PUBLIC AFFAIRS AND MEDIA RELATIONS BLOG - Veena Hudson

Tax: competition or co-ordination?

G20 leaders have recently proposed improved international regulatory co-operation to restore faith in global regulation. But financial regulation may not be the only area requiring international co-operation – opportunities exist for co-operation in tax matters as well.
 
For example, taxation as an element of environmental policy is one tool that relies heavily upon international co-operation. Green taxes can play a key role in persuading companies and individuals to modify their behaviour, but green taxes simply cannot function as they are supposed to without co-ordinated action. Any discrepancy in green tax levels between states will see polluting companies moving around to avoid those taxes, rendering them less effective.
 
International co-operation is necessary to combat tax evasion too. 2009 has seen a raft of traditional 'tax havens', including Liechtenstein and Switzerland, sign international agreements that will ensure compliance with OECD standards on tax transparency and information sharing.
 
Traditional tax havens should continue to co-operate with other states to help stamp out tax evasion. In return, larger nations should respect jurisdictions and refrain from adopting vociferous pursuits of tax havens, where the only purpose is to distract from domestic causes for budget deficits.
 
Total co-operation in all tax matters would be unwise, however.
 
For example, flat-tax regimes in Central and Eastern Europe should be treated with respect. Flat-tax policies in those states have so far proved appropriate for the current stage of their economic development and 'harmonisation' with higher tax rates elsewhere in Europe should be avoided; tax competition can be healthy.
 
Besides, governments can become hung-up on headline tax figures as reasons for business relocation. This is important but in reality it is often the complexity or simplicity of underlying tax regimes that repel or attract investment; a 2008 ACCA survey saw Britain score poorly on tax issues such as complexity, transparency, and, above all, sheer volume of tax legislation.
 
One potential cause of confusion in tax systems is the way tax policy is currently drafted in many countries; the politicisation of policy-formulation is rife, a major problem for tax policy. Policy designed in this way is usually riven with short-termism and is often overly complex. Additionally, the specialist nature of tax law means democratic bodies are often unable to provide sufficient scrutiny of new legislation.
 
Governments should focus on simplifying underlying tax issues to provide a secure environment for business that would attract investment. Re-adjusting the focus in this way could help bring much needed clarity and objectivity to tax policy.

Equality? Women in financial services

I recently asked a number of our female members for their views on equality in financial services for a paper I was writing. The overall feedback was that although there has been noticeable progress in encouraging women into senior positions in financial services, we are still far from establishing equality. Career progress is level for women and men only to a point – for example, women who make it to senior positions still earn less than their male counterparts. The higher the position, the bigger the gap.
 
According to member views, this is due to gender perceptions and covert sexism, with senior managers often recruiting in their own image or requiring experience that men are more likely to have.
 
There is also still a view that women make weaker leaders, can be emotional and may be unable to balance their family and professional lives, and it is often assumed that flexible hours mean less commitment, with part-time workers – often women – being passed over for promotions. On the other hand, women themselves may also lack self-esteem and often do not seek opportunities.
 
However, if we look at the statistics, women in senior positions are less likely to make risky decisions than men. Bearing in mind that risky decisions have been blamed for bringing about the current financial crisis, there is a strong need for female representation. There is also a significant body of research that shows that mixed management is more likely to make better decisions and to come up with innovative ideas.
 
The situation is different for women working for SMEs in the financial sector. Even though SMEs often pay less than larger companies in financial services, this is rarely based on gender, and employees are often rewarded with friendlier working environments. In terms of entrepreneurs, there is also much evidence that women lack appropriate business support, have worse access to finance and are disproportionately impacted by their responsibilities as carers. Nevertheless, those who manage to set up their own businesses are as likely to be successful as men.
 
There are number of ways to tackle these inequalities. Organisations should build special support programmes and provide access to role models, networks and mentors to help women overcome gender perceptions. Stereotypes should be challenged through management training and diversity education. Women themselves should be provided with relevant training.
 
Transparency is the key to overcoming gender inequality in financial services and that is why clear performance standards need to be set. Companies should regularly report disaggregated HR data.
 
Ultimately, what is needed to address these issues is not more legislation, but real buy-in from all levels of companies backed up by effective support and guidance from government for businesses of all sizes.
 
ACCA's new position paper on equality in financial services can be found here.

Climate change: is agreement at Copenhagen possible?

