Tag: #transparency

Moving towards mandatory CSR – EU’s mandatory Human Rights Due Diligence proposal

By Johanna Jarvela

◦ 2 min read ◦

Last March European parliament gave a proposal to create mandatory Human Rights Due Diligence directive. The aim is to prevent human rights and environmental harm in a more efficient way, through regulation. The commission proposal is based on the UN Guiding Principles on Business and Human Rights and has three core elements: firstly, companies should themselves assess the risks of human rights violations in their supply chains, secondly, take action together with the stakeholders to address identified threats, and lastly – and most importantly – offer a system for access to remedy for those whose rights have been violated.  The commission is expected to give their resolution on the matter before Christmas, though the decision has been delayed already few times.

The EU proposal can be seen as a part of a continuum towards more mandated forms of corporate social responsibility (CSR). Traditionally CSR has been defined as something voluntary that companies do in addition to the letter of law in response to stakeholder pressures and societal expectations. At the level of individual organisations this has meant providing societal good through philanthropy and partnerships with NGOs or avoiding harm by improving the sustainability of business operations. Also, a great number industry level voluntary standards have been invented to solve the environmental and labour issues in transnational supply chains (Fair trade and Forest Stewardship Council being good examples). 

However, the past 20 years of voluntary measures have not been able to eliminate human rights violations in business operations. Indeed, it seems that voluntariness works for inspiring collaboration and innovating for better world.

In situations of wrongdoing, exploitation, and harm, stronger frameworks are needed to hold organizations accountable and offer remedy to victims. 

The recent development towards more mandated forms of corporate responsibility, like the French Due Diligence reporting Act or the UK Modern Slavery act, can be seen as efforts to respond to the accountability deficit. In June this year Germany passed a HRDD law stipulating that companies must identify risks of human rights violations in their supply chains and also take countermeasures. Also, Norway passed a similar law that requires companies to conduct human rights and decent work due diligence. Similar issues have been discussed in most of European governments.

There are caveats in creating this type of regulation. It might lead to tick-the-box type of exercises without true consideration for the human rights risk, burden companies if not given enough time and guidance to adjust, and transparency reporting does not seem to be enough to change business behaviour. One of the most difficult, yet most important, area in developing the new binding standards is the pillar three of UNGP: Access to Remedy. This pillar tries to ensure that in cases of violations, the victims will have a channel to make claims and receive remedy. Whether it should be civil or administrative liability or whether there should be an ombudsman in each country receiving complaints or via whistleblowing is all still in the air. What is clear is that whatever the final design of well-functioning HRDD system requires inputs and cooperation from businesses, civil society, and governments alike. Companies know best their supply chains, but sometimes NGOs may be a useful counterpart for identifying the risks and setting up stakeholder consultations. Finally, governments should be final proofers of the system ensuring accountability and enforcement. 

While some industry associations have raised concerns about the new regulations and the ability of European companies to oversee operations elsewhere, companies also evaluate that the new EU directive might level the playing field and give them a new tool in managing supply chains. Indeed, it seems that we are moving towards regulated CSR not only within EU but globally. UN has launched an intergovernmental working group to prepare a binding treaty on Business and Human Rights, there is an initiative for  minimum global corporate tax and efforts to close tax havens. More and more reporting is expected by companies, not only as increasing ESG reports to shareholders but more and more also as part of the mandatory legal requirements. 

Societal expectations are one of the key drivers for CSR. According to the latest polls it seems that European citizens and consumers expect the companies to upkeep good human rights and environmental standards within their global supply chains. 

About the Author

Johanna Järvelä,  is a postdoc researcher at Copenhagen Business School and member of the advisory committee for Human Rights Due Diligence Law in Finland. Her research focuses on the interplay of public and private governance in natural resource extraction and she’s especially interested in exploring how steer private sector towards providing societal good. 

