulk of those funds.

According to Friedman’s (1970) proposal, Apple’s approach is perfectly fine, and perhaps a great strategic move. The company’s tactic has acted within the confines of the law – although one or two loopholes may have been discovered along the way – and has evidently provided the company with maximised profits which can ultimately be utilised to improve shareholder wealth through various methods (improved dividend payments, reinvestment into company expansion etc.). Apple have merely utilised ‘Taxation Treaties’ which have set up between countries and enabled corporations to only be taxed in one of those countries used during the strategic process. Apple have clearly been rather astute in their tax management and subsequently reduced their potential tax payments significantly, allowing for maximised net profits, which is a statistic many (if not all) of their investors will love.

However, on the other side of this discussion’s spectrum, Freeman’s Stakeholder Theory (2004) argues that a company’s responsibility must consider all of its key stakeholders (Figure 1). Although tax avoidance can be viewed to have great benefits for some of the stakeholders shown in Figure 1 (e.g. financers, employees, customers), this behaviour could arguably have some detrimental implications for other stakeholders.

Figure 1: Stakeholder Approach: Core Stakeholders of a Firm

Source: Freeman, Harrison & Wicks, 2007, cited in Beauchamp et al., 2009: 61

Firstly, it is clearly evident that governments are being controversially snubbed of corporate tax payments, which plays a significant role in government/federal income. For example, in the US, corporate tax generated 32.1% of all federal taxes in 1952. Today the proportion has fallen to around 9% (Kocieniewski, 2011; Peston, 2013). Part of that monumental decrease could be down to external factors influencing different tax category increases (imports, income and wealth, social contribtions etc.), however the 9% figure still reflects the US system is achieving poor figures from corporation tax (Kocieniewski, 2011).

These findings remain consistent with a broad trend of multinationals paying a much smaller proportion of public sector costs in all the world’s developed economies. Considering this is a time when government debt within many western countries is intensifying, it seems unfair that big multinational companies are not fairly contributing towards optimally repairing damaged economies.

Of course, it is not just Apple who have been scrutinised for their ability to find loopholes within tax payment regulations. Other high profile accusations of similar behaviour have been made about Google, Amazon and Starbucks, just to name a few. If this behaviour continues, and governments fail to implement efficient and agile regulations which can counteract unethical tax avoidance strategies from multinational corporations, it could erode the infrastructure of the global economy which once allowed these companies to thrive. The implications of this could ultimately be detrimental to all shareholders and stakeholders involved.