Business shoots itself in foot with poor corporate conduct

Anti-corporate sentiment has always been a thing, but it has clearly escalated over the past decade as the pain of the ‘great recession’ fell heavily on the shoulders of many people. 

Financial institutions were correctly blamed for the madness that resulted in the growth and eventual implosion of the sub-prime lending market, which in turn unleashed incredible global hardship.

The legacy of the global crash will take years to work through, and the anger will not subside. Arguably, the election of Donald Trump and the bizarre Brexit vote in the UK in 2016, represent two manifestations of this anti-corporate sentiment. Be prepared for more. Here in Ireland, the burden of the post-crash fiscal adjustment fell very heavily on those who work and pay income tax and/or the dreaded Universal Social Charge (USC). Back in 2006, income taxes accounted for just over 27% of total taxes paid in the economy, but this year that will be closer to 40%.

It is worth remembering that the total in employment this year is very similar to that in 2006. The proportionate contribution made by the corporate sector barely increased over that period. This is not a value judgment; it is simply a fact that we need to ponder on.

The developed world faces many intense economic and social challenges over the coming years. Against a background of ageing populations almost everywhere in the so-called developed world, the pressure on governments to increase spending on areas such as pensions, health, education, and public infrastructure will intensify. On top of this, the cost of addressing climate change and extreme weather events will undoubtedly impose a massive burden on exchequers around the world, the magnitude of which we cannot possibly comprehend at the moment.

The big question, of course, is where the resources will come from to fund this expenditure. One obvious conclusion is the burden will continue to fall on the shoulders of the personal sector and corporations will bear as little of the burden as possible. If this turns out to be the case, then anti-corporate sentiment will just continue to grow and inevitably give rise to the emergence of strong political forces that could end up creating a much less business-friendly environment around the world. Corporate behavior may well be causing the corporate world to shoot itself in the foot.

The recent behavior and reaction of the Irish banking sector to the tracker mortgage issue is a case in point. The longer the banks fail to live up to their moral and legal obligations, the more the popular anger will intensify and the more painful it could be for the banking sector in the longer-term. It beggars belief as to why they refuse to come out with their hands up and remedy the situation.

Many peoples and governments are becoming justifiably angry and disillusioned with the manner in which many multinationals are using mostly legal means to pay as little tax as possible. In response, the EU and the OECD are driving the charge to ensure that corporations pay tax in the jurisdictions where the economic activity occurs and not allow those revenues to be diverted to very low corporation tax locations such as Ireland.

Donald Trump’s plan to cut the US corporate tax rate from 35% to 20% has brought that issue to the fore in academic circles. Those who favour this approach argue the boost to corporate profitability will feed its way into wages and workers will ultimately benefit. Others argue it will just boost the wealth of already wealthy shareholders. If corporate behavior continues to drive anti-corporate sentiment, ultimately the corporate world could be the loser. Perhaps it is time for a new approach.


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