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Fighting Corporate Abuse: Beyond Predatory Capitalism
Fighting Corporate Abuse: Beyond Predatory Capitalism
Fighting Corporate Abuse: Beyond Predatory Capitalism
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Fighting Corporate Abuse: Beyond Predatory Capitalism

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Fighting Corporate Abuse demonstrates, through compelling and revelatory analysis, the legislation and regulation needed to deal with the abuses in the corporate sector that have been revealed in recent years. It highlights the more general contribution of company law and practice to the current crisis in capitalism.

The first section develops a controversial argument, using detailed illustrations and vivid examples which show how the various abuses of predatory capitalism have been carried out through the manipulation of the corporate form and the creation of highly complex corporate groups. The group of authors, all experts in their fields, tackle head-on the issues of tax evasion, extraction of value and asset stripping, environmental destruction and managerial self-interest. In doing so, they paint a picture of a system that is abusive, and degenerated, but also a system which can be reformed.

In the run up to the UK general election, the authors develop of a set of practical proposals for an incoming government, outlining how each of these abuses could be curtailed and how a more acceptable and accountable form of corporate capitalism can be developed through national and international action.

Drawing on the group's activism, as well as their academic experience in law, politics, economics and human rights, this will be an authoritative as well as a highly practical book.
LanguageEnglish
PublisherPluto Press
Release dateJul 20, 2014
ISBN9781783711956
Fighting Corporate Abuse: Beyond Predatory Capitalism
Author

Corporate Reform Collective

The members of the Corporate Reform Collective are: Tom Hadden (Emeritus Professor, Queens University Belfast), Paddy Ireland (Professor of Law at the University of Bristol Law School), Glenn Morgan (Professor of International Management at Cardiff Business School), Martin Parker (Professor of Organisation and Culture at the School of Management, University of Leicester), Gordon Pearson (author of Strategic Thinking, Integrity in Organizations), Sol Picciotto (Senior Adviser to the Tax Justice Network), Prem Sikka (Professor of Accounting at the Essex Business School) and Hugh Willmott (Research Professor in Organisational Studies at Cardiff University).

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    Book preview

    Fighting Corporate Abuse - Corporate Reform Collective

    FIGHTING CORPORATE ABUSE

    Fighting Corporate

    Abuse

    Beyond Predatory Capitalism

    Corporate Reform Collective

    First published 2014 by Pluto Press

    345 Archway Road, London N6 5AA

    www.plutobooks.com

    Copyright © Corporate Reform Collective 2014

    The right of the individual contributors to be identified as the authors of this work has been asserted by them in accordance with the Copyright, Designs and Patents Act 1988.

    British Library Cataloguing in Publication Data

    A catalogue record for this book is available from the British Library

    ISBN 978 0 7453 3517 9 Hardback

    ISBN 978 0 7453 3516 2 Paperback

    ISBN 978 1 7837 1194 9 PDF eBook

    ISBN 978 1 7837 1196 3 Kindle eBook

    ISBN 978 1 7837 1195 6 EPUB eBook

    Library of Congress Cataloging in Publication Data applied for

    This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental standards of the country of origin.

    10 9 8 7 6 5 4 3 2 1

    Typeset by Curran Publishing Services

    Text design by Melanie Patrick

    Simultaneously printed digitally by CPI Antony Rowe, Chippenham, UK

    and

    Edwards Bros in the United States of America

    Contents

    Introduction

    Part I     The Abuses

    Notes and Additional References

    The Corporate Reform Collective

    Index

    Introduction

    People are very angry about recent corporate abuses and about the way in which the capitalist system is operating. This is not just about one or two cases of unlawful or unethical conduct. It is about the nature of capitalism itself. The list of abuses that have emerged since the boom and bust over the last five years keeps growing:

    It is no wonder that there is growing public anger at this kind of corporate capitalism The campaigns of activists in the Occupy Movement and in UK Uncut and other pressure groups have reflected a widespread public mood. Ed Miliband and others have struck a chord with the focus on ‘predatory capitalism’ and the need to curtail the dominance of major utility suppliers, the power of the multinationals and the dangerous and unproductive operations of international investment banks.

