The Guardian (UK): Revelation, chapter one: “In an environment of voluntarism, many companies will continue to produce statements, proclaiming "core values of honesty, integrity and respect for people". Yet that may not be the whole story. Christian Aid has drawn attention to the anti-social activities of Shell in Nigeria. The company's annual corporate social responsibility reports stayed silent.” (ShellNews.net) 8 Nov 04
Prem Sikka (Prem Sikka is professor of accountancy at Essex University.)
Monday November 8, 2004
Corporations shape our lives from cradle to grave by providing goods, services, jobs and ideologies. They control our savings, pensions and investments. They can boost or destroy whole communities by closing mines, offices and factories, opening call centres, superstores and fast food outlets of the low-wage, shelf-stacking economy, or transferring whatever is movable to shed labour and increase profits.
Millions of people have directly experienced the cold-hand of corporate power through pension misselling and endowment mortgage scandals. Credit card companies, banks, phone companies and utilities have established new ways of making a quick buck. Corporate boardrooms, rather than Mother Nature, are producing new diseases, such as smoking related cancers, thalidomide, BSE and variant Creutzfeldt-Jakob disease.
Companies finance political parties, presidential campaigns and think-tanks to shape the domestic and foreign policies of governments. Yet people have little say in their affairs. There is an urgent need to bring corporations under public control, enhance stakeholder rights and change the way they are governed. But that is not on the government's agenda. Instead of deep reforms, the government is asking companies to publish some soft information in the shape of an operating and financial review - OFR - not too dissimilar to the US requirement for a management's discussion and analysis of financial condition and results of operations.
The OFR would require quoted companies to publish forward looking non-financial information about their strategy, prospects and opportunities to enable shareholders to make assessments of risks, earnings, dividends and performance. The OFR assumes that the primary goal of companies is to maximise profits rather than engaging in activities which are beneficial to all stakeholders.
The advent of OFR may be welcomed by supporters of corporate social responsibility, but there are a number of problems. The focus on quoted companies means that many large businesses exercising social power would be exempt. Examples include companies such as Northern & Shell, Portland Investment, Portland Enterprises and RHF Productions, which through control of national newspapers shape public choices and even elections of governments; privately owned utilities, which can charge excessive prices and cut off supplies to the vulnerable sections of our communities. Airlines, such as Virgin Atlantic, are major polluters but would be exempt from the OFR requirements.
Audit failures at Enron, WorldCom, Barings, Transtec, Maxwell and Parmalat have resulted in real losses to many stakeholders, but major auditing firms are exempt from the OFR. Britain is estimated to be losing up to £111bn each year in tax avoidance schemes, many designed and implemented by major accounting firms, but they would be exempt from OFR. Just to put this in perspective, the global income of PricewaterhouseCoopers, Ernst & Young, Deloitte, and KPMG is $55bn, which is greater than the gross domestic product of oil-rich Nigeria, or Kuwait. Yet they would not be required to explain their activities.
The OFR assumes that what is good for shareholders is also good for other stakeholders and society at large. This is highly problematical. Shareholders in tobacco companies benefit from the sale of cigarettes, but many smokers pick up lung diseases and society picks up the health and social costs. Many companies achieved record sales of animal feedstuff and paid record dividends, but consumers collected the mad cow disease. The same story can be told about pensions, endowment mortgage and other failures. Of course, directors could be forced to consider the interests of other stakeholders and wider society, but the OFR proposals are not accompanied by any enforceable director obligations to stakeholders. To publish any information, companies need to focus upon key performance indicators. However, the Companies Acts will not specify the indicators. Instead, the government expects the Accounting Standards Board (ASB), in collaboration with business and other parties, to develop the appropriate indicators and methodologies for reporting key information. The business-funded ASB has involved the TUC and some NGOs in the identification of these. Such processes may create impressions of pluralism but they cannot develop hard-edged policies, as they do not give stakeholders any enforceable rights. The key performance indicators will effectively be the residue of negotiations and bargaining amongst unrepresentative elites, with governments rubber-stamping or legitimising their lawmaking powers.
UK history shows that change often had to be imposed in the teeth of opposition from the entrenched business elite. Think of the minimum wage, health and safety and sex discrimination laws, even the need for the companies to publish the profit and loss account, balance sheet, audit report, turnover figure and fees paid to auditors for non-audit work. Yet, in the case of the OFR, the teeth of parliament are being drawn. Regulatory control is slipping away from parliament and any notion of representative government to a network of elite, unrepresentative and unaccountable private actors. Parliament will not have any real opportunity for vetoing the standards developed by the ASB. What is parliament for?
In an environment of voluntarism, many companies will continue to produce statements, proclaiming "core values of honesty, integrity and respect for people". Yet that may not be the whole story. Christian Aid has drawn attention to the anti-social activities of Shell in Nigeria. The company's annual corporate social responsibility reports stayed silent. Recent media attention has focused upon bribery and clandestine operations of BAE to secure defence contracts, while its annual reports are silent on such matters. The financial reports of NewsCorp and Virgin Atlantic are silent on the tax avoidance schemes operated by the companies.
Many UK companies massage their financial reports by using tax havens and concocting transactions which have no commercial substance and whose sole purpose is to avoid taxes. These practices have created new political risks for the companies and their shareholders, as evidenced by the Russian government's lawsuits against Yukos to recover past taxes, and the US government lawsuits against Enron and WorldCom and their advisers for devising questionable tax avoidance schemes. Yet no company provides the required information to enable anyone to assess these risks.
No major company publishes details of its "transfer pricing" policies. These are the policies which enable multinationals to price and transfer goods and services throughout their global operations; a crucial device for tax avoidance, flight of capital and worldwide laundering of profits. Through such techniques, WorldCom managed to avoid taxes on $20bn of its income. More recently, fingers have been pointed at major multinational drug and car companies.
The corporate mammoths are unlikely to volunteer any meaningful information about tax dodges, transfer pricing, use of tax havens, deaths and diseases caused by their products unless parliament lays down firm enforceable requirements for the OFR. The possibilities of that are slim. In such a climate, companies are more likely to publish self-congratulatory statements rather than hard data which would enable stakeholders to question corporate power and operations. Overall, the sentiments behind the OFR are probably right, but it is unlikely to deliver the promised accountability and responsible capitalism.