Cal Poly Discusses Ethics with Steve Mintz aka Ethics Sage:
Cal Poly Discusses Ethics with Steve Mintz aka Ethics Sage:
Is Tax Avoidance an Ethical Issue?
Last week Donald Trump used his primary night victory speech to name just a few companies that he has big plans for once he’s in the Oval Office. A few of them were familiar targets for the Republican front runner — Apple, Carrier Air Conditioning, Eaton, Ford, Nabisco, and Pfizer. He has railed many times about how he will force these companies to move their manufacturing operations back into the United States where American workers will be employed. But are these companies doing anything wrong by merging with smaller foreign companies, moving their headquarters overseas, and avoiding U.S. corporate income taxes?
All these companies are doing is taking advantage of U.S. tax law. There is a difference between tax avoidance (legal), as these companies are doing, and tax evasion (illegal), which means to knowingly lie or cheat on taxes to gain an advantage through fraudulent actions. No one is accusing the companies of such egregious behavior.
As I have blogged about many times, there is a difference between following the law and being an ethical person – or company in this case. The notion of ‘ethical legalism’ equates ethical behavior with being law-abiding. Most ethicists dismiss such a notion. After all, it would have been legal to tell the Nazi’s where Ann Frank was hiding when they came knocking on the door, but not very ethical to do so. This is because we value the rights of human beings above all else.
Back to the issue at hand. As I have explained before, in an inversion, a large U.S. firm acquires a much smaller target company domiciled in a tax-friendly jurisdiction such as Ireland, Switzerland or the U.K., but the deal is structured so that the foreign minnow swallows the domestic whale. U.S. shareholders of the U.S. firm must pay immediate capital gains tax for the privilege of inversion, and the U.S. Company ends up as the nominal subsidiary of a publicly held foreign corporation.
The deals are driven by a desire to avoid paying U.S. corporate income taxes that are the highest in the world (35%) by relocating to a tax-friendly country. The UK tax rate is 21%, Switzerland is 18% and Ireland, with the lowest corporate income rate, at 12.5%. U.S. companies avoid paying any corporate income taxes by shifting profits overseas so that taxes are avoided until and unless those profits are repatriated from their low-taxed foreign earnings to the U.S. By simply keeping the profits overseas a U.S. company avoids paying U.S. corporate income taxes.
Trump has also called for a reversal of corporate policy that encourages U.S. companies to move production facilities overseas, to say China, Mexico, or Vietnam, to drastically reduce their labor costs and enhance profits. Just imagine if a U.S. company could pay $1 or $2 dollars to factory workers rather than $10 or more. Now think about the savings in not paying retirement or health benefits to foreign workers. Is there any wonder U.S. companies routinely move production facilities offshore? But, it is not illegal to do so.
The problem is the U.S. is still acting like it’s the 1960s, 1970s, 1980s, and 1990s rather than the 21st century where economic factors surrounding global competition and national tax and export policies of foreign countries put them at a competitive advantage compared to the U.S. We no longer can act like these countries need our help to move toward a capitalistic society and our economic and tax policies are used to push them along this road. We need to realize the country is divided in part because about 10 million manufacturing jobs have been lost thereby ‘hollowing out’ the U.S. manufacturing segment. Add to this the fact that many American companies use H-1B visas to bring in small numbers of foreigners for openings demanding specialized skills. But for years, most top recipients of the visas have been outsourcing or consulting firms based in India, or their American subsidiaries, which import workers for large contracts to take over entire in-house technology units — and to cut costs. The immigrants are employees of the outsourcing companies.
The U.S. needs to craft a long-term economic policy to bring jobs home and encourage U.S. corporations to stay in the country and pay their ‘fair share’ of taxes. If we don’t do this and soon, the economic divide in the country will continue to grow. The gap between the top 10% on the wealth scale and the middle class is over 1,000%; that increases another 1000% for the top 1%.
So, yes, Trump is mostly correct about corporate inversions. However, the irony is not lost on me that he rails against U.S. companies taking advantage of tax laws while doing the same with his bankrupt companies. He has no problem taking advantage of eminent domain as well. To say he is hypocritical is an understatement.
The problem is ethics has taken a back seat in our country to self-interested behavior and corporate greed. It’s been happening for years so it won’t turnaround anytime soon. However, we need to start moving in the right direction or risk falling behind China as the largest global economy. We need to start being insular and look out for our own workers, not encourage companies to shift wealth to foreigners. If not now, when?
Blog posted by Dr. Steven Mintz, aka Ethics Sage, on March 22, 2016. Professor Mintz is on the faculty of the Orfalea College of Business at Cal Poly San Luis Obispo. He also blogs at: www.workplaceethicsadvice.com.
Does man make the times or do the times make the man?
Have Trump’s supporters drank the Kool-Aid? It seems so to me. His followers are loyal to a fault. His speeches seem to bring out the worst in supporters and detractors. Trump plays to the crowd with the real fear of rising violence before, during and after his speeches. This is a real concern going forward especially now that he has a comfortable lead in delegates. Still, let’s put that aside and look at the issues that attract the cult-like following.