    And yet corporate capitalism is essential to current economic systems throughout most of the world. It has produced generally better results in terms of economic activity and individual prosperity than most forms of state-controlled economic activity. Market forces and competition between different suppliers, producers and retailers have generally proved to be more efficient in the allocation of resources than strict state socialism, which has its own common forms of abuse and corruption. And the largest multinational corporations have undoubtedly introduced some much-needed forms of economic development in many developing economies, and have often paid higher salaries to their employees than more traditional businesses. But they have also exhibited and benefited from the standard practices of economic imperialism.

    So there are no political or economic certainties in the choice of structures for business enterprise. The underlying concept of the corporation as the legal basis for large business enterprises is quite sound – the creation of a legal entity through which people or bodies with surplus resources can supply capital for investment in economic enterprises, the development of natural resources or the delivery of essential services. Company law provides the basic structures. But the providers of capital, whether they are private individuals or state bodies, have a good deal of freedom to determine the detailed structures for the management of the business by the directors and executives they have appointed, and can in return expect a fair share of the resulting operating returns or profits after the payment of wages and other costs of operating. If the business is unprofitable they must either provide more capital or lose what they have already contributed. Whether the model is state or private capitalism is less important than formal operating structure of a self-contained operating company or corporation which is expected to run the business or utility as efficiently as practicable.

    It is this formal operating structure, usually contained in the memorandum and articles of association of a standard company, that is the key to an understanding of any corporate body. These are designed to deal with the obvious conflicts of interest between the investors, the managers and the employees within the company, not to mention the impact on external consumers and the public at large. In the standard model the investors or shareholders are granted the power to appoint and dismiss the directors, who in turn are granted formal control of the operation of the business. This normally gives the directors the power to decide on how to allocate the company’s resources between the payment of dividends to shareholders and reinvestment in the business, how much to pay their employees and themselves, and most other major decisions on how the business or enterprise is run. But the standard model is not the only one. In co-operatives the memorandum and articles of association grant most of these major powers to the members or employees rather than the providers of capital, who are usually entitled only to a fixed rate of interest on their contributions. In state corporations the government, whether national or local, is usually given the power to give instructions to the directors on all major decisions, including how much of the available resources to pay to the national or local exchequer.

    The obvious point is that there is a huge range of possible structures for corporate enterprises. So how did things go so wrong with the standard model, and how can they be put right? Some activists argue that it is the system of corporate capitalism itself that is the problem, and that the system must be smashed and replaced by something better, though precisely what and how we might get there is not usually explained or argued in any depth. ‘Smash capitalism’ is a great slogan but not a convincing policy option. A return to state control of all major economic activity is not on any realistic political agenda. And the record both of capitalism and of the more extreme forms of state socialism suggests that other more pragmatic reforms may be more effective and achievable.

    A History of Success and Recurrent Scandal

    The history of corporate capitalism shows that the system can work but that it is inherently open to manipulation and abuse. Since the invention of the modern form of financial capitalism in northern Italy and in the chartered trading companies in Britain and France, its progress has been regularly interrupted by scandals and crashes.

    All these developments illustrate the continuing battle between corporate directors and executives, their shareholders and market traders who seek to use and abuse the corporate economy for their personal financial advantage. They also highlight the need for action by governments to protect and develop their national economies by regulating and controlling abusive practices.

