Rewarding Good Ethics in Business

Laid out below is a response I made to the current British Government’s consultation on ways to improve freedoms and reduce the numbers of laws and regulations that have an impact on our lives.

The actual item can be found on the governments Freedom Website HERE.

I would like to propose the government considers making corporate taxation voluntary.

This provides a way for government to remove a raft of regulation and legislation while at the same time allowing businesses that treat their stakeholders well an opportunity to leverage their ethical behaviour so that it translates to the balance sheet.

By stakeholders in a business, I mean shareholders, customers, suppliers, employees, the environment and the community.

Sharp business practice is contagious. When a company discovers a way to cut costs at the expense of a stakeholder, they are able to compete that much more effectively against companies that try to uphold a higher standard of ethics. Of course, when there is a sufficient public outcry over a particular practice, governments and regulators have moved to legislate against it. Sadly they too often find that there is little they can do to stop it or it is too late to save some businesses.

At the moment, the only measure of a company's success is the balance sheet. This determines the share price and thus the way the markets perceive a company. The only way a Government can truly influence this is through taxation and the best way governments can ensure ethics are maintained in business is by making corporate taxation voluntary.

Governments should empower organisations such as Trade Unions, Environmental Groups, Supplier Organisations, Local Councils, and Consumer Groups to set up ethical behaviour standards that represent what they consider the ethical way to conduct business. Government itself should also maintain a certification scheme that allows it to act against excessive bonuses and reward companies that employ people in development areas.

If a business meets these standards and gains certification, then that business should be exempted from a proportion of their tax bill - thus improving their balance sheet, profits and share price. A particularly good company that consistently achieves the highest ethical standards should therefore pay little or no tax.

This doesn't increase the size of Government because existing external bodies would run the schemes. These external bodies would be allowed to charge for the certification. If certification is revoked, then a minimum period of five years would need to elapse before a company could re-apply. Should a company voluntarily withdraw, then this period would reduce to two years.

The external bodies would be allowed to charge for certification so that they would be able to afford the resources to run them properly. It is also possible to allow different certification bodies to compete with each other over certification. E.g. Different Trade Unions could all offer their own schemes as could different environmental charities.

Companies would not be forced to accept expensive, over the top schemes because if a particular certification was too onerous, the companies would just choose to pay the tax instead.

However, it would introduce ethical frameworks that had a direct impact on share prices.

One particular safeguard for the system to work is a strengthening of tax evasion legislation and punishments to make key executives directly accountable for making sure they are following the rules of the system and are being honest in all their dealings surrounding certifications.