Corporate Social Welfare

EXTRACT

This paper examines the relationship between a company's approach to its tax liabilities and its attitude to corporate social responsibility.

CSR is defined for this purpose as a manner of doing business that takes into account the economic, social and environmental impact of the company's actions (the so-called 'triple bottom line').

A company's approach to this issue will reflect its chosen ethical stance; ie, the set of values or rules of conduct that govern its interactions with other parties. CSR is distinguished from corporate philanthropy (which relates to the distribution of profits rather than to the manner in which they are earn

Objections to CSR
The fundamental objection against CSR is that to apply the shareholders' funds in any way other than for the advancement of the company's business is contrary to the fiduciary duty of a company's directors and thus diminishes rather than enhances any claim they may have to be acting in an ethical manner.

Milton Friedman argues that 'there is one and only one social responsibility of business "" to use [its] resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.'

He suggests that where directors, whose responsibility is to manage the business for the benefit of the shareholders, spend money for a 'general social interest' they are usurping the functions of government in taxing and spending, but without any democratic mandate and without any particular expertise in the areas concerned.

He does, however, make the point that if there is a genuine business case for CSR expenditure it is legitimate for the directors to incur it, in the same way as any other business expenditure.

In practice, despite the conceptual differences, it seems that such an approach may not always produce significant variation in behaviour between its advocates and those who see directors as having a wider responsibility to a variety of stakeholders.

Other commentators object to the CSR concept on the economic ground that it interferes with efficient resource allocation, and that it is precisely by its profitable commercial activity that a company contributes to the welfare of society.12 This in turn may reflect a particular stance on the respective roles of the state and of private enterprise, and lead on to a debate on taxation. Once companies take on 'state' responsibilities such as education and vocational training they may see this as being to some extent in tension with the continued obligation to contribute to the state through taxation.

'Enlightened shareholder value'
A contrasting view is put forward in the paper Developing the Concept of Tax Governance, issued by KPMG's Tax Business School in February 2007.13 In broad terms, section 4 of that paper, 'To whom do the directors have a duty?' adopts, by reference to s172 of the UK's Companies Act 2006, the concept of 'enlightened shareholder value'.

This recognises that in order to promote the success of the company for the benefit of its members as a whole the directors must also have regard to: the interests of employees; the need to foster business relationships with suppliers, customers and others; the impact of the company's operations on the community and the environment; and the desirability of the company's maintaining a reputation for high standards of business conduct. That view is also adopted in the present paper.

Tax and corporate social responsibility
A discussion paper

David F Williams
KPMG's Tax Business School
September 2007