Indulge me as I share my knowledge of ancient philosophy. You've heard the phrase "if it looks like a duck, walks like a duck and quacks like a duck, then it's a duck" haven't you? Legend has it that the "if it looks like a duck" phrase was said by people in the 18th century and referred to a certain mechanical duck. And they were being very serious. That mechanical duck was built to astound audiences, by quacking, moving its head to eat some grain which the mechanical marvel seemingly digested and then after a short time, the machine would round things off by plopping out a dollop, what has been described as, foul smelling sh*t. [I apologize for the language, but it's necessary to make my point].
The "looks like a duck" phrase is now thought of as a mildly amusing philosophical argument but back in the 18th century would certainly have been more akin to the way the Turing Test challenges artificial intelligence systems to fool the assessor into believing the system is a real human and not a computer.
I read these stories a while back and couldn’t get out of my mind that it sounded ominously like Donald Trump’s campaign tactics. Now before you attack me let me add that ample reason exists for the cult-like following Trump has managed to attract. A ‘huge’ number of people are upset with just about everything – and who can blame them. Trumps' issues resonate with the masses, including immigration, trade, corporate inversions, and ISIS. The immigration problem dates back to the Reagan administration. We’re talking about over 30 years trying to solve a problem.
What about our trade policies that undeniably favor exporters to the U.S. to the detriment of U.S. exporters? How can we ever compete on a level playing field? This problem has persisted since 1994, over 20 years, since the Clinton administration signed the NAFTA agreement and Congress approved. CAFTA was passed in 2005 during the Bush administration with Congresses' support. And now we have the Trans-Pacific-Partnership (TPP) supported by President Obama that, according to the Office of the U.S. Trade Representative, the goal of the agreement is to level the playing field for American workers & American businesses.
Critics of TPP claim there will be a net loss of U.S. jobs. Estimates are that NAFTA has already displaced nearly five million manufacturing jobs. Since China was allowed to join the World Trade Organization, 2.7 million jobs were lost or displaced in just over ten years since 2001. It's no wonder the American people distrust their politicians.
Trump talks about corporate inversions, an issue I have addressed in past blogs. Large companies are setting up headquarters overseas after being “purchased” by a foreign, often smaller entity, for the sole reasons of maximizing profit (lower wages) and minimizing taxes (profits are tax-free until repatriated to the U.S.). Trump promises to end these practices. Like most things he doesn’t explain the ‘how.’
Then there is the rise of ISIS. Are we looking at it as a long-term struggle with an enemy that aims to rule the world under Sharia law? Or, as I suspect, are our future leaders content to “contain ISIS” as President Obama stated in November 2015. Defenders say he meant to apply it only to the geographic expansion of ISIL in Iraq and Syria. Well that makes me feel better.
Should we “bomb, encircle, and take the oil” from ISIS, as Trump has stated? Taking the oil seems a bit over-the-top to me and highly unethical. Besides, we can never totally eliminate ISIS, its off-shoots, or the radical Islamic threat to our country. I hate to say it but we are in World War III. A different kind of war to be sure, but an all-out war nonetheless – a clash of civilizations so to speak.
Let me return to Trump’s cult-like following. Webster defines a cult as “a situation in which people admire and care about something or someone very much or too much” and “a small group of very devoted supporters or fans.” This seems to explain the followers of Trump quite well.
Trump has hit a nerve in the American psyche. Supporters contend, as does Trump, that we never win anymore. We are losing in the battle against illegal immigration; trade with other countries; corporations leaving the U.S. for more profitable foreign lands and jobs going with them; and, perhaps, the battle against ISIS. Add to that the government has done little to improve the well-being of the middle class; reduce and eliminate poverty; improve our crumbling infrastructure (how long has the dysfunctional Congress talked about this one?); and generally regain our moral leadership in the world.
It has been said that Trump’s rise is a phenomenon illustrative of a “cult of personality.” There is an old saying; “Does man make the times or do the times make the man?” I think we would all agree the man made the times with respect to the effect of President’s such as JFK and Reagan. However, with Trump the times make the man. People are angry and many want change…any change…without thinking through the possible long-term consequences to our nation.
Blog posted by Dr. Steven Mintz, aka Ethics Sage, on March 16, 2016. Professor Mintz is on the faculty of the Orfalea College of Business at Cal Poly San Luis Obispo. He also blogs at: www.workplaceethicsadvice.com.
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Corporate Responsibility Takes a Back Seat to Self-Interest
Donald Trump supported H1-B visas during the Republican debate last Thursday night. He claimed it is difficult to find skilled American workers to fill certain jobs so he advocated bringing in trained foreign workers to do the job. He said he wanted to expand the program. Trump said “We do need highly skilled, and one of the biggest problems we have is people go to the best colleges. They'll go to Harvard, they'll go to Stanford, they'll go to Wharton, as soon as they're finished they'll get shoved out. They want to stay in this country. They want to stay here desperately, they're not able to stay here. For that purpose, we absolutely have to be able to keep the brain power in this country.”
