Business and society need a new type of conversation. Such a conversation needs business to recognise the requirements of society and speak directly to concerns that those requirements are not being met. Society needs to offer a path to reflection and change rather than only a language of recrimination and suspicion. The framework of principles offered within the “Blueprint for Better Business?” initiative, may provide the basis for a new narrative. It offers a way for companies to reflect on and, if necessary, change their orientation around their place within society. It does this by helping to define their purpose in terms of how they contribute to society as they pursue profits. In addition it sets out supporting behaviours needed to achieve such a purpose. Together these enable a clearer narrative for the people they employ and society at large. This is what should guide the actions of people they employ and against which they can be judged and supported or challenged in their effort.
Contribution to society and the pursuit of profits do not need to be in conflict and indeed together should produce a better overall return. Society already benefits from the profits that businesses produce (for example through employment, savings, pensions and tax revenues to governments), but more could be done to create a better society in which to enjoy those financial outcomes. And for businesses comes the benefits of building trust with the society which gives it the freedoms to operate. Interestingly, in response to a survey in advance of the conference launching the initiative 94% of respondents said that companies that combined financial return and service to society were more trusted and successful.
Taking this from the general to the particular, how might the framework have helped companies anticipate and respond to the current debate on the amount of corporation tax they pay? In addition could it have provided a broader and more reasoned platform from which to debate their stance?
The starting point for the new narrative is for companies to better define their purpose in terms that recognise that society provides companies with the freedoms to operate, and that business cannot succeed in a failed or suspicious society. Equally society and those who comment on its behalf need to recognise the corrosive effects of a relentless assault on people in business who want to re-orient business in the right way.
In broad terms the Framework sets out two foundational principles that can be used to help define purpose and five behavioural principles that help achieve that purpose. Importantly, taken together, the principles reflect fundamental values that build communities outside of the workplace and so encourages people to bring those values to the workplace and connects business and society.
The foundational principles of, firstly, respect for the dignity and value of the person and community and, secondly, seeking the common good helps to define a company’s purpose in a way that is better aligned with society’s understanding of the role business should play. So, for example, a bank might be described as “ a promoter of profitable financial products “ or it might define its purpose as “building trust in the financial system to allow people and businesses to flourish” and be prepared for its actions to be judged against that chosen purpose. This is not to suggest a universal purpose for banks but to provide a simplified example of how people and society can be at the heart of what drives the business. It also allows people to consider a company in terms of the impact on them rather than what is sold to them. The same principle can apply to all businesses as it is not just the financial sector that has failed to meet society expectations.
A related test of reality of purpose being embedded in the business model is whether the profits of the business arise from achieving that purpose. An alternative reality is that profits arise from activities designed primarily to pursue financial gain for the company, perhaps using the skills it has acquired in the pursuit of achieving its stated purpose. So, what if a construction company says its purpose is “to build quality homes that are energy efficient to live in and inexpensive to maintain “ but its profits derive from arranging or facilitating expensive loans and insurance to buy the properties ? It suggests that it is not focussed on its purpose and so is being judged by the wrong societal impact, so it could change its purpose or re-consider the focus of its profit making activities.
Taking this concept of purpose to the tax debate the first question a business would ask themselves is to what extent does the totality of tax contribution, and balance of that tax contribution between countries, properly reflect the design and reality of the business model and operations consistent with delivery of purpose? A related question would be to what extent were decisions on tax designed primarily to create a financial benefit solely for the company. ? The answer to the second question in particular may cause a company to re-examine its decisions to have such narrowly focussed arrangements.
This approach recognises the importance of the law in determining tax obligations and the choices that businesses both legitimately can take and indeed are incentivised to consider as countries use their tax systems to attract investment – to create jobs, infrastructure investment and tax revenues. However, the operation of the law and the right of countries to incentivise investment does not mean that judgements stop at deciding if it is just legal and profitable. As the keynote speech at the conference observed , in such narrowness of thinking potentially lies the path of exploitation and the subversion of the trust that enables markets upon which all profitable activity is based.
