Investors are uniquely placed to engage with government to push for more responsible fiscal policy for the good of the savers they represent. After all, capital cannot sustainably grow without a functioning society. Corporates need to share the burden of funding that society.
Matthew Parris raises some very compelling arguments in his piece in last Saturday’s Times The squeezed middle must pay more tax. He is right that a civilised society makes sure its seniors are at least comfortable and pensions need to be a key focus for government. However, I’m struggling to agree with the headline.
More income tax is not the solution to creating a stable, fair society in which businesses and wealth can flourish to the benefit of all. The suggestion that individuals should carry this burden is frankly bewildering given income tax already represents 60% of government revenue in the UK. Workers are increasingly self-reliant for securing their financial futures while the protections they enjoy as employees are going backwards. This breeds discontent towards companies and politicians, neither of which is good for society as a whole.
Corporates, meanwhile, are reaping the profits resulting from the nation’s productivity and sharing that gain with an increasingly small section of society. We have reached an age where company executives are paid a far greater share of profits than their achievements would justify while their employees working conditions, particularly among low and middle income earners, are deteriorating rapidly. (I’d love to see a FTSE 100 CEO sign the kind of zero-hours contract that are frequently thrust upon their low-income employees, or measure up to the kind of performance targets companies like Amazon expect their pickers to meet.)
Targeting the workers to solve the ills in society will bring about discontent on a scale we’ve not seen before and financial markets – and therefore investment returns – will seriously suffer as a result.
The government needs to do more to protect those employees and work harder at making companies pay their fair share of the total tax burden. It needs to do whatever it can to create more secure employment and increase job satisfaction among the masses. Doing so would create a more equal and sustainable society and economy, which is the entire mandate of any government. Yet, since the 1970s, those governments have failed time after time to live up to this mandate as inequality has increasingly moved in the wrong direction.
It seems to me the most effective way for the government to fulfil its mandate is to reform the corporate tax structure to reward companies that contribute positively to society and punish those that don’t.
Using corporate tax as a way to ‘win’ companies to locate in a country is a good idea, but the details are all important. Just lowering the headline rate doesn’t necessarily help those the government serves. If that encourages employers with poor human capital management practises and overly aggressive tax policies to locate in a jurisdiction, the long-term impacts their example could have on the nation’s economic and societal wellbeing could be devastating. And the government will find its days are severely numbered.
Governments have to change their attitude to the corporate sector. Companies have been treated like gods for decades, but, with inequality and populism on the rise, the time has come for a fundamental rethink on the role those companies must play in the long-term sustainability of the societies in which they function.
The role of investors
We in the private sector, and big, institutional investors in particular, have a vital role to play in solving the corporate tax problem. Capital cannot grow over the long-term in a society that doesn’t function well.
A lot of very positive work is already being done to engage with companies and encourage them to take a more responsible approach to tax. The PRI, for example, has formed a group of 11 global investors to come up with a guide to engaging companies on their tax policies. This work, and that of many others, should be applauded.
But we need more from our institutional investors. Engaging with companies is treating the symptoms, not the wound. We need big, influential investors to engage with government as well.
Investors are the middle man between the workers, whose savings they are allocating, and the companies (and governments) that capital is allocated to. That puts them in a unique and powerful position that gives them total discretion on the corporate sector in a way the government can’t hope to have.
Those investors have to engage in a serious debate between themselves, the corporate sector and with government about what future corporate tax systems could look like. They have to do this for the good of the savers whose money they invest (and whose money pays their bills and salaries).
The investment industry also employs some of the most remarkable brains across the world. That collective might needs to be used to help push fiscal policy down a more sustainable path.
This is a call to action for all those institutional investors to do just that – get together, talk, discuss, debate and argue about more progressive corporate tax structures.
There are plenty of visionary investors and service providers whose responsible approach to capitalism could be harnessed to find new corporate tax solutions – Hermes Investment Management, BMO Global Asset Management, MSCI, Royal London Asset Management, Lombard Odier Investment Managers, Tomorrow’s Company, PIRC, the PRI. These are just a few I’ve been fortunate enough to come across. There will be many, many more I haven’t.
The best ideas are borne of collaboration and discussion. I’m still at the beginning of this journey so if you know of some work underway in this space, if you agree or disagree with any of these arguments, or can add to this debate in any way, please comment below or email me. The media also have a vital role to play and the more views we can represent, the better the solution might be.
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A quick cuppa with Faith Ward, Chief Responsible Investment and Risk Officer, Environment Agency Pension Fund