The next day he seemed to reverse his position when his campaign released a statement saying that he actually does not want to expand it. So what’s up? I don’t mean with The Donald changing his position. That has been his mantra during the campaign. Instead, I look at the ethical issues of the Visa program in this blog.
H1-B visas allow U.S. companies to hire foreign workers on a temporary basis, usually for up to 3 years. The federal government limits the number of H1-B visas to 65,000 every year with 20,000 additional visas for foreign professionals who graduate with a Master’s or Doctorate from a U.S. university. Visa workers are in high demand. Technology giants like Microsoft, Facebook and Google repeatedly press for increases in the annual quotas, saying there are not enough Americans with the skills they need.
H1-B visas are not for cheap laborers. A Heritage Foundation study aound the median employee earns $74,250 a year. “The average H1-B salary of $78,600 is 50 percent above that of the average U.S. workers’ of $50,300,” the study said.
Many American companies use H-1B visas to bring in small numbers of foreigners for openings demanding specialized skills, according to official reports. But for years, most top recipients of the visas have been outsourcing or consulting firms based in India, or their American subsidiaries, which import workers for large contracts to take over entire in-house technology units — and to cut costs. The immigrants are employees of the outsourcing companies.
It seems quite clear from an ethical perspective that replacing competent and skilled American workers, many of whom have worked for their employers for years, with skilled foreign workers is unethical. Corporations have a social responsibility to advance the cause and improve the well-being of American workers unless it can be clearly demonstrated that there are no Americans with sufficient skills to fill a job. Even then I contend that a socially responsible corporation should establish a training program, perhaps in conjunction with U.S. universities, to provide the skills necessary to fill employers’ needs.
The problem is very few corporations see themselves as “citizens” of a community with an obligation to better the lives of American workers. Instead, most are out for themselves – nothing more; nothing less. It’s an egoist approach to ethical decision-making. It infects various segments of society including not helping to raise wages of the middle class; outsourcing of jobs; and now, corporate inversions where the corporate headquarters are moved overseas to avoid paying U.S. corporate income taxes.
A case in point about H1-B visa ethical failings is what happened at Disney a couple of years ago. About 250 Disney employees were told that they would be laid off. Many of their jobs were transferred to foreigners on temporary visas for highly skilled technical workers, who were brought in by outsourcing firms, such as Infosys and Tata, based in India. Over the next three months, some Disney employees were required to train their replacements to do the jobs they had lost. Talk about adding insult to injury. Disney needs to be held accountable for its actions and questions should be raised about how this American icon of a company could act so irresponsibly.
Leo Perrero was laid off from his technology job at Disney. Perrero discovered that despite his high performance ratings, he and most of the other 250 tech workers dismissed would not be rehired for at least a year, and probably never. Perero and Dena Moore, another American laid off by Disney at that time, have filed lawsuits in federal court in Tampa, Fla., against Disney and two global consulting companies, HCL and Cognizant, which brought in foreign workers who replaced them. They claim the companies colluded to break the law by using temporary H-1B visas to bring in foreign workers, knowing that Americans would be displaced.
The lawsuits by Perrero and Moore, who each filed a separate but similar complaint seeking class-action status, represent the first time Americans have gone to federal court to sue both outsourcing companies that imported foreigners and the American company that contracted with those businesses, claiming that they collaborated intentionally to supplant Americans with H-1B workers.
The H1-B visa program has an important role to play in driving the economy of the U.S., and many of those hired become responsible citizens and contributing members of society. However, a balance needs to be crafted to provide the skills to American workers when purportedly they are lacking. Corporations should reach out to universities or provide their own professional education and technology training programs to keep our workers competitive.
I have become increasingly more skeptical of the true motivation of corporations given all the recent scandals, such as at companies like Enron and WorldCom; Wall Street investment banks; and now we have rampant insensitivity in the use of foreign workers replacing American workers in the H1-B visa program. It is time for U.S. corporations to prove to the American people that they have the best interests of American workers at heart.
Blog posted by Dr. Steven Mintz, aka Ethics Sage, on March 8, 2016. Professor Mintz is on the faculty of the Orfalea College of Business at Cal Poly San Luis Obispo. He also blogs at: www.workplaceethicsadvice.com.
Do the Ends Justify the Means?
By now you know that a U.S. magistrate has ordered Apple to assist the government in unlocking the iPhone of San Bernardino shooter Syed Rizwan Farook. The FBI is seeking information that may be on Farook's employer-issued phone as it investigates the December 2 shootings that left 14 people dead. At the time of the attack, Farook and his wife, Tashfeen Malik, destroyed two personally owned cellphones and removed a hard drive from their computer.