    How This Book Can Point the Way to a More Acceptable Corporate World

    The current range of these and other abuses is documented and explained in the chapters in Part I of this book. Chapter 1 considers the ways in which major companies can structure their operations to avoid or limit the taxes they pay to national governments. Chapter 2 describes the way in which auditors and accountants play their part in tax avoidance and covering up the true state of affairs in the companies they are paid to audit. Chapters 3 and 4 illustrate how the freedom enjoyed by major companies to structure themselves in complex corporate groups, both nationally and multinationally, allows them to evade liability for financial failures and ecological disasters and to avoid the impact of outdated regulatory systems. Chapters 5 and 6 illustrate how directors and executives are able to organise the affairs of their companies to promote their own financial interests and to take advantage of the fine-sounding but self-serving concept of corporate social responsibility to preserve a warped and self-interested view of the corporate economy. Chapter 7 explains how the operations of investments banks and market traders have contributed to the supplanting of useful productive activity by complex financial manipulation.

    Part II of the book is about how those regulatory systems can be made more effective, not by relying on outdated received wisdom about depending on shareholders or non-executives to control executives or by exhortations for corporate social responsibility, but by developing more radical structural reforms of corporate governance, market trading and taxation. Chapter 8 sets out how the political economy of major corporations can be restated and reformed to achieve fairer corporate structures. Chapters 9 and 10 set out the ways in which the operations of major multinationals can be regulated and controlled, and how the international taxation system can be reformed to ensure that they pay a fair share of the taxes that are needed in all the jurisdictions in which they carry out their businesses. Chapter 11 shows how the structures for internal corporate governance can be reformed and developed to ensure a fairer distribution of decision-making power and a better way of promoting research and investment in productive manufacturing rather than socially unproductive financial services. Chapter 12 shows how the unproductive and disruptive activities of investment banks and market traders can be curtailed more effectively. Chapter 13 illustrates some of the ways in which smaller and more co-operative enterprises can develop and compete effectively with their larger competitors. Chapter 14 sets out how alternative structures for the control and management of large enterprises can be developed and facilitated by government action.

    The key elements in this programme for serious corporate reform to outlaw and prevent the worst aspects of predatory capitalism and to develop structures to enable the benefits of more responsible corporate capitalism to be enjoyed by everyone, whether as shareholders, employees, consumers or the population at large, will be:

    We shall continue to press for these reforms and hope that you will join us in our campaign for national and international action on all these issues.

    The Corporate Reform Collective: Tom Hadden, Paddy Ireland, Glenn Morgan, Martin Parker, Gordon Pearson, Sol Picciotto, Prem Sikka and Hugh Willmott

    Part I

    The Abuses

    1

    Tax Evasion and Avoidance

    Modern corporations are not independent of the state, but intricately connected with it in many ways. Yet our political leaders generally behave subserviently to businesses bosses, so that corporate power dominates political power. Much of this results from manipulation of the corporate form itself. Nowhere is this seen more clearly than in relation to taxation.

    The revenues lost through tax avoidance, including those relating to corporate practices, are hard to estimate, but the European Union claims ‘the level of tax evasion and avoidance in Europe to be around €1 trillion [£830 billion or US$1.25 trillion]’,¹ equivalent to 7–8 per cent of the gross domestic product (GDP) of all EU member states. The US Treasury has estimated its tax gap (tax avoidance, evasion and arrears) to be $385 billion.² A large number of corporations, including Amazon, Apple, eBay, Facebook, Google, Microsoft and Starbucks, have been on the radar of parliamentary committees for avoiding taxes through complex organisational structures.³ The amounts are a stark reminder of how tax avoidance forms an integral part of corporate profitability.

    It is sometimes argued that companies should not be taxed at all, since taxes are a cost which they pass on to their customers. This rests on the mistaken view that a company is no more than a bundle of contracts. In reality, a company is a form of property protected by the state. The privilege – it should not be regarded as a right – of incorporation gives shareholders the protection of limited liability, justified by the advantages of enabling the combination of factors of production for large-scale economic activities. This protection enables companies to reap super-profits from economies of scale and scope, and to accumulate large concentrations of capital. Unless their profits are taxed, they will grow even bigger, further distorting competition. Furthermore, if companies were not taxed, the corporate form could easily be used to shelter all kinds of income from taxation.

