Fuelled by financial crises, shareholder disputes, geopolitical and social upheavals, the guidelines governing business models, practices, and behaviours have and will continue to evolve.
Our contemporary model, Environmental Social Governance (ESG), is the product of lobbying and legislating by a powerful and unlikely assortment of stakeholders: governments, multinational entities, investors, boards, media and the public. They demanded a remedy for the impact of “short-termism” corporate practices (making profit at the expense of all else) on our natural, social and economic environments. As a result, good governance principles have been redesigned, and so too have the way these are measured and monitored.
To earn the trust of the public, business partners, regulators, shareholders, customers and employees, corporations must demonstrate transparent and sustainable business conduct. Non-compliance or “bad” governance attracts extremely harsh penalties – fines, jail, loss of business and damaged reputations to name a few.
The most recent and high-profile compliance target for Australian regulators has been the financial industry, thanks to the banking royal commission, and Treasury’s hard line mission to curb the black economy. But no industry can boast a clean slate, with almost daily reports of alleged felonies occurring in the entertainment, media, sporting, political, and resources sectors.
The good, the bad and the taxing
Tax is one of many components in the governance picture, but it is an important one. Because of the “back office” nature of the business function, tax has traditionally flown under the regulatory radar. For a long time, tax has lent an effective camouflage to illegal and ethically questionable practices, such as money-laundering and obscuring income through profit-shifting. But the lack of robust tax governance also meant that many unintentional misdemeanors went undetected, often costing companies substantial sums due to incorrect rate calculations.
As tax features in almost every part of an organisation’s activities, the international community has recognised its role as key in establishing overall good corporate governance. At the recent G20 summit in Argentina, Laura Alonso, head of the Argentine Anti-Corruption Office, highlighted the vital role that tax, accounting and auditing plays in fighting financial crime. This sentiment was shared by the International Federation of Accountants and the International Bar Association as they called for global collaboration in the fight against corruption.
In the investment world, global groups are also increasingly interested in tax transparency as part of a responsible investment strategy. And through the exposure of tax-cheating of epic proportions in the Panama and Paradise papers, ordinary people have no tolerance for what they perceive as being a huge disparity in the equality base of the tax system.
The power of consumer sentiment is not to be underestimated. Brand damage is a huge risk for multinationals who continue to employ sophisticated tax-minimisation strategies, even if these activities are legal. Consumers see the paltry amount of tax paid by these companies as a deliberate snub to the communities in which they operate, much like the robber barons of old.
However, Corporate Australia is embracing the “social licence to operate” ethos. From a tax perspective, under our “Justified Trust” initiative, the take-up of transparent reporting is growing. The board of Taxation reported that as at 20 August 2018, there were 142 signatories to the Voluntary Tax Transparency Code (the code), 120 of which have published at least one tax transparency report. But there is unprecedented pressure on corporations to do more.
Compliance and a cultural-revolution
It is convenient to see a corporation as a machine, where all parts perform to design, in synchronicity with each other. In reality, it is a much more complex, and messy organism.
One of the most challenging aspects in championing best practice in corporate governance is not about people resisting change, but the corporate culture created and perpetually reinforced by a combination of conflicting systems, organisational goals, and business performance KPIs.
So, what is the best way to address this? With tenacity and creativity. Strategies for a wholesale corporate governance reboot will have to involve many elements. Companies spend a lot of resources on researching the behaviour of their customers, but what if this approach was inverted to look within, at the routines and habits of its workforce at a macro and individual level?
Perhaps one of the most significant aspects of good corporate governance is the organisational mindset, where best practice is the alignment between “stated” and “lived” values, or “walking the talk”.
From a tax perspective, there is no doubt that having processes in place for maintaining accurate records and reports, questioning and calling out anomalies through the audits is essential. And so is ensuring that these processes are facilitated by the right technological solution – one that accelerates the compliance process and allows employees to focus on the business’ strategic needs.
Without the right cultural attitude being adopted by the whole organisation from the board and senior leadership team across all business units, the getting of good governance will be hard. But by embracing tax as a vital part of governance strategies, this transition will be much easier to navigate.
Tony Kinnear, MD of Thomson Reuters for Asia and Emerging Markets