Claudia-3902

The good news is that yesterday BG Group cut incoming Chief Executive, Helge Lund’s remuneration package to within the scope of the remuneration policy agreed by shareholders less than six months ago. The board responded to considerable pressure from shareholders and no doubt from the Institute of Directors.

The bad news is that the BG Group reneged on the promise it made to shareholders in the first place in proposing this departure.

I have a small number of shares in BG Group. I have considered selling, but always think I’d better hang onto them for the long-term. I’ve never been to an AGM or paid close attention to the management or governance of BG Group until two things coincided a couple of weeks ago.

Just before the BG Group story broke some colleagues explored how ACCA may address the CG shortfalls in transparency in the UK identified in a recent ACCA and KPMG Singapore study ranking the CG requirements of 25 markets. The UK came number one but the research did identify some issues; that executive remuneration disclosure is not mandated, nor is the process for executive and director performance.

The second was before I was aware of the BG proposal outcry, I received a 30 page letter from the Chairman calling the extraordinary general meeting to vote on the conditional share award ahead of Helge Lund’s appointment.

It was a long well-crafted and compelling argument of how thorough the independent executive remuneration benchmarking was and that a package of this magnitude was needed to secure someone of Lund’s calibre. It sounded desperate.

Once I got over (kind of) the huge annual package and “golden hello” Lund was due to receive, I was nearly convinced to vote in favour. But it didn’t feel right to me at all and I felt like it was going to be a huge issue. It was and here’s what I’ve learnt from all this.

More good news

Shareholders (and others) are speaking louder

The Chairman’s proposal really hit a few nerves with institutional investors (Legal and General, Aviva), individual shareholders (me), politicians (Vince Cable), and the public (IOD, High Pay Centre) calling for a shareholders to vote against a binding pay deal being overturned so soon. Interestingly Standard Life Investments has long opposed the rewards given for “meeting unchallenging performance targets” – abstaining from votes on remuneration for 13 consecutive years.

UK corporate governance “saves face”

The U-turn from BG Group has allowed UK corporate governance to “save face”. The UK is considered a leader in corporate governance principles and practices since the Cadbury Report in 1992. It has a reputation to uphold, and many countries look to the UK when developing instruments and codes. I hope they still will.

And more bad news …. Wealth inequality is still growing

Executive pay packages like this one are driving greater wealth inequality between the UK’s top and bottom earners. The pay deal is still enormous – potentially £18m reduced from £25m – and this reduction won’t address the widening gap.  Is it time to seriously consider a maximum pay ratio?

Transparency and performance

The chairman’s letter was transparent about how much Lund would receive, but I still struggle to understand how performance will be measured. So do others.

Studies indicate that pay packages linked to short-term financial measures and share price movement encourage excessive risk taking, with calls for performance based on non-financial measures to be included as well.

So, on 15 December, I will be going to the BG Group EGM and I have to say that I am a little disappointed that I won’t need to use my vote at the meeting! However, I am pleased that the much discussed Mr Lund has still decided to join BG with the generous package pre-approved by shareholders. But most of all I am pleased that we “voted” for the long-term societal impact and not short-term shareholder value. This will serve as a warning to companies thinking of breaching their remuneration policies any time soon.

Tax is difficult…

accapr —  1 December 2014 — Leave a comment

By Jason Piper, ACCA Technical Manager, Tax and Business Law

Tax is difficult because the world is complicated. Trite though that sounds, it is unfortunately the simplest way of expressing the inevitable outcome of a huge bundle of conflicting factors. One of the most fundamental issues is that tax is always expressed as an amount of money, but is at the same time used as a mechanism to influence underlying behaviours in line with society’s ‘values’.

Whether you think of monetary labels as the price or the value of something may depend on your level of cynicism, but those amounts are only ever an equivalent for whatever the underlying “thing” is worth. It follows that how we define and process those numerical expressions is fundamental to calculating tax liabilities so the ‘value’ of a business’s activities, as reflected by its tax contribution, is seen through that filter.

Take a factory producing bicycles. The actual taxes paid by the operators of the business will certainly be far more sensitive to the accounting treatments of the factors of production than to the quality of the bicycles, the treatment of the workers or the environmental impact of the whole operation. Whether the ownership of the factory is leasehold or freehold, and whether the workers are employees or independent contractors makes no direct difference to the number of physical bicycles it can produce – and yet those different legal descriptions can radically alter the tax outcomes.