Photo by Lan Nguyen on Unsplash

Why transparency may not lead straight to CSR paradise

By Dennis Schoeneborn

◦ 2 min read ◦

Business firms worldwide are increasingly engaging in practices of corporate social responsibility (CSR), a trend strongly driven also by the agenda of the UN Sustainable Development Goals. However, when doing CSR, firms tend to face recurrent suspicions by the media, NGOs, and other civil society actors that they would not put the money where their mouth is; in other words, that they would adopt CSR practices only ceremonially rather than substantially (a.k.a. “greenwashing”).

High transparency demands are commonly seen as the main ‘remedy’ that would ‘cure’ firms from mere ceremonial adoption and would drive them towards substantive adoption of CSR practices. However, in recent years we can find increasing evidence that high transparency demands do not always lead straight to CSR paradise. In a Financial Times article from 2020, Jason Mitchell raised the provocative question: Is greenwashing a necessary evil? The author argues that firms often require some leeway to experiment with CSR and sustainability practices to begin with, and without such leeway CSR efforts tend to get cut off too early by too high transparency demands and greenwashing accusations. After all, some decoupling between talk and action can also be due to a time lag between aspirations and the actual implementation of CSR practices within a firm (see here).

In the same context, Patrick Haack (HEC Lausanne), Dirk Martignoni (University of Lugano), and Dennis Schoeneborn (Copenhagen Business School) have recently published an article in the Academy of Management Review that draws on a computer-based simulation to study the dynamic interplay between transparency demands and CSR practice adoptions in a field or industry. By drawing on a probabilistic Markov chain model, the authors demonstrate that under certain conditions a regime of opacity followed by transparency (i.e. intially low and later high transparency demands) “outperforms” a regime of enduring transparency (i.e. high transparency demands right from the start) with regards to maximizing the share of firms in an industry that would adopt CSR practices in a substantive way. But what are such boundary conditions?

In the article, the authors explain that the optimality of the “opacity followed by transparency” regime tends to apply only for practices that are characterized by low adoption rates (i.e. those costly to implement) as well as by low abandonment rates (i.e. once adopted firms tend to stick with the practice, also since they may face public backlash if they abandon a practice after adoption). Interestingly, these are exactly the kinds of conditions that characterize CSR as a practice area.

What to learn from all this? NGOs and other civil society actors can benefit, in the long run, from cutting business firms some slack (i.e. putting rather low transparency demands onto firms), at least in the initial stages of CSR adoption processes. Instead, societal actors should then try to increase transparency demands at later stages in the adoption process to push firms further towards substantive adoption.

Haack et al. (2021) explain this process to work due to what they call a “bait-and-switch” mechanism of CSR practice adoption. Initially lower transparency demands allow for larger numbers of firms to adopt practices, even if they do so for ceremonial reasons to begin with. Importantly, when transparency demands are then increased over time, a number of firms tend to switch from ceremonial towards substantial adoption, thus leading eventually to the desirable outcome (from a societal viewpoint) of rather high rates of substantive CSR adopters in an industry. 

Further reading

Haack, P., Martignoni, D., & Schoeneborn, D. (2021). A bait-and-switch model of corporate social responsibility. Academy of Management Review, 46(3), 440-464. 

You can also access a (non-layouted) version of the same article at ResearchGate. The article has been picked up in a recent story by Forbes magazine. And if you want to learn more about the ‘backstory’ behind the AMR article, you can watch a video interview with two of the authors, Patrick Haack and Dennis Schoeneborn, on YouTube. 

About the author

Dennis Schoeneborn is a Professor of Communication, Organization and CSR at Copenhagen Business School and a Visiting Professor of Organization Studies at Leuphana University of Lüneburg. In his research, he focuses on organization theory, organizational communication, digital media and communication, corporate social responsibility and sustainability, as well as new forms of organizing.

Photo by Joel Filipe on Unsplash

Is Seeing Knowing? When Visibility Reduce Transparency

By Lars Thøger Christensen

◦ 3 min read ◦

We are arguably living in an era of visibility in which our communicative interactions with others are accessible to the gaze of third parties. Does this mean we understand our fellow beings, our organizations and our governments better? Well, not quite and maybe not as expected.