But how does a company go beyond legal in the area of tax, which is bound by an explicit body of law? A voluntary contribution of additional money may keep the Exchequer happy but also undermines the reliance on the law as the mechanism for determining the right amount of tax to pay.
To address the issue requires two stages. First, a reflection on whether the amount of tax paid clashes with achievement of business purpose as a whole. (This covers total tax paid, the mix of taxes and countries in which it is paid). Second, if a change is required, then how can that level and balance of taxation be changed within the framework of tax legislation.
The framework of principles can be brought to bear to assist. If you consider the foundational principles that help shape purpose it may be concluded , for example , that the level of taxation is not consistent with demonstrating respect for people as customers and citizens. (Indeed it also affects people inside the company if the workforce feels that the company’s stance detracts from the respect they attract from working within the organisation). Also, looking to the principle described as solidarity (broadly connectivity to society as a whole) do the decisions impacting on the level of tax paid by the company position them as being isolated from wider society? By implication this risks the company being seen as using society for its own ends rather than being an integral part of the society that provides its freedom to operate and flourish? Remember these are judgements and not absolutes.
If, on reflection, the level of taxation paid does not sit well with the stated purpose of the business and a sense of solidarity with society then action will be required. This may mean that the purpose is wrong or not attainable and should be changed or the tax paid is incompatible and needs to change.
Also the principle known as reciprocity should be considered, as it is at the heart of building relationships and trust. In essence reciprocity is a concept of mutuality. It has two levels; basic justice or compliance with laws and a higher level of a desire to give beyond the contractual and encourage long term relationships based on the ability to give rather than right to receive. So, has the company got stuck at the base level of justice and contractual compliance or should it go beyond that in how it operates? It is important that answers are thought through and not just a reaction to one vocal constituency. Actions taken could impact the tax revenues of other countries and could impact on both customers and employees if the remedy required is a change to the business model, location of services or how goods and services are delivered. It is complex because a company’s purpose is in relation to society as a whole and not exclusively to any one particular country or constituency.
Within the law action may be taken to change the balance and the total contribution of tax between countries by re-locating parts of the business to bring additional value-adding activities to another country – bearing in mind the consequences outlined above.
Another alternative is to reflect again on the principle of reciprocity; are there areas of judgement that have been negotiated that on reflection were too weighted to the advantage of the company and might sensibly be re-negotiated? The area of transfer pricing i.e. the pricing of transactions between related companies, generally in different countries, is an area to be considered (royalties, interest, supplies of goods and services.) This area of reflection is of particular interest in the developing world where sometimes the expertise and information available to companies outweighs that available to tax authorities. This can lead to outcomes that disproportionately reward the greater knowledge of the companies and lead to an allocation of profits designed solely to lower the overall tax paid rather than a fair sharing of tax revenues between countries.
So, using the framework of principles there is a way for companies to reflect on their decisions and for society to comment sensibly on them (there are three other principles not brought to bear to address the particular issue of taxation but are relevant for other issues facing business such as employee involvement, globalisation and offshoring and stewardship of resources).
This is just one example where the framework of principles provides a “place to go” when a company wants to reflect on its relationship with society or vice versa. There are judgements to be made and consequences to be considered. A consistent framework of principles, however, that binds business and society can be a useful aid, not just for decision making but for reasoned analysis and argument. In short, a new conversation that is inclusive and structured. The framework and the guiding purpose of the Initiative within which it is contained (“uniting corporate purpose and values to serve society”) provides a way to broker new relationships between business and society. It helps business issues to be considered within a moral framework without prejudging the morality of business leaders or business decisions. Just as importantly, it provides an opportunity to go beyond recrimination and to build a better future with the common purpose of good for society and business in mind.
Click to access the Framework