COP 15 in December 2009 is the latest in the series of UN Climate Change meetings aimed at coordinating international action against climate change.
 
The goal is to establish an ambitious global climate agreement for the period from 2012 when the first commitment period under the Kyoto Protocol expires.
 
The challenge facing negotiators at Copenhagen is significant. Recent projections from the Intergovernmental Panel on Climate Change (IPCC) warn that unless action is taken to cut greenhouse gas emissions, global warming will exceed the danger level of a 2°C increase, possibly as early as 2050. Unprecedented coordinated action is required to address this.
 
The international climate change negotiations and their objectives are vitally important, as is having a follow-on agreement to the Kyoto Protocol. Without internationally binding regulations, there will be no effective action to tackle climate change. Taking into account the necessary ratification phase, the conference in Copenhagen is the last opportunity to reach a follow-on agreement that can be entered into force by 2012.
 
Unfortunately, it seems increasingly unlikely that agreement will be reached in time. 
 
At the moment, governments around the world are understandably focusing on jobs and national economies. However, world leaders should view the financial crisis and climate change as intertwined challenges.The financial crisis is an opportunity to invest in low-carbon growth that will be the foundation of long-term sustainable economic prosperity, by investing in energy-efficient technologies and renewable energy and creating lower-carbon growth and green jobs.
 
A new climate change agreement must contain a clear regulatory framework that is valid, ideally until 2030 or 2050. 
 
The level of effort and commitment from developing countries will need to reflect their national circumstances, but they too will need to take action, with appropriate support from developed countries, to put themselves on track to a low carbon economy.
 
China believes it is the responsibility of established industrialised nations such as the UK and US to set an example in cutting carbon emissions, while the US points to the fact that it has been overtaken by China as the world's largest emitter of carbon dioxide. The US has historically emitted far more than China, and on a per capita basis Chinese emissions are significantly less than those of the US. China is also unwilling to contemplate emissions cuts at a time of rapid economic growth, taking the understandable position that it refuses to be penalised for the West's excesses. This needs to be resolved before meaningful carbon cuts can be agreed to. For Kyoto's successor to succeed, both the US and China have to sign up to it.
 
Governments should agree to a reformed and expanded global carbon market; however, any steps towards a global carbon market must be taken alongside robust monitoring, reporting and verification arrangements.
 
Business has a key role to play in tackling climate change and governments and supranational bodies should support them, by, for example, developing a portfolio of fiscal instruments designed to internalise sustainability impacts in international trade treaties.
 
Finally, leaders should focus on designing markets which promote technological and behavioural responses and on creating laws and regulations that protect the environment without damaging trade.
 
Good laws create market opportunity – we need incentives for positive action.
 
ACCA's recommendations to world leaders in advance of COP 15 can be found here.

Small business and the financial crisis

Small and medium sized enterprises (SMEs) are an important part of developed and developing economies as they play a key role in creating jobs, innovation, supporting stability, macroeconomic growth and act as a growth engine. In OECD countries, SMEs represent 95% of all enterprises, accounting for two-thirds of employment and being the main source of new job creation (1). As such, SMEs in many countries around the world are the major source of economic recovery and assist the return to sustainable growth.

SMEs are particularly badly affected in times of financial crisis, due to the reduced demand for products and services, sudden rises in the prices of raw materials, energy and food, liquidity and credit related problems, variations in exchange rates, inflation, and still are subject to a relatively high cost of capital. Access to finance continues to be one of the most significant challenges for the creation, survival and growth of SMEs, especially those that are innovative. Start-ups in particular are most vulnerable, often lacking the resources to survive the downturn.
 
In addition, the uneven application of regulatory and legal frameworks that have primarily been designed for large-listed companies leads to market failure and requires governments to intervene to support these important contributors to the economic well-being of countries. SMEs will require effective short-term measures to address these financial and other aspects that are a part of their business environment. It is critical in these circumstances that regulators think small first. 
 
SMEs need more urgency on measures to help restore confidence, on issues such as late payments, access to finance and employment support measures. These will need, however, to be linked to structural improvements in the SME financial environment over the longer term in order to be successful and to restore growth.
 
The current economic context is a unique opportunity for governments around the world to find more far-reaching ways to collaborate and partner with business, civil society as well as between governments, to pool efforts to build infrastructure, build social capital and encourage institutional changes and help improve the operating environment for business.
 