We tend to assume that we understand what we see. Yet, we see a lot that we do not grasp.

Increased visibility is often taken to represent an increase in transparency. Thus, for example, it is commonplace to associate organizational transparency with visibility management. Many writers use the notions interchangeably as if we automatically comprehend what we see. Such assumption is misguided. Although transparency has come to refer to a host of different qualities and activities, its original and fundamental promise is to increase knowledge and insight and, this way, reduce manipulation, ensure fairness and avoid power abuse (see previous blog). Visibility on its part merely signifies the ability to identify by the eye.

Although it intuitively makes sense to treat these terms as related, especially because they both invoke an ocular metaphor, they differ significantly in terms of the depth of the involved perception. Transparency, in spite of its complexities, absurdities and unexpected consequences when implemented in practice, continues to invoke the ideal of some deeper understanding. What is visible, by contrast, may arouse our attention only in passing without producing any further insight. The conflation of the two therefore weakens our approach to transparency and reduce society’s ability to develop more sophisticated transparency practices.

Visibility is not the same as transparency and may not enhance understanding and insight. 

‘Visibility’ has several related meanings, including the state of being visible, the ability to see or be seen under certain conditions, and the distance at which a given object can be identified with the unaided eye, also known as visual range. In all these senses, visibility is related to observation and suggests that the object in question is accessible to the eye and can be distinguished more or less clearly from its surroundings. While technological developments have turned visibility into a mediated quality freed from the temporal and spatial constraints of the here and now, the visible still refers to “that which is perceptible by the sense of sight”, perhaps augmented by other senses. 

What is perceptible to the eye is heavily shaped by contexts, such as norms, cultures and social structures.

In everyday usage, the notion of visibility is frequently invoked in a more abstract sense that combines sight with understanding. Notions such as discover, observe, notice, recognize, monitor, viewpoint, or perspective, for example, all invoke both dimensions and contribute to the impression that what we see is what we comprehend. As Brighenti (2007) puts it “vision is alias for intellectual apprehension” (p. 327). This belief may explain ambitions to uncoverand expose reality to the naked eye. Although such ambition is often driven by social indignation and a desire for fairness and change, major data leakages such as WikiLeaks illustrate that visibility may confuse, frustrate or pacify rather than inform.

The eye and what it allows us to see is a frequent source of illusion.

Leaving aside the possibility of optical illusions, although this is a quite realistic prospect in a world saturated with images, the gaze is a frequent source of blindness. While the promise of transparency is to help the spectator see into something, there is always the risk that the gaze is blunted or bored by impressions to the effect that objects accessible to the eye are seen through and ignored. Even when this is not the case, the lack of an Archimedean point of observation from which an observer can perceive the object of inquiry in its totality seriously challenges the notion of a single perspective on reality and thereby conventional conception of transparency as visibility. 

Without knowing in advance what to look for, visibility is likely to confuse more than inform.

While the gaze is obviously never “naked” or innocent, it takes a trained gaze as well as understanding of local norms, mores and myths, as anthropologists are aware of, to look systematically and to know what to look for. This problem is evident when we are invited to “see for ourselves”, but lack professional experience to differentiate between relevant and irrelevant material and events. When organizations of various sorts, for example, host “open house” days – a practice that is quite common in in all kinds of organizations from organic farming to higher education – visitors may be able to see a lot without necessarily knowing what to make of it. Here, visibility only makes sense because it is placed in a context of a well-known social ritual.

What happens to insight if visibility affects the objects we intend to understand?

In addition to the limitations of the gaze itself, it is well-known that objects of attention are significantly affected by processes of observation. While system theorists have argued that the properties of an object are relative to the observer, breakthroughs in quantum physics have demonstrated that even small particles behave quite differently when observed. The behavioural effects of visibility are likely to be even more dramatic when the objects of attention are human beings. In such cases, whatever is visible is likely to be shaped by power plays and image management. 

Visibility is a trap.

(Foucault, 1977, p. 200).

