G8, tax avoidance and sustainability

The G8 summit recently concluded in the UK, and one of the key action items supported by some of the world’s leading economies is reducing corporate tax evasion and avoidance.  Before you stop reading, let me assure you that this post will not be an experience akin to having lunch with your accountant – and being stuck with the bill.  The global economic climate of so-called austerity coupled with increased public perception and involvement are, at the very least, giving a platform for this important issue to be voiced.  Why does tax compliance matter?  It matters because governments cannot continue to pay for education, healthcare and infrastructure without corporate contributions.  It matters because developing nations often suffer a great deal more, and have fewer resources to collect than more advanced economies.  It matters because Starbucks voluntarily paid more tax in the UK due to the public outcry, even though it was legally obligated to pay a lesser amount.  Oh, the double-edged sword of fickle social media relationships.  Marketers strive to build engaging brands with emotional appeal only to have consumers tell them how to run their businesses.  That’s enough ranting for now.

If global governments do not address the legal loopholes in the current corporate taxation system, the effects will multiply on the ground with cutbacks to important government programs.  In other words, corporate tax avoidance is not sustainable.  Google, Amazon and Starbucks have been in the news recently for taxation issues.  The hard-working finance departments of global companies are paid handsomely to minimize tax exposure within the established legal framework.  Perhaps some of those wages should be used to pay a company’s fair share of taxes.  The responsibility rests with governments and business to work together, streamline the corporate tax system and eliminate global tax havens.

When discussing sustainability, it helps referring to John Elkington’s “triple bottom line”: People, Planet and Profits.  It’s not enough for organizations to pursue profit – although it’s certainly a vital goal since most businesses cannot exist if unprofitable in the long-run.  Corporate strategy must also consider what’s best in the environmental and social realms.  The environment, of course, rightly receives immense media attention but the focus of this post is on the social or people category of sustainability.  Since taxes contribute to helping communities through government social programs like healthcare, education and support for new entrepreneurs, it is imperative for the ongoing viability of these programs that corporations pay their fair share of taxes.  Corporations in Canada, and globally, benefit from a well-educated workforce with access to healthcare and a plethora of other programs.  But these come at a cost, and we all need to contribute.

It is not an easy road ahead for world governments.  The challenge begins as delegates return home from the G8 summit in Northern Ireland.  Most countries have complex tax systems with distinct regional discrepancies – just ask anyone registering a corporation in the state of Delaware.  Pressure from business lobbyists to maintain the status quo will certainly be immense.  

Just because you can legally do something, doesn’t mean you should.  Dr. Sue Bridgewater, a marketing expert at Warwick Business School states (as reported by the BBC), “The issue arises when we feel that a company has crossed a line and what it does to be tax efficient is morally, if not legally, inappropriate."  As government lawmakers look to the future, and individuals keep governments and business accountable, there is hope on the horizon that global tax avoidance is quickly becoming taboo.

Supply chain responsibility in a global economy

A compelling debate raged in my international marketing class this past week: lines were drawn in the sand concerning the responsibility of global brands in the Rana Plaza travesty in Bangladesh.  One student took the Milton Friedman route and stated emphatically that business is not liable – the responsibility rests with the Bangladeshi government.  The only purpose of a corporation is to make a profit within the prescribed rules and regulations.  If it plays within the rules, all is well.  The other side of the debate states that a company must be accountable for activity within its supply chain.  Action driven by consumers, demanded by big business and implemented, monitored and enforced through third-party audits has the best chance of survival.  Although supply chain reform is desirable to savvy consumers, the ethics of the situation must be separated from corporate PR-spin. 

Are corporations responsible for their supply chains?  It’s helpful to refer to Archie Carroll’s CSR pyramid in answering the complex question.  Each layer of the pyramid depends on the foundational layers for support.  At the bottom of the pyramid is the economic component: business must generate economic value by meeting the needs of customers and providing jobs.  Second to the bottom is the legal aspect.  Business must follow the rules, pay taxes and treat employees according to codified regulations established by law.  Both of these are requirements.  The ethical aspect is second from the top – treating suppliers fairly, doing what is right over and above the law – and expected by society.  The apex is the philanthropic component which includes raising awareness and funds for worthy causes.  Although this is not required or expected of a company, it is desired by the community.  The fair treatment of the supply chain (including workers and factory conditions abroad) certainly falls under the ethical imperative of Corporate Social Responsibility.  Pursuing safe working conditions in the supply chain is not only expected by society, but it’s the right thing to do.

The influence of big brands can foster positive change.  Galen Weston expressed remorse during a meeting with Loblaw shareholders to address the tragedy.  Joe Fresh clothing was manufactured at Rana Plaza.  Loblaw pledges to compensate the families of workers and implement directives to help avoid future calamities.  In a nation where only 6 of the approximately 20,000 buildings, according to New Age, created in the past 10 years had all the necessary approvals, it will be an enormous feat.

The situation in Bangladesh is complicated: factory owners hold public office, corruption is widespread and the garment industry accounts for 80% of the nation’s exports according to Ethical Corporation.  Although the wages are miserly and the situation has been described as Dickensian, the factories provide millions of jobs to women in Bangladesh who may otherwise be unemployed.  The fashion retailers must work within the Bangladeshi framework and demand ethical reform.  It’s not enough to passively review factory safety certificates and blindly accept audit results about the state of buildings.  Brutally honest dialogue must begin because lives depend on it.  It won’t be quick and easy.  But nothing worth doing ever is. 