    Behind a wall of secrecy corporations are able to devise complex schemes to boost their profits and meet incessant stock market pressures to report higher profits. Tax avoidance also personally benefits business executives because their remuneration and status is often related to reported profits. In these tasks, corporations are advised and guided by an established tax avoidance industry fronted by accountancy firms, lawyers and financial services experts.⁴ The system sustains a vast army of professionals engaged in both avoidance and evasion not only of tax but also banking and financial and other forms of regulation, resulting in enormously wasteful expenditures for both firms and governments.

    In a globalised world, the distinctions between domestic and global are blurred, and almost all big companies are able to play the tax avoidance games. A few examples will help to illustrate the issues

    Corporate Tax Trickery

    Within major corporations, the taxation department/division often acts as a profit centre. It is assigned profit and revenue generation targets, and the promotion and the salary increments of its members often depend on meeting the targets. The promotion of tax avoidance schemes by a highly profitable division within Barclays Bank is a telling example, which unusually led to a public rebuke from the government. This rebuke might have curbed two tax avoidance schemes but does not deal with the corporate love affair for tax avoidance or tax havens. A 2013 report published by Action-Aid, summarised in Box 1.1, chastised Barclays for promoting investment in Africa through tax havens, all with the aim of increasing corporate profits and depriving millions of people of much-needed education, healthcare and social infrastructure.⁵

    It is not just financial institutions: other corporations can also arrange their financial affairs in ways that avoid taxes. Companies can use their ownership structures to effectively shift profits and avoid taxes. A good example of this, as shown in Box 1.2, is the strategy adopted by a US private equity firm to enable it to capture and relocate the finances of Boots the Chemists, a major pharmacy chain in the United Kingdom, and to save around £1 billion in tax.

    Corporate tax avoidance is not just a problem in the United Kingdom, but an issue wherever the corporate form has taken hold. US companies like Enron and WorldCom used offshore havens and artificial royalty programmes and management fees to reduce taxable profits.⁶ The Chinese government claims that ‘Tax evasion through transfer pricing accounts for 60 percent of total tax evasion by multinational companies’.⁷ A Chinese government official added that ‘almost 90 per cent of the foreign enterprises are making money under the table. … most commonly, they use transfer pricing to dodge tax payments.⁸ A former senior fellow of the Brookings Institution has argued that transfer pricing is used by virtually every multinational corporation to shift profits at will around the globe.¹² So in the next section we look at the root cause of the ease with which companies are able to shift profits and avoid taxes.

    Box 1.1 Tax avoidance promotion by Barclays Bank

    Barclays Bank, a UK-based major international financial institution, came under public scrutiny because of the mismatch between its profits and taxes. For the years 2010–12, Barclays reported pre-tax profits of £5.7 billion, £3.2 billion and £4.8 billion respectively, but paid UK corporation tax of £147 million in 2010, £296 million in 2011 and £82 million in 2012.⁹ One of the reasons for the mismatch between profits and tax is the existence of its tax division, which generated revenues of more than £1 billion a year between 2007 and 2010. One of its roles was to craft tax avoidance schemes. In 2012, the UK government took the rather unusual step of blocking two tax avoidance schemes which could have enabled Barclays and/or its clients to avoid around £500 million of UK corporate tax.¹⁰ A Treasury press release referred to both schemes as ‘highly abusive’ and ‘designed to work around legislation that has been introduced in the past to block similar attempts at tax avoidance’.¹¹ The first scheme was designed to ensure that the commercial profit arising to the bank from a buyback of its own debt would escape corporation tax. The second scheme involved the use of authorised investment funds (AIFs), and sought to convert non-taxable income into an amount carrying a repayable tax credit in an attempt to secure ‘repayment’ from the Exchequer of tax that has not been paid.

    International tax avoidance by multinational or transnational corporations (TNCs)¹³ exploits the tax haven and ‘offshore’ secrecy system, which was originally devised by and for them. However, tax havens are now also used for

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