In the long run it’s as likely, if not more so, that the success or failure of the venture will depend more upon the abstract legal considerations than it will the quality of the bicycles or its treatment of the workforce and environment– even though you could make a good argument that it’s actually those aspects of the factory’s operations that society ought to be more interested in.

For the vast majority of individuals things are generally simpler. There’s far less in the way of accounting to be done; all that matters is the tax treatment of the cash amounts of earnings that hit their bank accounts in the year and valuations usually arise only in the context of “benefits in kind”. (It’s probably a given that all employees consider the monetary value their employers put on them to be far too low, but that’s another issue).

The other main tax individuals pay in most countries is sales taxes or VAT – but these are almost entirely dealt with and accounted for by the businesses selling the goods to them, and the complexities that arise bypass the consciousness of consumers altogether. A recent change in VAT treatment of a popular consumer product in the UK hasn’t even resulted in a noticeable change in the retail price, despite the 20% shift in margins for supermarkets.

The issues arise because society tries to use the application of the tax system to enforce its values directly (rather than just raising the revenue to fund other measures). Differentials in tax treatment inevitably end up cruder than the world they’re trying to operate on. There’s a myriad shades of difference between a factory employing local disadvantaged and disabled people to build environmentally friendly water filters for developing economies and a fully automated cigarette rolling plant that deposits its waste products straight into a local river.

It may look simple to use the tax system to distinguish between those two extremes, but then comes the difficulty of drawing the black and white line between tax/no tax on infinite shades of grey. Somewhere after all the tax system has to draw the line, because tax is a binary choice between “this dollar is yours to spend as you will” against “this dollar is taken by the state and you no longer have a say in its use”, and it’s around those tipping points that the uncertainty will crystallise. Set that in the context of accounting standards so complex that even experts can’t agree on them, and tax codes so long that no one dare claim to be expert on all aspects of them, and it can hardly be a surprise that we can’t work out what the tax system does do, let alone what it ought to.

Read ACCA’s certainty in tax paper here

Ethics in Finance Robin Cosgrove Prize 2014-2015

By Carol Cosgrove-Sacks, Director, Ethics in Finance Robin Cosgrove Prize

How can robust ethical standards and integrity be boosted in the finance sector?

All financial firms depend on maintaining trust with their clients. Without trust, the public value a firm possesses quite simply disappears.

So I want to start this blog by posing a series of questions that I hope get you thinking about trust and ethics in finance:

Would you put your money in a bank you don’t fully trust? Would you give your confidential financial information to an accountancy firm if you feared they might reveal your data to a competitor? Why would you insure your life or your assets with a group if there were doubts about its trustworthiness? Would you invest in an enterprise if you doubted the credibility of their accounts? What responsibility does younger staff working in the finance sector have for promoting stronger commitment to trust, ethics and integrity.

To address these questions, and to hopefully find solutions, the Ethics in Finance Robin Cosgrove Prize has launched a global debate on these issues, and is seeking fresh ideas to inspire young people working — or hoping to work — in the financial services sector.

A recent study by economic scientists from the University of Zurich in Switzerland looked into business culture and dishonesty in the banking sector. Published in Nature magazine, the report revealed that “prevailing business culture in the banking industry weakens and undermines the honesty norm, implying that measures to re-establish an honest culture are very important.”

The Prize has become an iconic influence in stimulating innovative approaches to ethics in finance. Doing the right thing because it is the right thing to do may sound simple, but there seems to have been rather a lot of confusion in recent years about what is “right” in terms of corporate and personal ethics and integrity.

The Prize was first launched in 2006 to promote the sustainable and responsible future development of young finance professionals, consistent with the vision of Robin, a young investment banker who died in an accident on Mont Blanc.

The book TRUST & ETHICS IN FINANCE (2012) brought together the best papers submitted for the first three Prize competitions, and it is now recommended by the IMF to promote awareness of Ethics in Finance.

The 2014-20145 Prize – An agent of change

The prestigious Prize now enters its 5th edition, with $20,000 to be awarded to young finance professionals writing about their “Innovative Ideas for Ethics in Finance”. The Prize was launched in London by ACCA Global and the closing date for the 2014-2015 competition is 15 April 2015.

The 2014-2015 Prize is supported by the global Association of Chartered and Certified Accountants [ACCA] and by the CFA Institute. The Prize competition is open to those aged 35 or less, and papers may be submitted in English or in French.

