Tax wasn’t a material issue for ESG – let alone traditional – investors a few years ago, but now it is. So how did this happen and what does it tell us about other issues which are currently dismissed as non-material?
Investors weren’t quick off the mark. The exception was Henderson Global Investors which published two reports in 2005 and engaged with some companies. Few other fund managers followed and even at Henderson the interest didn’t continue for long: the firm switched its domicile from the UK to Ireland in 2008 for tax reasons and then back again in 2012.
New issues – especially ones that challenge norms and powerful elites – are often dismissed as ‘not material’ at the outset. This reaction seems to happen with other social issues (like inequality) and environmental topics (like biodiversity) as well. What do these have in common?
Costs can be externalised with impunity. And investors, asset owners included, may be exposed (as is the case with tax avoidance). Those in glass houses cannot afford to throw stones.
This is understandable, but it means that the investment industry operates as if its possible – in the aggregate and over the long-term – to deliver healthy returns in a progressively unhealthy and, enfeebled world.
And we wonder why many have an instinctive distrust of the investment industry.
Another specific learning from the tax debate is that NGOs, progressive foundations and sympathetic media set the agenda. And when events demand, even complacent politicians will follow. It took the global financial crisis to ignite the tax debate: with budgetary pressures, governments needed to show that austerity for the public – and the crackdown on ‘benefit scroungers’ – was matched by a clampdown on lost tax revenue.
So could investors learn to be more on the front foot? Without doubt they could. Partnerships with critical academics and NGOs is one obvious way forward. But the bigger question is do they want to? For those executives focused on maximising their income in a short period, realistically the answer is no. As Upton Sinclair said several decades ago, ‘It is difficult to get a man to understand something when his salary depends on his not understanding it’.
I am more hopeful, however, about those who are coming up the ranks and who can see that the financial industry is gambling with its licence to operate.
Yes, they are concerned about career risk when they challenge norms, but many can see the industry is approaching a crisis. If their firms don’t do much more to evidence the industry’s social purpose, then the pay packets of yesterday – perhaps, even their jobs – will really be a thing of the past.
So back to materiality. It is always, almost by definition, in the eye of the beholder. And what that eye considers to be important is determined by the beholder’s objectives.
If the purpose of the industry is to see corproate total shareholder return or dividend growth – and simplistically assume that this aggregated is good for society – then it is logical to turn a blind eye to ‘preventable surprises’ like BP, Northern Rock, Tepco and Tesco, plus cases under the waterline.
But if the purpose of the industry is to do the best for end clients and be concerned about the portfolio as a whole – what a former president of the CFA Institute calls fiduciary capitalism – then today’s insouciance over tax and income inequality is problematic. Countries that have a shrunken tax base, with taxation falling only on those who can’t avoid it, cannot be resilient, and will become unstable.
Is this what long-term globally diversified investors really want? And if so, do their customers realise this?
Raj Thamotheram is CEO of Preventable Surprises and a visiting fellow at the Smith School, Oxford University