The very possibility of being observed affects the behavior of those within visual range. While Foucault described this tendency in the context of prisons, Bernstein has demonstrated how it affects work practices. However, whereas Foucault emphasized that visibility enforce self-discipline, Bernstein illustrates that visibility may reduce productivity because it removes attention from working effectively to practices of signaling that the correct procedures are followed. 

When impression management is prevailing, what we see are ideals rather than actual practices.

When scholars and social critics take visibility to mean transparency, they reproduce a deep-seated conviction that the gaze is a primary source of insight. By maintaining a close link between visibility and transparency, transparency is reduced to a surface phenomenon that only requires accessibly to the eye. Hereby, what visibility does or conceals is ignored. Increasing visibility may hide an object in plain sight. It may also dazzle the observer in ways that reduce the ability to understand what goes on.

The fascination with visibility needs to be tempered by a persistent aspiration for knowledge and real insight.

Further readings

Bernstein, E.S. (2012). The transparency paradox: A role for privacy in organizational learning and operational control. Administrative Science Quarterly, 57(2), 181-216. 

Brighenti, A. (2007). Visibility. A category for the social sciences. Current Sociology, 55(3), 323-342.

Foucault, M. (1977). Discipline and punish. The birth of the prison. London: The Penguin Group.

Neyland, D. (2007). Achieving transparency : The visible, invisible and divisible in academic accountability networks. Organization, 14(4). 499-516.

Roberts, A. (2012). WikiLeaks: The illusion of transparency. International Review of Administrative Sciences, 78(1): 116-133.

Stohl, C., Stohl, M., & Leonardi, P. M. (2016). Digital age—Managing opacity: Information visibility and the paradox of transparency in the digital age. International Journal of Communication, 10, 123-137.

About the Author

Lars Thøger Christensen is Professor of Communication and Organization at the Copenhagen Business School, Denmark.

Source: Photo by Jonathan Borba on Unsplash

SFDR, NFRD and the EU Taxonomy – What is their relationship?

By Andreas Rasche

◦ 5 min read ◦

The new Sustainable Finance Disclosure Regulation (SFDR) is on the minds of many investors these days. While a lot has been written on SFDR itself, I discuss how it relates to the Non-Financial Reporting Directive (NFRD) and the EU Taxonomy on sustainable economic activities. Taken together, these regulations can be overwhelming and maybe even confusing. While this is not the right place to comprehensively discuss all three regulations, I make some clarifications on their interlinked nature. 

SFDR, NFRD, and the EU Taxonomy – What are we Talking About? 

To start with, let us briefly review the three legal instruments, all of which belong to a series of EU regulations under the EU Action Plan on Sustainable Finance.

  • NFRD is the EU legal framework for regulating the disclosure of non-financial information by corporations. It was adopted in 2014 and states that corporations have to report on ESG information from 2018 onwards (for the 2017 financial year). NFRD is rather flexible – it applies only to so-called “public interest entities” (basically rather big corporations) and it contains so-called comply-or-explain clauses (allowing for non-disclosure of information if this is made transparent and reasons are given). 
  • SFDR is the new EU regulation that introduces rules for financial market participants (FMPs) and financial advisers (FAs) to report on how they account for sustainability risks. SFDR applies at the “entity level” (i.e. requiring financial firms to report on how the whole organization deals with such risks) and also on the “product level” (i.e. requiring firms to report on how their financial products are affected by such risks). SFDR contains few comply-or-explain clauses (e.g., smaller firms, with less than 500 employees, can opt out of reporting on due diligence processes). The regulation asks all FMPs and FAs to report on sustainability risks even if they do not offer ESG-related products. If an entity offers ESG-related products, SFDR requires additional disclosures depending on how “green” the product is considered to be. SFDR came into force on 10 March 2021. 
  • The EU Taxonomy regulation (hereafter: the Taxonomy), which entered into force 12 July 2020, reflects a common European classification system for environmentally sustainable activities. Basically, the Taxonomy tried to answer the question: What can be considered an environmentally sustainable activity? Answering this question is essential for investors to prevent “greenwashing” – i.e. a situation in which financial products are marketed as being sustainable without meeting sustainability criteria. The taxonomy defines six environmental objectives, and it defines an economic activity as sustainable if this activity contributes at least two one of these objectives without, at the same time, doing significant harm to any of the other objectives. 
Differences and Commonalities 