The ethics of RBC's outsourcing decision

RBC, Canada’s largest bank, has been under fire recently for planning to outsource 45 IT jobs through a vendor, thereby eliminating full-time Canadian positions.  India-based iGate is part of RBC’s supply chain and responsible for hiring the foreign workers.  All of this was accomplished through the proper legal and governmental channels – although Human Resources and Skills Development Canada is reviewing the matter.  As an ethics practitioner, it is the ethical territory outside the legal boundary that is the subject of scrutiny, analysis and interest.  RBC’s decision in this matter is legal, but is it ethical? 

First, let’s examine the components of an ethical decision.  According to Crane and Matten, the following three elements shed light on whether a decision is ethical in nature (as opposed to the numerous decisions made each day that are not necessarily ethically-charged: buying lunch out or brown-bagging it, black or brown shoes, jazz or salsa, mild or spicy):

1.   The decision has a significant impact on others.  Since a number of workers would lose their positions, we can conclude this decision affects others substantially.  RBC stated that the employees would be re-assigned within the organization, but it’s still a major change either way.

2.   The decision has viable options available.  In other words, did RBC have a choice in the matter?  On this point, we can agree RBC had a variety of different options concerning their IT staff – outsource (where and to what extent) or keep jobs in-house.  It wasn’t a financial deal breaker – RBC wouldn’t be forced into bankruptcy for not outsourcing.

3.   The decision is viewed as ethical by one or more parties.  Even if RBC did not initially believe the situation to be ethical, it does not automatically mean it’s not.  Certainly, the IT staff, unions, and the Canadian public perceived RBC’s decision as containing an ethical component.

The last point, of course is what makes this story media-worthy.  This case is generating publicity for a number of reasons: RBC’s profits are enormous, RBC’s employees were slated to train their replacements (an unsavoury proposition) and RBC, to put it bluntly, is a bank.  It’s important to cut through some of the emotionally-charged banter to achieve a balanced discussion.  RBC is not alone in outsourcing.  It’s a growing trend and will continue despite public uproar.  The major banks outsource as do major retailers and service-providers.  Classical economists argue that countries with a comparative advantage in a particular industry should produce those goods and trade with other nations.  If India and China produce goods or services of acceptable quality at a cheaper cost, Canada should produce other goods and trade with India and China.  If manufacturing or call centre jobs are lost in Canada, re-training in growth industries will provide new opportunities (a worthy goal, but does it work?).

I hope it’s apparent that ethical outcomes are complex and rarely a straight-forward proposition.  Is it ethical to outsource jobs when company survival or competitiveness is not at stake?  RBC answered the question on whether the original outsourcing decision in this particular case was ethical by introducing a new supplier code of conduct (http://www.rbc.com/sourcing/supplier_code_of_conduct.html).   “RBC will not offshore work where salary savings is the primary reason and will make every effort to source in Canada,” the financial institution states.  This flies in the face of the original mandate and is a complete change of direction.  RBC’s PR machine says they value Canadian jobs above cost-cutting, but only time will tell if the new policy is ethical.  If RBC respects Canadian jobs, why did this revelation emerge only after major media coverage?  Unravelling motives is another subject altogether: Would RBC have introduced this Code without the public outcry or government prodding?  RBC claims the Code is the first of its kind in Canada.  The Canadian public helped produce this outcome and it’s a step in the right direction regardless of motive.

What's the environmental skinny at Timmy's?

I was impressed while reading the 2012 Tim Hortons Sustainability and Responsibility Summary Report (http://sustainabilityreport.timhortons.com/pdf/2012_summary_report_30pages.pdf).  It isn't just the pretty layout: a lot of time and effort was devoted to generating a report of this magnitude.  The plans are both unexpected and welcome.

My original thinking was I’d find a few token lines about sustainability and CSR on the corporate site - some broad promises and wishful thinking with no follow-through or commitment.  Let’s nod and smile for the cameras, answer a few questions at the press conference and then it’s business as usual.  This is certainly not the case with Tim Hortons, and I applaud the organization. 

Tim Hortons’ sustainability and responsibility initiatives are housed under three pillars: individuals, communities, the planet.  Third party guidelines by the Global Reporting Initiative are used for the Sustainability and Responsibility Report.  Tim Hortons is also part of the Dow Jones Sustainability Indexes.  As explained in the report, “The DJSI North America tracks the performance of the top 20% of the 600 largest companies from Canada and the United States in the Dow Jones Global Total Stock Market Index that lead the field in terms of sustainability.”

Many wonderful things are happening at Tim Hortons: waste to landfill is diverted at some stores for recycling into take-out trays, a few newer stores have LEED certification, less sodium is used in food preparation, underprivileged kids are going to camp and small-scale coffee farmers are receiving help for their businesses.  Some of these things I was aware of and some I wasn't.  Even supply chain proposals are included for the humane treatment of animals, but some of the poor pigs will have to wait until 2022 for roomier housing.

Despite all these efforts, ignoring major environmental and community issues won’t make them disappear.  Although I'm a Tim Hortons customer and respect the iconic Canadian brand, there is room for a bolder environmental stance.  The elephant in the report was the lack of solutions addressing the drive-through idling problem.  Unfortunately, all the other worthy initiatives do not stop cars from idling, polluting and sometimes just getting in the way. Idling a 3-litre car for 10 minutes burns a quarter litre of gas as noted by Natural Resources Canada.  According to a 2012 Globe and Mail report, the residents of Markham, Ontario waste enough gas in drive-through line-ups annually to drive 85 cars around the world.  I’m not picking on Markham; this could easily be Oakville, Mississauga or Brampton – don’t even mention Toronto.

 

At the end of the day, Tim Hortons is a business and responsible to shareholders, franchisees and customers.   A 30-page report on all the positive things under way with no mention of drive-through related emissions is not fair to any stakeholder group.  Even a “we know this is a problem and we’re working on it” would indicate the key issue is on management’s radar.  All the professional graphics and charts cannot hide the elephant in the report.  I know Tim Hortons can do better.