A fast growing crisis for global business leaders is shaping up as a classic ethical quandary: a question not of right vs. wrong, but one of right vs. right.
The issue is taxes paid by corporations. News articles based on the Panama Papers over the past 11 days have revealed to the world what tax experts have always known, that it’s possible to set up labyrinthine networks of shell companies to conceal income and reduce or completely avoid taxes. As a result, millions of people around the world are now reasoning as follows. 1: Most of this activity sounds as if it’s meant to deceive, and why would someone try to deceive unless they’d done something wrong? 2: Further, if Vladimir Putin does it, as he apparently does, then it’s probably illegal or at least slimy. 3: Panamanian law enforcement yesterday raided the offices of Mossack Fonseca, the law firm that set up these shell companies, which must mean there was criminal activity going on. 4: Companies have been shown to do this same kind of thing, moving money around the world in mind-bending schemes to avoid taxes. 5. Ergo, global companies are tax cheats.
The fact that this argument fails on factual and logical grounds is irrelevant. It’s what many people think. The European Commission on Tuesday called for the world’s biggest companies to disclose more data on the tax they pay worldwide – more evidence, or so it would appear to many, that mega-corporations are nefariously escaping their obligation to pay tax.
So here’s the problem for business leaders. They do indeed move money all over the world and play tax laws like a violin in order to minimize their taxes – and for the most part, it’s all legal. Certainly crimes may be committed inside vast organizations, but famous companies like Google, Amazon, General Electric, and Starbucks have no interest in breaking laws because they can reduce taxes so dramatically within the law. And such behavior is more than just legal; it’s arguably ethical as well. If the managers of a company can legally reduce its expenses, they’d be derelict in not doing so. Otherwise they’d be at a competitive disadvantage, endangering jobs and everything they do.
Ah, you say, but what if the public, even through flawed logic, becomes enraged by corporate tax-minimizing behavior? That’s been happening in Europe, where big U.S. companies including Google and Starbucks were revealed to have paid U.K. tax that was only a minuscule fraction of their revenue there. In response, both those companies have voluntarily paid more tax than they owe. Is that a wise move that helps shield valuable brands? Or is it just throwing money away, especially when some vocal critics became even more enraged by the “offensively” small extra amounts the companies paid?
News will keep trickling out of the Panama Papers for months, so this issue won’t go away soon. What’s the right response? For business leaders this isn’t a black-and-white issue, though much of the public will see it that way. Right-vs.-wrong choices are easy. Right-vs.-right questions like this – Minimize tax legally but maybe harm reputation? Pay more than you owe but maybe harm stakeholders? – are the kind that test leaders most severely.
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What We’re Reading Today
Verizon CEO comes out strong against Bernie Sanders
Lowell McAdam responded on LinkedIn to Sanders‘s claims that Verizon doesn’t pay its share of taxes and doesn’t invest in America. McAdam noted that Verizon has paid $15.6 billion in taxes over the past two years and that nearly all of its $35-billion investment in infrastructure over the past two years went to the U.S. Sanders has also attacked Verizon’s dealings with its wireline workers, who went on strike yesterday; Sanders joined a rally. McAdam says Sanders is distorting facts on that issue as well. Fortune
Financial pressures may have affected Takata’s airbag response
Internal documents unsealed in a lawsuit related to the company’s faulty airbags suggest that Takata approached the recall with caution. In 2008, after three ruptures had been reported, former engineering v.p. Al Bernat said recalling them would cost $100 each. With 62,000 airbag inflators under review, Takata recalled just 4,200. A month later a teenager was killed in Oklahoma in a minor crash, leading to a 440,000-car recall two months later. While Takata says the documents are taken out of context, they seem to reinforce a pattern of inaction by the company and CEO Shigehisa Takada. NYT
Regulators propose banning Theranos founder for two years
The Centers for Medicare and Medicaid Services, in a letter to Theranos, propose banning CEO Elizabeth Holmes and President Sunny Balwani from owning or running any labs for two years. The letter also proposes revoking the California lab’s federal license. Theranos has responded, stating why it believes the sanctions are unwarranted. WSJ
Rare basketball feats
The Golden State Warriors, led by coach Steve Kerr and likely NBA MVP Steph Curry, set the all-time wins record in the regular season last night, with 73. But even this feat was overshadowed by the last game of Los Angeles Lakers great Kobe Bryant‘s career. He scored 60 points. ESPN
Building a Better Leader
Layoffs have become a quick-fix response to high costs…
…but there’s little evidence they help weak profits. Knowledge@Wharton
The worst job in America is…
…newspaper reporter, for the third year in a row. Fortune
Most oil CEO pay packages dropped in 2015
CEOs of Exxon Mobil, Chevron, and Royal Dutch Shell received less last year, but their combined pay packages have been worth an estimated $500 million over the past five years, while their companies’ stocks haven’t beaten the S&P 500. WSJ
Investment group calls for Chipotle to shake up its board
CtW Investment Group has sent a letter to Chipotle shareholders calling the board “one of the least diverse, least independent boards among the S&P 500.” It criticized the long median tenure of directors, 17 years, and the lack of racial and gender diversity on the board. Co-CEO and Chairman Steve Ells hasn’t responded. CtW successfully pushed for compensation changes at Chipotle in 2014. Fortune
Trump tries to refresh his campaign
As Ted Cruz‘s efforts to slow Donald Trump‘s momentum appear to be working, Trump is taking steps to reignite his run. He hired long-time Republican strategist Rick Wiley as national political director and scheduled a meeting for this morning between a campaign adviser and a dozen U.S. legislators. He also met privately with Megyn Kelly, the Fox News broadcaster with whom he has skirmished throughout the campaign. Reuters
U.S. says it’s conducting joint patrols in the South China Sea
Defence Secretary Ash Carter said the U.S. Navy has conducted joint patrols alongside Philippine forces, an unusual move in the region. Tensions with China have intensified in recent months as President Xi Jinping increases the country’s military presence in the disputed waters. BBC
Up or Out
Facebook hired former Google leader Regina Dugan to lead its “Building 8” unit. Fortune
Fred Mossler, longtime confidant to Zappos CEO Tony Hsieh, will leave the company on June 3. Fortune
Fortune Reads and Videos
Adidas cut paper usage 38% over 7 years…
…at the corporate office by adding the line “Please don’t print out this e-mail” to virtual correspondence. Fortune
McDonald’s will phase out McWraps
The “Subway buster” took too long to make and never caught on with millennials. Fortune
Starbucks pulls back on plan to sell beer and wine…
…in some San Francisco locations. Some San Francisco regulatory agencies opposed the plan. Fortune
China’s crackdown on golf has weakened
The three-year campaign to label the sport a tool of corruption appears to be over. Fortune
Quote of the Day
“To be drafted and then traded to this organization and then to spend 20 years here, you can’t write something better than this…All I can do here is thank you guys. This has been absolutely beautiful. I can’t believe this comes to an end.” — Basketball great Kobe Bryant, speaking to fans after his final game. ESPN
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