In what Apple described as a "customer letter" posted on its website last Tuesday, CEO Tim Cook said Apple will contest the judge's order. "Opposing this order is not something we take lightly. We feel we must speak up in the face of what we see as an overreach by the U.S. government. We are challenging the FBI's demands with the deepest respect for American democracy and a love of our country. We believe it would be in the best interest of everyone to step back and consider the implications. While we believe the FBI's intentions are good, it would be wrong for the government to force us to build a backdoor into our products. And ultimately, we fear that this demand would undermine the very freedoms and liberty our government is meant to protect."
This is a hot button issue for our society as evidenced by the questioning of the Presidential candidates about their view in last Thursday’s Republican debate. I’ve heard both sides of story and want to weigh in on my views from an ethical perspective.
Apple says helping the FBI will be like providing a universal key that will permit law enforcement to break into anyone's iPhone. Apple and other tech companies say it would also create a vulnerability that hackers from China, Iran or elsewhere can exploit.
Last week, FBI Director James Comey told members of Congress that investigators had been unable to access Farook's phone. He pointed out that "it is a big problem for law enforcement armed with a search warrant when you find a device that can't be opened even when a judge says there's probable cause to open it".
In a prior case, Apple told a federal judge that it was "impossible" for the company to unlock devices running an operating system of iOS 8 or higher. In arguing this latest case, prosecutors said Apple could still disable security barriers in the phone's coding. Farook's phone runs iOS 9 and, if the security feature is enabled, will erase data after 10 unsuccessful password attempts.
Forensics expert Jonathan Zdziarski said Apple might have to write custom code to comply with the court order. He also said that even without Apple's cooperation, federal investigators should be able to hack the phone with the assistance of the NSA and the CIA.
My initial reaction is to question why it took a catastrophic event to demonstrate to the government that such a problem exists. I find it hard to believe the government did not know that an event such as transpired in San Bernardino could lead to the dilemma of iPhone access as a necessary measure to keep our country secure and protect our individual liberties. It scares me that the government is playing catch up on this issue. The larger question is whether we have the security apparatus in place in the 21st century to ward off terrorist attacks and then gain valuable data from the attackers’ electronic devices that might prevent additional attacks and a blood bath in our streets.
Apple’s view is quite different. It has described the FBI's request as amounting to asking for "a backdoor to the iPhone" — a flaw in a security system purposefully designed to help law enforcement break in for investigations. But unlike the FBI's policy demands for encryption backdoors, here it is not asking for a change to the technology on all iPhones; instead, the court order calls for a targeted tool, software using unique identifiers of this individual phone. This is important as the FBI’s demand is narrowly focused so it may stand Constitutional scrutiny in a court of law.
So, the issue finally comes down to the rights of phone users to have secure information on their phones inaccessible by the government and the government’s duties to protect those rights of our citizens. The ethical issue is one of creating "a slippery slope." If the government is granted access in this case, where will it stop? Will foreign governments have similar access – or the right to it?
On the other hand, we can weigh the costs and benefits to society of requiring Apple to provide access to what is perceived to be a need to thwart future terrorist attacks. The benefits are clear: to protect society from harm and secure the homeland. But, at what cost? Do the ends of allowing the government access justify the means in which the government is going about gaining access to a secure iPhone? This is the ethical issue that should be debated going forward.
Blog posted by Dr. Steven Mintz, aka Ethics Sage, on March 1, 2016. Professor Mintz is on the faculty of the Orfalea College of Business at Cal Poly San Luis Obispo. He also blogs at: www.workplaceethicsadvice.com.
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Lack of Diversity and Gift Bags Demonstrate Poor Judgment
When I think of ethics I immediately look at the way in which an individual or group of people have been treated and the message it sends to others who may not “qualify” for such treatment. The Academy Award nominations miss the mark of fairness in leaving out all African-American movie stars and directors from the nominations for the second consecutive year.
To say the Academy is out of touch is an understatement. Consider its decision to give out $200,000 in goodie bags to acting and directing nominees put together by L.A. PR firm Distinctive Assets that includes beauty goods and luxury experiences from brands hoping to capitalize on the stars' names. This act reflects an ethical blindness to the legitimate needs of so many in the country who are still struggling to make ends meet. Can anyone explain why Hollywood’s rich and powerful need $200,000 worth of extravagant goodies? It would seem to be a good “talking point” for Bernie Sanders supporters.
On February 28 the Academy of Motion Picture Arts and Sciences will have their annual Oscar awards amidst almost universal condemnation for a lack of diversity in the nominees. Stand-out films with African-American casts or directors such as “Concussion”, "Creed", and “Straight Outta Compton” were largely ignored. Not to mention Beasts of No Nation that received no Oscar nods even though African-American actor Idris Elba won the Screen Actors Guild Award as the Best Supporting Actor. I wonder whether the latter can be attributed to the fact that the movie was made by Netflix and not a major studio.