The Ethics in Finance Robin Cosgrove Prize is proving to be an agent of change going beyond compliance issues and promoting a refreshing approach — look at the website, see how you might contribute to this important debate, and write about your ideas to make a difference and promote innovative ideas for ethics in finance – you should complete an Expression of Interest and obtain the rules from herewww.robincosgroveprize.org

Please get involved and add your voice.

Public sector services are entering an era when they need to change more radically than before to meet the complexity of a highly networked world that is making it harder and harder to find a one-size-fits all approach.  At the same time, increasing demands and expectations make expanding existing ways of providing services difficult to afford.

The Auditor General for Wales hosted a conference in Cardiff on 5 November 2014, at which ACCA participated, which brought together public sector delivery officials to consider key issues.  Two major factors were highlighted.  First, the so called ‘Chart of Doom’ forecasting UK population demographics over the next few years, which shows an ageing population coupled with an increase in the number of children under working age.  The net result is a squeezed working population who will be required to pay taxes to support the provision of public services facing greater demand.  Second, an expected continuation of austerity over the next parliament (5 years) which will restrict the ability to potentially fund service needs.

Clear messages to emerge were that the government should concentrate on those services it excels at delivering or is otherwise the only possible source.  Otherwise it should act as an enabler to support local delivery of services. The latter would involve greater involvement with local communities who are best placed to understand local needs and conditions, and consequently come up with innovative solutions.  Such an approach would require a change of focus from:

  • Target setting to outcome delivery;
  • Direct delivery (i.e. top down driven policies) to local need approach (i.e. bottom up driven policies);
  • From state to the third sector service provision;
  • Public sector agencies working in silos to everybody working together;
  • Delivery of services to preventative measures to reduce the need for services.

The day was structured around three key themes identified as being important to customer services. Highlighted at the event, a survey of those currently receiving public services had emphasised the importance of listening thereby opening up communication, being clear about what needs to be achieved and how to go about adding value, and the benefit of closer working together.

The conference was not intended to come up with quick answers, but forms part of a series of events aimed at looking at how the transformation required might be achieved in Wales.  ACCA will continue to participate in this important initiative which has wider implications for everybody involved with, or in receipt of, public services.

As part of Margot James MP’s Aspirations Programme for young people in the West Midlands in the UK, ACCA was invited along to tell them about a career in accountancy. We also held a blog competition about why ethics is important to business. The winner was Guvan Singh Riar, 16 years old, from West Midlands. Here is his blog

Ethics concern an individual’s moral judgements about right and wrong. Decisions taken within an organisation may be made by individuals or groups, but whoever makes them will be influenced by the culture of the company. The decision to behave ethically is a moral one; employees must decide what they think is the right course of action. This may involve rejecting the route that would lead to the biggest short-term profit.

Ethical behaviour and corporate social responsibility can bring significant benefits to a business. For example, they may:

  • Attract customers to the firm’s products, which means boosting sales and profits
  • Make employees want to stay with the business, reduce labour turnover and therefore increase productivity
  • Attract more employees wanting to work for the business, reduce recruitment costs and enable the company to get the most talented employees
  • Attract investors and keep the company’s share price high, thereby protecting the business from takeover.

Knowing that the company they deal with has stated their morals and made a promise to work in an ethical and responsible manner allows investors’ peace of mind that their money is being used in a way that arranges with their own moral standing. When working for a company with strong business ethics, employees are comfortable in the knowledge that they are not by their own action allowing unethical practices to continue.  Customers are at ease buying products or services from a company they know to source their materials and labour in an ethical and responsible way.

For example, a coffee company which states all their raw beans are picked from sustainable plants where no deforestation has occurred, by people paid a good living wage, in an area where investments have been made to ensure that producing the coffee for a foreign market has not damaged the local way of life, will find that all these elements of their buying strategy becomes a selling point for their final product.

A company which sets out to work within its own ethical guidelines is also less at risk of being fined for poor behaviour, and less likely to find themselves in breach of one of a large number of laws concerning required behaviour.

Reputation is one of a company’s most important assets, and one of the most difficult to rebuild should it be lost.  Maintaining the promises it has made is crucial to maintaining that reputation.

Businesses not following any kind of ethical code or carrying out their social responsibility leads to wider consequences. Unethical behaviour may damage a firm’s reputation and make it less appealing to stakeholders. This means that profits could fall as a result.

The natural world can be affected by a lack of business ethics. For example, a business which does not show care for where it disposes its waste products, or fails to take a long-term view when buying up land for development, is damaging the world in which every human being lives, and damaging the future prospects of all companies.

Ethics is important to businesses for many reasons. Businesses can increase sales or increase their reputation.