An ever-present challenge for those looking to hold firms to account for their actions is what mix of carrots and sticks to use. While providing incentives for firms (i.e., executives) to make the right decisions can be productive; how can we, as a society, wield sufficient sticks? How can we punish firms which, by definition, cannot go to jail? The article in the url below highlights the extent of this problem by focusing on the fines paid by firms that are found to have committed serious transgressions:
“The numbers seem eye-popping. So many billions here for supposed mortgage abuses, so many billions there for questionable foreclosures. But there’s more than meets the eye to the big legal settlements you’ve been reading about involving some of the nation’s biggest banks. Actually, there’s less than meets the eye. The dollar signs are big, but they aren’t as big as they look, at least for the banks. That’s because some or all of these payments will probably be tax-deductible. The banks can claim them as business expenses. Taxpayers, therefore, will likely lighten the banks’ loads.”
What does this look like in practice? Well, for example:
“After the Gulf of Mexico oil spill, for example, BP received a $10 billion tax windfall by writing off $37.2 billion in cleanup expenses.”
The law in the U.S. appears to be that, in general, settlements or penalties paid by firms to correct either civil or criminal transgressions are not tax deductible. That is, unless the payments are being made into funds that will ultimately aid others. Of course, that is a loophole that any half-decent corporate lawyer can wade through with their eyes closed. As a result, the issue of tax deductibility (of any settlement) is usually part of the negotiation between the firm and the government, with enforcement being left up to the IRS (which may or may not have been informed by the relevant government agency about what parts of the settlement are deductible). The outcome, in most cases, appears to be a fine that is largely tax-deductible. The only exception is the SEC:
“Since 2003, it has barred companies from deducting settlement costs as a business expense.”
In reality, however:
“… a 2005 report from the Government Accountability Office suggests that tax benefits in settlements are prevalent. Examining more than $1 billion in settlements made by 34 companies, the G.A.O. found that 20 had deducted some or all of the money from their tax bills.”
So, one possibility in terms of punishing firms is to fine them. But, as the article demonstrates, who is really being punished in such cases? The default to firms in financial settlements appears to be to treat it as a tax deductible expense. And, even when additional costs are levied, the firm is free to pass those costs onto customers in the form of higher prices. Surely, the only way to hold firms to account is to punish individuals. But, as the government demonstrates every time it tries, white-collar crime is notoriously difficult to prosecute.
So, where does that leave us? The whole discussion around HSBC and its money laundering activities earlier this year was that the firm was “too big to fail”—that, if the government had indicted the firm for a criminal act, it would have essentially put the firm out of business, which would seriously damage the economy, which is not in our collective best interests, etc., etc. As such, I am increasingly left with the sense that, in practice, societies are highly limited in being able to hold firms to account. In the worst cases, the organization dissolves and the individuals (the smartest ones among them, anyway) simply move onto the next job. What recourse do we have?
Everything I ever needed to know about bargaining/leverage was taught to me by my Chinese step mother in the street markets of Hong Kong. Unless you are willing to walk away, you will not come out on top. I can translate that action directly to CSR—what I am terming ‘corporate stakeholder responsibility.’ If self-interest is an insufficient motivation for firms to engage in strategic CSR, corporate stakeholder responsibility seems to me to be the only option that can form the basis for a sustainable economy. In short, stakeholder vigilance has to lead to the withdrawal of business/custom. That is the only message firms seem to understand, and history shows that they are very good at reacting to it. As stakeholders, we have to be willing to walk away, even at the risk of forgoing a product we demand, if we ever hope to change anti-social behavior into pro-social behavior.
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Paying the Price, but Often Deducting It
By Gretchen Morgenson
January 12, 2013
The New York Times
Late Edition – Final