Following criticisms two years in a row about the lack of diversity in Oscar nominees, the president of the Academy, Cheryl Boone Isaacs, who is African-American, issued a statement saying that she was "both heartbroken and frustrated about the lack of inclusion. This is a difficult but important conversation, and it's time for big changes".
Those changes, according to Isaacs, includes altering the makeup of the membership of those who vote on the awards. "In the coming days and weeks we will conduct a review of our membership recruitment in order to bring about much-needed diversity in our 2016 class and beyond," Isaacs said. "We have implemented changes to diversify our membership in the last four years. But the change is not coming as fast as we would like. We need to do more, and better and more quickly."
This is a cop out in my opinion. The key is that the studios are not proactively seeking out qualified minorities to direct major films; neither are they looking for outstanding African-American actors to play important roles. Can it be attributed to an old-boy network? Perhaps to some extent. However, there is a racial bias in my opinion, and it’s not just in the Academy. Just consider some of the public criticism of the Star Wars movie which prominently features Nigerian-British actor John Boyega in a role some deemed for ‘whites’ only. What difference does color make? If we truly are in post-racial America, these choices should not even be debated as “right” or “wrong”; good or bad.
It gets worse for the Academy. I’m sure it didn’t think about the message it sends when acting and directing nominees receive $200,000 worth of stuff in their goodie bags, even those who aren’t selected for an award. We’re talking about millions of dollars in party favors for a group of Hollywood stars, most of whom are millionaires many times over. The list of gifts will turn your head.
We’ve heard a lot this election cycle about the rich getting richer and the poor getting poorer while the middle class gets squeezed. I’m all for capitalism but as an economic and wealth creation system we have lost our way. From realty TV shows that depict conspicuous consumption to those in financial services industry that made decisions based on greed, and which ushered in the financial recession. My concern is that our economic system has broadened the gap between the haves and have-nots. My fear is that societies which are highly unequal create resentment and social division. We need to reverse course now and not kick the can down the road for another 8 years.
Blog posted by Dr. Steven Mintz, aka Ethics Sage, on February 23, 2016. Professor Mintz is on the faculty of the Orfalea College of Business at Cal Poly San Luis Obispo. He also blogs at: www.workplaceethicsadvice.com.
Statesmanship and Integrity MIA in Republicans' Approach to SCOTUS Nomination
Once again the Republicans have shot themselves in the foot by naively thinking it is better to not even consider President Obama’s prospective appointment of a justice to replace Antonin Scalia. Somehow in their interpretation of Article II, Section 2, paragraph two of the U.S. Constitution, known as the Appointments Clause, that empowers the President to appoint certain public officials with the "advice and consent" of the U.S. Senate, allows the Senators not to even entertain the President’s nomination. I care less whether they are correct in their interpretation than whether it is ethically right to not go through the process, ask the probing questions that Americans want to be asked, and then take an up or down vote.
The Republicans are truly losing an opportunity to provide the American public with insights into the mind and convictions of the potential nominee as well as President Obama’s objectives in selecting a replacement for Justice Scalia. We could learn a lot about the nominee and Republicans could ask the probing questions that, quite frankly, would add significant value to the needed debate about political philosophy that is the centerpiece of the nomination process on both sides in 2016.
Here is the reaction of many prominent Republicans. Their main talking point is that in this election-year nomination it is unprecedented that a sitting, lame duck President makes such nomination in their last year in office.
“The fact of the matter is that it's been standard practice over the last 80 years to not confirm Supreme Court nominees during a presidential election year," Republican Senate Judiciary chair Chuck Grassley said. “It has been over 80 years since a lame duck president has appointed a Supreme Court justice", Florida Senator Marco Rubio said in the Republican presidential debate two weeks ago; "We have 80 years of precedent of not confirming Supreme Court justices in an election year", according to Texas Senator Ted Cruz.
Technically, the issue turns on how one defines “lame duck”. A standard definition is a lame duck, in politics, is an elected official who is approaching the end of their tenure, especially one whose successor has already been elected. The official is often seen as having less influence with other politicians due to their limited time left in office. To extend this to eleven months still in office is a stretch and, more importantly, it ignores the spirit of the process to nominate a replacement for Scalia so that the Supreme Court could operate at full strength as soon as possible and not be hand tied by a 4 to 4 vote.
As a factual matter, Ronald Reagan nominee Anthony Kennedy was (unanimously) confirmed to the court in February 1988 – not only an election year but a year in which Reagan was term-limited and could not run again. So the talking point is wrong. (Grassley, by the way, broke with his own self-professed "standard practice" and voted to confirm Kennedy.)
It is true that Kennedy was nominated in 1987. When was the last time in history that a president nominated someone for the court in an election year and the Senate confirmed them? That would be Franklin Roosevelt nominating Frank Murphy, then the attorney general, on January 4, 1940, and the Senate confirming him 12 days later. So that was 76 years ago.