To start with, it is important to note the different legal status of SFDR/the Taxonomy as well as NFRD. NFRD is based on an older EU Directive (2014/95/EU). Directives imply that EU member states have to translate the broad requirements into national regulation. By contrast, SFDR (2019/2088) and the Taxonomy (2020/852) are both based on European regulation, which is immediately enforceable and does not require transposition into national law. 

To understand how the three legal frameworks relate to each other, look at the Figure below. NFRD applies to corporations of all kinds. Hence, for investors NFRD is mostly relevant because it stipulates how investee companies report ESG data. SFDR, by contrast, most concerns financial market actors and ensures transparency about how these report on sustainability risks to their audiences (e.g., retail investors). The Taxonomy was introduced to have a common reference point when trying to figure out whether an economic activity really is sustainable. The Taxonomy therefore has the power to further specify the regulations set out in SFDR and NFRD. 

source: Andreas Rasche
Emerging Relationships  

The linkages between the three frameworks will be further specified throughout the coming years. While SFDR has been in force since 10 March 2021, it is only in the so-called “level 1 stage of development”. As with many EU regulations, level 1 development sets out the basic framework principles for a regulation, however without specifying technical details. SFDR level 2 will come into force once the regulation is complemented with Regulatory Technical Standards (RTS), which are developed right now. The RTS will also specify the linkages to the Taxonomy in more detail (e.g., related to the “do-no-significant-harm” concept inherent in SFDR). 

So, what can we say right now? The current versions of SFDR and NFRD do not yet link disclosures to the Taxonomy. This is likely to change, especially with the SFDR RTS being further specified and rolled out (in early February the European Supervisory Authorities released their final draft of the SFDR RTS). Moreover, the NFRD regulation is currently under consultation and will be revised in the near future. However, two important linkages are important to consider right now.  

  • First, the scope of the Taxonomy is defined through NFRD and SFDR. In other words, if an organization is affected by NFRD and/or SFDR, the Taxonomy will also be relevant for its disclosure practices. It is important to note here that the EU Taxonomy defines further mandatory disclosures in addition to what is laid out by NFRD and SFDR. 
  • Second, the Taxonomy asks companies (incl. asset managers) to report the percentage of their turnover and capital as well as operational expenditures that are aligned with the Taxonomy. It also asks asset managers to report the percentage of their portfolio which is invested in economic activities that are aligned with the Taxonomy. 
The Future

We will witness a good deal of technical specifications of all three regulations throughout the next years. SFDR level 2 reporting will kick in once the RTS standards are part of the reporting (probably by mid-2023); also by 2024 year-on-year comparisons of data points under SFDR will be likely mandatory. The six environmental objectives of the Taxonomy will be specified through technical screening criteria, some of which will be released very soon. 

It is good to see non-financial reporting and sustainable finance being backed by strong European regulations. It allows for more comparison and benchmarking and hence transparency. But, of course, we should also be prepared for a good deal of clarifications that will be necessary until institutionalized reporting cycles can fully kick in and unfold their potential. 

About the Author

Andreas Rasche is Professor of Business in Society at the Copenhagen Business School (CBS) Centre for Sustainability. His latest book “Sustainable Investing: A Path to a New Horizon” (with Georg Kell and Herman Bril) was published recently. Email: ar.msc@cbs.dk Homepage: www.arasche.com

Top Leadership Compensation: From Hockey-Stick to Shared Pay-checks

“Sharing is Caring” is a way to manage post-COVID19 Economic Crises and Layoffs

By Anirudh Agrawal & Bharat Dhamani

10 of the 25 Linkedin review of best companies to work in India published in 2019 are firing their employees in 2020.  They paid huge performance based salary to top management, who drove performance by reducing pay of the lower rung employees [1].

