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.