Here is a useful analogy. What if the vice president had to assume the presidency? Who becomes the new vice president? The 25th Amendment, ratified in 1967, provides that the new president appoints someone to fill his or her old position, subject to congressional approval. Would the Republican Senators block such a nomination claiming the country can wait eleven months for a new vice president?
What if the sitting vice president dies or resigns in office? The new president would appoint a new vice president subject to congressional approval. Would the Republicans Senators refuse to vote on the replacement? This happened in 1973 when vice president Spiro Agnew resigned in disgrace after pleading no contest to a charge of income tax evasion. Then President Nixon nominated Gerald Ford to be his replacement and the Congress confirmed the appointment.
SCOTUS faces several critical issues in 2016 including public union dues, abortion, and Obamacare. In their entirety, these issues affect virtually every American. Moreover, the Republicans can grill the potential nominee on these issues and more, such as the contentious Citizens United v. Federal Elections Committee – the campaign financing decision – that is one of the most talked-about issues this election year. The Republican Senators can demonstrate their smarts and legal insights, and perhaps gain public support for their cause. Instead they seem to be headed in the same old obstructionist direction in order to demonstrate how they stood up to President Obama. For them it has become a pissing contest with the good of the country hanging in the balance.
Blog posted by Dr. Steven Mintz, aka Ethics Sage, on February 18, 2016. Professor Mintz is on the faculty of the Orfalea College of Business at Cal Poly San Luis Obispo. He also blogs at: www.workplaceethicsadvice.com.
Reversing the Trend of Corporate Inversion and Noncompetitive Tax Policies
We’ve all heard presidential candidate Bernie Sanders arguing that “the business model of Wall Street is fraud”. Claiming our capitalistic system creates “corporate welfare”. Critics claim this is nonsense. The truth lies somewhere in between.
Frauds did occur that directly contributed to the financial recession. Greed was largely responsible for the financial meltdown in 2007-2008. But to prove fraud, intent must be shown. Is greed an indicator of intent, or a manifestation of ethical blindness?
Sanders likes to claim no Wall Street executives were sent to jail for their role in ushering in the financial recession, although investment banking firms paid billions in fines and penalties for their actions including Bank of America ($16.65 billion), JP Morgan Chase ($13 billion), Credit Suisse ($10 billion), Goldman Sachs ($5.1 billion), and Morgan Stanley ($3.2 billion). Sanders is almost 100% correct. The exception is Kareem Serageldin who approved the concealment of hundreds of millions in losses in Credit Suisse’s mortgage-backed securities portfolio. Fraud exists here because evidence indicated he not only approved it but knowingly participated in the concealment.
What about corporate inversions? Is it fraudulent to merge with a foreign entity and relocate headquarters to a low tax or tax-free country? One would have to demonstrate that the intent of such activity is to evade taxes rather than avoid them for fraud to exist. Inversions are a self-serving practice and gaining in popularity as U.S. corporations look for ways to hold on to as much of their cash as possible. Donald Trump talks about inversions all the time. He claims that he will stop such practices but doesn’t really give any details how it will be accomplished.
The inversion deals are driven by a desire to avoid paying U.S. corporate income taxes that are the highest in the world (35%) by relocating to a tax-friendly country. The UK tax rate is 21%, Switzerland is 18% and Ireland, with the lowest corporate income rate, at 12.5%. U.S. companies avoid paying any corporate income taxes in the U.S. (but not in the foreign country) by shifting profits overseas so that taxes are avoided until and unless those profits are repatriated from their low-taxed foreign earnings to the U.S. By simply keeping the profits overseas a U.S. company avoids paying U.S. corporate income taxes.
Many people do not understand how global taxes are collected on U.S. multinationals. There are two models: territorial and worldwide taxation. A pure version of territorial taxation imposes tax on active business income earned by corporations outside their countries of residence only in the source (“host”) country, incurring neither contemporaneous tax liability in the home country, nor taxation on dividend repatriation from foreign subsidiaries. Worldwide taxation is a system under which corporations deemed “resident” in a country are taxable by that country on their income from all over the world, normally with offset either by deduction or credit for taxes paid to source countries on the same income, and sometimes, as in the U.S. case, with deferral of tax until repatriation of the income in the form of dividends from foreign subsidiaries to the home country resident parent.
Both the UK and Japan have moved to territorial systems, with modifications, within the past few years. Several recent proposals for US corporate tax reform propose or consider this option as well—the Simpson-Bowles Commission recommended it; the Volker Report (by the President’s Economic Recovery Advisory Board) considered it favorably; House Ways and Means Committee Chairman Camp’s proposed legislation would adopt a territorial system together with a minimum tax on foreign earnings. It is argued, as it was in the cases of the UK and Japan, that the U.S. system of worldwide taxation with foreign tax credit and deferral is unduly complex and burdensome, deters repatriation of income, and encourages foreign incorporation.