There is a moral dilemma when we compare top management compensation with those employed at the lower levels or those employed on temporary contracts in India Inc. The median top management salary in India is as much as 243 times than those at the lowest strata of the organisation [2]. During the recent Covid-19 crises, this wage asymmetry between the lowest rung employees and top management the resulting crises of legitimacy were further highlighted. This opinion piece discusses three strategies to control hockey stick pay-outs to the corporate leadership. Contrary to current narrative on free market  and invisible hand, the corporate must self-reflect and implement policies for greater employee rights and dignity, collective bargaining and equality of pay to create  sustainable competitive advantage. 

India Inc. must learn from Scandinavian enterprises about their top leadership compensation model where the compensation is decided collectively ( along with the employee union), ensuring fairer pay and shared accountability towards organizational performance. Scandinavian strategy of collective bargaining has ensured multiple benefits [3].

  1. It has ensured that the rights of the lowest-ranked individual is protected.
  2. It has ensured that organizations follow sustainable policies both internally and externally, keep sharing the impact from shareholders to stakeholders, and
  3. The employees at each level and the communities work in sync towards ensuring organisational mission and competitiveness politics, cliques and influence of personal interest groups are limited.
  4. The collective agreements ensure that the employee flights to competitors are limited.

The effect of Scandinavian model has ensured an overall positive impact on organisational longevity, brand recall and competitiveness [4].

The India Inc should engage with their Indian public sector counterparts and learn their functioning and how they treat their employees through fairer pay and work conditions. India Inc should reflect and study the pay structure adopted by the Indian Public sector [5].

The public sector salaries have ensured respect for each, preservation of rights, longevity in the job and service to all irrespective of caste, colour or religion.

For example, the public sector banks like SBI ensure delivery of financial services to the poorest of the poor while ensuring that its banking officials are paid well. Our common sense would suggest that the Indian private sector to emulate some of the public sector compensation methodology, ensuring that the employee at the lowest strata get decent wages. The private sector can learn from the public sector on how to manage organisational compensation and increase organisational loyalty and in doing so, it must also increase benefits to the lowest ranking employee in the organisation. Similarly, the public sector should develop agility to reflect on market forces and learn to innovate to ensure that it is aligned and competitive as the competition demands. 

Narayan Murthy of Infosys rightly questioned his senior management about the lack of accountability despite hockey stick payouts. He pointed out that shareholders might approve the actions of the top management but the corporate leadership must be accountable to the stakeholders that includes the public and the employees [6]. 

Therefore, top management compensation should be duly decided by following a strong corporate governance principles, transparency and by installing elements of corporate ombudsman. 

Firms with strong accountability and stakeholder interests would perform better in the long run, than those firms which are driven by offering high incentives to top management for performance.

Some Indian private sector organisations belonging to distressed industries and markets had taken large public owned capital to run their businesses, paid hefty compensation to higher management but when things went wrong, both the promoters and top management had no public accountability. Besides, when the business failed to perform, the top management were just let go while the lower-ranked employees struggled to pay their bills. The audit reports were hardly made public and the accountability measures and corporate governance rules of such organisations were never questioned.  

The organisations while deciding top management compensation must also bring proportionality in accountability and stakeholder engagement.

Collective bargaining, equality in pay similar to public sector and corporate social and moral accountability are three strategies that the Indian corporations must reflect and incorporate in their managerial processes. Some of the NIFTY fifty Indian corporations like the Tata Group, Infosys, Mahindra and Mahindra, Hero Motors, ICICI Bank have implemented in their processes and one can see these effects on the employee satisfaction on Glassdoor employer ratings, brand recall by the consumers and overall stakeholder satisfaction is reflected positively.

Therefore, if the Indian private sector implements the policies that lead to greater accountability, equality in pay, collective decision making while ensuring its flexibility to market forces, we will see a disruptive and positive change in the image, governance mechanism, competitiveness and longevity of Indian corporations.