Governments need to ensure that the SME interests are adequately represented within government. Separate agencies, with strong influence and links within government, that deal with small business policy and manage government intervention relating to business support may be needed in order to ensure adequately focused policy and a clear point of contact. Ensuring that small businesses have a strong voice within government is crucial to ensuring a small business-friendly environment. Regulation, for example, is a key area for creating the right environment both for entrepreneurship and for business to prosper. World Bank research has found that countries with burdensome regulation have larger informal sectors, higher unemployment, and slower economic growth (2).
 
Working collaboratively, governments can do more to support host governments in developing and emerging markets with the development of enabling frameworks that encourage responsible private sector investment. For example, by supporting efforts to put in place effective regulatory and voluntary standards; legal frameworks; funding and investment vehicles; policy consultation mechanisms; accountability structures; and civil society networks.

Governments can also support the creation and strengthening of local business associations, chambers of commerce – which are often weak or non-existent – as well as essential ‘institutional infrastructure’ (linkage programmes, skills/training programmes) for SME development.
 
Although, much of the emphasis is on governments to act 'locally' to the problems confronted by SMEs during this crisis, there are important issues that have a global dimension and need to be addressed to ensure the sustainability and growth of the SME community. For example, the level of SME cross-border activity is increasing year on year through the development of technology and communication.

It is important that SMEs are protected against external events that are out of their control such as fluctuations in exchange rates. SMEs around the world need special attention and support in the current financial crisis.

References
(1) SME and Entrepreneurship Outlook, OECD, 2005
(2) Doing Business, The World Bank, 2008

Member views: Addressing the Challenges of the Global Economy

As part of its ongoing work on the global economic crisis, ACCA recently held a conference entitled Addressing the Challenges of the Global Economy.

This conference, which used electronic voting and virtual participation to assess the views of members, called for a major shake-up of regulation, the way non-executive directors (NEDs) are appointed and operate as well as a new approach to corporate governance in the financial sector.

The conclusions that came out of the debates were many and varied and offered some real solutions that could ensure that a crisis of this nature does not happen again. We have fed these back to policy makers and governments around the world. Some of the top-line conclusions were: 


• NEDs in large banks have proven to be ineffective and there needs to be a new structure to ensure that they have the independence, skills and resources to exert supervision over the executive in future.
• While recognising there were mitigating factors, such as the fact that independent NEDs must rely on company information that can lead to them being misled and that the complexity of company issues and the NEDs' distance from them make it difficult to govern, their lack of understanding was not acceptable as an excuse.
• There should be co-ordinated national systems of regulation. Delegates agreed that while there are advantages to global regulation to deal with global issues, there should be national enforcement of those regulations.
• With commercial banking critical to national interest, it is important that there should be national regulation.  
• Regulations should recognise uniqueness of individual countries and markets, and the different attitudes that nations have to enforcement of regulation.
• Accountants also agreed that they should take more responsibility – by being tougher on how they recognise profit.
• Regulators should continue with principles-based regulation and that banks that were seen as too big to fail, too big to challenge and too big to rescue should be left as they were but should be subject to much closer supervision.
• There should be greater connectivity and transparency between banking systems.
• The current corporate governance combined code appears to be ineffective. There is a real need and potential for a radical new approach to effectively monitor and control behaviour within the financial sector rather than to attempt to restructure the combined code, but actually achieving this will be difficult.


Participants also made a number of suggestions regarding what a new approach should look like, such as:


• executive directors should not choose their own non-executive directors
• there should be stronger consequences for not following the combined code
• there should be a change to reporting lines, which are currently too narrow
• the focus should not be only on backward-looking narrow financial data and should not focus only on short-term profit making, monitor indicators of the well-being of the company
• rewards for short-term success that put the business at risk should be reduced, and incentives should instead be used to create a long-term mindset
• 'ethical committees' should be introduced into organisations
• young people should be educated so that when they become investors they can make wise decisions and hold financial sector organisations more accountable.


As an accountancy body with members and students around the world, ACCA is in a unique position to work with others in the financial services sector to develop the network necessary to understand the financial crisis from the perspectives of governance, remuneration, regulation and accounting.

ACCA will continue to host roundtables and conferences and to lend our expertise to policy makers and governments around the world, in order to assist in finding a way out of the global financial crisis. 


A full summary of the global economy debate can be found on our global economy microsite here.