Chile, Greece, Ireland, Israel, Korea, Mexico, Poland, and the U.S. follow the worldwide system while most others use a territorial tax approach. Worldwide taxation is deemed to be double taxation by U.S. multinationals. They believe taxes should be paid wherever they are headquartered (e.g. Ireland) and not taxed again (i.e. U.S.). Would a territorial system lead to fewer inversions? No one knows.
My suggestion is to keep the territorial system in the short run but take action to reverse the trend of inversion by instituting a lower rate of 15% corporate taxes paid in the U.S. to be competitive with other industrialized countries, and keep it in place for two years. Similarly, a 15% rate hopefully would lead to repatriated profits, higher taxes paid to the U.S. government, and the in-sourcing of jobs. If so, then the 15% rate should be made permanent. If, however, U.S. businesses continue to shift their profits overseas and continue to outsource jobs, it means one or more of three things: (1) they are motivated by lower wage rates outside the U.S.; (2) they may feel stifled by the excessive regulatory system in the U.S.; and (3) they may truly want to be closer to their expanding overseas markets. Of course the over-arching motivation is still to avoid taxes.
Let’s not throw out the baby with the bath water. Our capitalistic economic system has generally served us well for many years. However, it is time to significantly restructure the corporate income tax system to be competitive with other countries and incentivize corporations to stay in the U.S.; use their money to expand jobs here and create economic growth; and start to play a more active role in developing policies that conform to their corporate social responsibilities in the U.S.
Blog posted by Dr. Steven Mintz, aka Ethics Sage, on February 16, 2016. Professor Mintz is on the faculty of the Orfalea College of Business at Cal Poly San Luis Obispo. He also blogs at: www.workplaceethicsadvice.com.
Analyzing the Blame for Emissions Disaster at VW
It's been dubbed the "diesel dupe". Last September, the Environmental Protection Agency (EPA) found that many VW cars being sold in America had a "defeat device" - or software - in diesel engines that could detect when they were being tested, changing the performance accordingly to improve results. The German car giant has since admitted cheating emissions tests in the US.
The EPA said in November that it had found the same test-cheating software on additional VW and Audi diesel models and on a Porsche model. The agency said it covered about 10,000 cars sold in the US since the 2014 model year. But, in meetings with the EPA back on November 19 and 20, the company admitted that all model years since 2009 with its 3.0-liter diesel engines contained the software as well. The latest disclosure covers an additional 75,000 vehicles.
"We've totally screwed up," said VW America boss Michael Horn, while the group's chief executive at the time, Martin Winterkorn, said his company had "broken the trust of our customers and the public". Winterkorn resigned as a direct result of the scandal and was replaced by Matthias Müller, the former boss of Porsche.
It will take time for VW to regain the public’s trust, I believe, because the public’s confidence in the VW brand must first be restored before sales can reach their pre-scandal heights. I have my doubts whether VW’s corporate culture can be changed, at least in the short run.
Financially, VW will be recalling millions of cars worldwide and has set aside €6.7bn (about $7.2 bn) to cover costs. That resulted in the company posting its first quarterly loss for 15 years of €2.5bn ($2.7) in late October.
But that's unlikely to be the end of the financial impact. The EPA has the power to fine a company up to $37,500 for each vehicle that breaches standards - a maximum fine of about $18bn. Moreover, the costs of possible legal action by car owners and shareholders cannot be estimated with any certainty at this time.
How could this disgraceful act happen to such a heretofore well respected auto company? The answer is the company cultivated a culture of fear and deceit that led to its unethical actions: scare tactics imposed on employees; self-interested decision-making; and a total disregard for the driving public.
Let’s look at VW’s corporate culture. Reports about the incident show that Winterkorn was a demanding boss who didn't like failure. That’s not unheard of in and of itself. Many CEOs are hard charging. But critics say the pressure on managers at VW was unusual, which may go some of the way to explaining the carmaker's crisis. No doubt the pressure was linked to a desire to maximize revenue and produce financial results that met or exceeded financial analysts’ earnings expectations.
It is important to understand that all German companies have two boards: the management board, led by the CEO, runs the business day-to-day, and above it the supervisory board, to which the CEO reports. The supervisory board can hire and fire management board members and must sign off on major strategic decisions.
It has been reported that staff members in engine development felt pressure from the management board to find a cost effective solution to develop clean diesel engines for the US market. Rather than telling VW’s management board the rules could not be adhered to, staff members in engine development decided to push ahead with manipulation, according to a German publication, Sueddeutsche Zeitung.
"Within the company there was a culture of 'we can do everything', so to say something cannot be done, was not acceptable," Sueddeutsche Zeitung said, quoting the VW internal report which included testimony from a staff member who took part in the fraud. "Instead of coming clean to the management board that it cannot be done, it was decided to commit fraud".
Let’s examine the company’s initial reaction after publicly admitting its faux pas. Müller, VW’s current CEO, and Hans Dieter Pötsch, chairman of VW’s supervisory board, admitted publicly that the technological evasion began in 2005, earlier than originally reported. Nine executives were suspended, even though VW maintains that management was not aware of any wrongdoing, and has since said that a small group of engineers was responsible for the breach.