While the hockey stick model of compensation shifts the responsibility entirely on the top management, the collective bargaining and equitable compensation distributes the responsibility to each and every employee, bringing greater sense of employee engagement and employee accountability. Such a strategy has a potential to create long term competitiveness and shareholder value.

References

[1] https://www.businessinsider.in/here-are-the-25-most-popular-workplaces-in-india-according-to-linkedin/articleshow/68704338.cms
[2] https://economictimes.indiatimes.com/news/company/corporate-trends/india-incs-top-executives-earn-243-times-more-than-average-staff/articleshow/63359591.cms
[3] https://www.socialeurope.eu/why-trade-unions-at-work-do-work
[4] http://norden.diva-portal.org/smash/get/diva2:816030/FULLTEXT02.pdf
[5] https://www.spjimr.org/blog/learning-public-sector
[6] https://www.hindustantimes.com/india-news/narayan-murthy-recounts-his-spat-with-vishal-sikka-to-drive-home-point/story-YNG126VbaGMO5nDgFx0XCM.html

About the Authors

Anirudh Agrawal is Impact Investing and Social Entrepreneurship Fellow at Copenhagen Business School and Lecturer of Entrepreneurship and Strategy at Department of Entrepreneurship at FLAME University India. He is researching on the institutional theory framework to reflect on debates in social entrepreneurship and social innovation. 

Bharat Dhamani is a Lecturer of Entrepreneurship and Strategy at the Department of Entrepreneurship at FLAME University India. He practices engagement oriented learning through simulation and practical work. His subjects include financial management, business plan preparation, new venture business strategy and social entrepreneurship.

Photo by Sharon McCutcheon on Unsplash

Investigating Emerging Responsible Corporate Tax Practice

By Sara Jespersen.

  • In the absence of an over-arching world tax authority, much agency and power remains in the hands of the corporations operating the system.
  • Much of the discussion on responsible corporate tax practice is focused on those corporations that maximize the use of the rules to minimize their tax payments
  • But what about those corporations that do not participate in the race to the bottom on tax practices –  can we see emerging trends of responsible corporate tax practice and where?

Approximate reading time: 2-3 minutes.

The issue – corporate tax and globalization
Corporate tax planning is high on the political agenda in Denmark and, indeed, internationally since the revelations of how corporations minimize their tax bills through the use of tax havens have started rolling. Several corporations have been exposed for their aggressive practices by the European Commission, NGOs, journalists – to the great outrage of the public and politicians.

Valuable work is being undertaken to understand the depth of the crisis for society, the seriousness of the problem – its persistence and scale, and the dynamics of the politics of solving it. Much of which is focused on those corporations that maximize the use of the rules to minimize their tax payments.

But what about those corporations that already pay their so-called fair share and do not participate in the race to the bottom on tax practices? In particular, those who are not afraid to show it?

The governance challenge – tax competition among sovereign states and the offshore world
The challenge of all this arises because of the way in which the governance of the tax affairs of multinational enterprises (MNEs) is set up. MNEs that operate in several countries from the North to the South of the world operate in various judicial systems. Many of them also have mobile assets that can be moved from one jurisdiction to another through the click of a mouse and has little to do with the physical world. Some jurisdictions have set themselves up to attract the location of this type of intangible assets and will give favourable tax conditions in return. Judging where corporate assets should be taxed and what the market value is of intangible assets is no easy task for any one country in the world. With no over-arching world tax authority the outlook for permanent solutions to some of these fundamental challenges to the taxation of MNEs corporate profits is looking somewhat long-term.

What role for business and for responsible corporate tax practices?
So it looks that much agency and power remains in the hands of the corporations operating the system. In a society where the focus on corporate tax payments remains one of the hottest topics and trust in corporate tax affairs is dwindling for years on end conditions are perfect for encouraging greater responsibility in corporate tax matters. But what responses are we seeing from the business world of their own initiative if any? How are they responding to this mounting distrust in corporate taxation practices from “society”?