There you go. Blame a few rogue engineers for the failure of management to properly oversee all aspects of its development, production, and sales activities, and for establishing its culture of fear and intimidation. This indicates a lack of integrity by management.
What about seeking out whistleblowers to get to the bottom of the story and prevent wrongdoing going forward? This is an important part of corporate culture. Well, back in November VW said it would not sack workers for what they might reveal, but they might be transferred to other duties, so long as they report to the company by November 30, 2015. Why set a deadline? Is this part of the fear culture at VW?
Ferdinand Piëch, the immensely powerful former chief of VW's supervisory board, has been “credited” with establishing the culture of fear and intimidation. When asked how he managed to achieve a certain level of results he said that he basically gives marching orders to body engineers, stamping people, manufacturing, and executives. In the case of the Golf VW model body fit that was the envy of many in the industry, he explained that he got results by saying, “I am tired of all these lousy body fits. You have six weeks to achieve world-class body fits. I have all your names. If we do not have good body fits in six weeks, I will replace all of you. Thank you for your time today."
Well, it would scare the you know what out of me. But, do the ends justify the means? Is fear and intimidation an ethical long-term strategy or a short-term solution to a larger problem? My guess is such a culture wears down over time as key production people can’t meet expectations, as happened with the emissions devices, and then the company is left picking up the pieces of a failed culture.
Blog posted by Dr. Steven Mintz, aka Ethics Sage, on February 9, 2016. Professor Mintz is on the faculty of the Orfalea College of Business at Cal Poly San Luis Obispo. He also blogs at: www.workplaceethicsadvice.com.
Recovering an Ethical Balance in Business
During this election cycle we've heard a lot from Bernie Sanders about the moral failures of large corporations especially in the banking industry. Who could argue this point given the financial disaster that ushered in the financial recession just a few years ago. Greed, self-interest, and a lack of moral awareness motivated deceitful actions that led the public down a road with no return. It's not the first time this has happened. We can go back to the savings and loan debacle of the early 1990s for a parallel, albeit on a smaller level. The question is whether business has learned its lesson?
Business can be an engine for economic opportunity, wealth accumulation, and a vehicle to raise up those in lower and the middle classes to higher levels on the economic prosperity ladder. However, that hardly has been the case since the end of the recession. Salaries have been stagnant; good job opportunities scarce; pay equality for women is still lagging; and a malaise has infected many workers whereby they are more open to a socialist agenda than ever before. This is why Bernie Sanders has a wide appeal especially among young people who are concerned about getting good jobs after college, paying off student debt, and whether their social security benefits will be there when they need them.
One reason businesses still struggle with ethical behavior is they are not attuned to their role as a moral agent in society. A moral agent is anyone capable of making ethical decisions and putting them into action. The idea that an organization has moral agency stems in part from U.S. Supreme Court decisions declaring that a corporation is a person in the eyes of the law. That makes an organization accountable for the predictable results of its actions. In practical terms, this means a business has a responsibility to the public to act ethically.
To me this is an outdated notion. Business ethics may be an oxymoron. How else can we explain ethical failings at companies like Volkswagen? Or, Turing Pharmaceuticals that purchased the right to the prescription drug Darprim this past August and CEO Martin Shkreli decided a price increase of 5500% was needed.
Economist Milton Friedman famously argued that it is the social responsibility of corporations to increase profits thereby putting more people to work and paying more taxes to support programs that benefit the general public. But business ethicists caution against a myopic pursuit toward earnings. The quarterly reporting syndrome that pressures companies to meet earnings expectations promotes temptation that can push some to distort the truth.
But the desire to satisfy shareholders must be balanced with the need to service all corporate constituents — all of whom contribute to a company’s worth. That structure must be reinforced with values that build trust, as well as by more cognizant oversight and notable penalties for egregious acts.
“So, even if you can’t really regulate ethics, the fact that more people are more closely scrutinizing board behavior encourages directors to be more responsible,” says Mary Driscoll, an analyst with Standard & Poor’s. “But, there is no panacea, and I think we will continue to see abuses and excesses — but hopefully fewer.”
Certainly, ethical dilemmas are not always black and white. And the situations that can lead to hard choices can be as complex as the options themselves. Some companies therefore struggle with how to manage and measure ethics and particularly in cases where they have worldwide offices that operate in diverse cultures. Those decisions have a direct bearing on their public identities and will affect their share prices.
My views on business ethics were recently publicized in a release by Cal Poly, San Luis Obispo where I teach students about business and accounting ethics. Here is a link to that story.
Blog posted by Dr. Steven Mintz, aka Ethics Sage, on February 4, 2016. Professor Mintz is on the faculty of the Orfalea College of Business at Cal Poly San Luis Obispo. He also blogs at: www.workplaceethicsadvice.com.
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