There are signals that somethings are brewing. The fair tax mark in the UK have taken off, CSR Europe have included the issue of corporate tax in their work, as has the network of responsible investors the Principles for Responsible Investment (PRI) and the European Commission is not shy to be clear about their vision of tax as a part of CSR (speech by Margrethe Vestager, EU trade commissioner.

My research going forward will focus on investigating this emerging trend of responsible corporate tax practice. It will investigate to what degree it is already taking place and what it might consists of, as well as its meaning and potential in an international political economy with a great focus on corporate tax payments and MNE’s role in supporting the achievement of the sustainable development goals around the world.

Sara is PhD Fellow at Copenhagen Business School and her research is focused on the emerging relationship between responsible business conduct and corporate tax planning of multinational enterprises. Building on several years of experience from working with international development NGOs, Sara is particularly interested in how this affects developing countries’ financing challenges and the focus on the role of the private sector in achieving the sustainable development goals (SDGs).  

You can contact Sara via email and follow her on Twitter.

Pic by Madison Kaminski (Unsplash), edited by BOS.

The Dark Side of Transparency

By Lars Thøger Christensen.

Transparency is essentially about creating insight into organizational and institutional practices in order to allow for critique, stimulate improvement and hold politicians and decision makers accountable. As such, transparency is an essential dimension of a rational, open and democratic society. Without transparency, there is great potential for manipulation, negligence and fraud. Yet, transparency may itself be manipulative. Even when the intention is to disclose and stimulate insight, the results may be less benign. Whenever something is illuminated and pulled out for further inspection, something else remains in the dark.

Any serious pursuit of transparency needs to consider what the pursuit itself is doing to public insight, what it “hides” so to speak and what remains out of view.

Part of this problem resides in the way we understand transparency. While openness and insight may be the ultimate goals, it is commonplace to define transparency in more prosaic terms, for example as information provision. With oceans of information available at our fingertips, the world certainly appears far more transparent than ever before. Yet, accurate information about complex issues, such as sustainability or social responsibility, is usually not easy to digest. Most information about such matters, thus, is often accessible only to experts. And whenever it is made accessible to lay people, it has been subjected to multiple processes of editing and simplification.

No information speaks for itself and attempts to make it “speak” hide as much as it disclose.

Another problem concerns the organizational behavior we hope to see and understand better through practices of transparency. If we think that organizations and decision makers continue to conduct business as usual when subjected to increased transparency, we are utterly wrong. Transparency is not a neutral tool that simply illuminates a preexisting world. When people in organizations know that their talk, decisions and actions are publicly accessible, they are less inclined to experiment, take chances, share ideas, or talk freely about their accomplishments, ideals, assessments and aspirations. This is the case in numerous organizational processes, including meetings, bargaining games, conflict resolutions, idea generation, etc. where the need to withhold some information and protect identities or strategic positions are often important concerns. In such cases, the willingness to share complete and accurate information may be limited and replaced by a desire to “send the right signals” or make the right impressions.

Transparency may cause organizational members to hold back or otherwise adjust behavior.

As a result, we may see less than we think. Even when transparency is enforced by rules and regulations, like for example social responsibility reporting in some countries, participants have a tendency to alter and edit their behaviours in ways that conform to social norms and expectations (i.e. by creating a “front”). Organizational behaviour is certainly not unaffected by increased transparency demands. Thus, we know that organisations carefully select, simplify, and summarize data before they are revealed, that they selectively disclose or leak information, for example through competitive signalling and they shrewdly manage the timing of disclosure, sometimes with the intention of deflecting critique or handling potential issues. Moreover, producers and custodians of data often shift the medium, the classification scheme, or the level of comparisons when forced to share information that used to be confidential.

Demands for more transparency are likely to be handled strategically by organizations.

None of this is to suggest that transparency should be avoided or reduced. Quite the contrary. But it is a reminder that transparency ideals and practices are shaping organizations in dramatic ways and that our desire for more transparency needs to include a desire to know its limitations.

Lars Thøger Christensen is Professor of Communication and Organization at the Department of Intercultural Communication and Management at Copenhagen Business School.

Pics by Roland Molnár and I Want a Poster, Flickr