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Aggressive Tax Planning and Corporate Social Irresponsibility: Managerial
Discretion in the Light of Corporate Governance
Ave-Geidi Jallai* and Hans Gribnau**
Abstract
The purpose of this contribution is to explore the possibility of integrating tax with corporate
social responsibility (CSR). Some corporate directors seem to argue that they do not have a
choice with regard to tax planning, implying that a responsible tax planning strategy is not an
option. This contribution shows such argument to be wrong. First, the issue of management
accountability and choice will be dealt with in the context of corporate governance systems in
order to find out what kinds of obligations corporate governance entail for managers. It will be
shown that corporate directors enjoy sufficient discretion for making socially responsible
decisions. To this end, two existing theoretical frameworks will be analysed, according to which
corporate decisions should prioritise either shareholders or stakeholders interests. Both theories
allow managers a choice to act with a wider interest than purely shareholder value maximisation.
Furthermore, it will be argued that managerial discretion to take CSR into account does not
oblige managers to aspire to some kind of ideal social responsibility but rather to stay away from
corporate social irresponsibility (CSI). Therefore, corporate managers in different corporate
governance regimes have sufficient room for aligning their tax planning strategies with societal
expectations and avoiding aggressive tax planning.
Thus, this paper aims to make two contributions to academic theory. First, it is shown that both
shareholder and stakeholder-oriented corporate governance regimes allow for managerial
discretion to take CSR on board in tax matters. Secondly, the concept of corporate social
irresponsibility (CSI) is introduced to enhance a more balanced debate about multinationals’ tax
planning practices.
As for methodology, this contribution explores managerial discretion within various corporate
governance systems and relates this to CSR and tax planning. Thus, this interdisciplinary
research comprises three different perspectives: corporate law, taxation, and applied business
ethics.
1. Introduction
This contribution explores possibilities to integrate tax with corporate social responsibility
(CSR). Recent scandals such as the so-called ‘Panama Papers’ and ‘LuxLeaks’ have shown that
The authors wish to thank Ronald Russo and Ger van der Sangen for their comments on a previous draft of this
paper.
* PhD researcher, Fiscal Institute, Tilburg University. The author can be reached at a.g.jallai@tilburguniversity.edu;
©.
** Professor of Tax Law, Fiscal Institute and the Center for Company Law, Tilburg University; Professor of Tax
Law, Leiden University, the Netherlands. The author can be reached at J.L.M.Gribnau@tilburguniversity.edu; ©.
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there is something wrong with international tax planning. In this respect, multinational
corporations attract much media attention (see e.g. Miliband 2015; Birrell 2014; TJN 2014;
Conway 2015; Setzler 2014; ICIJ LuxLeaks; ICIJ Panama Papers). The general public seems to
expect multinationals to change to less aggressive tax strategies - deployed to achieve higher net
profits. However, during the UK Public Accounts Committee hearing, Google’s Matt Brittin
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claimed that (aggressive) tax planning “is not a matter of personal choice” (UK/PAC HMRC
2012, Q. 485, p. Ev 40). This is a surprising statement that makes one wonder, for if corporate
management does not face choices with regard to tax planning then what determines corporate
decision-making? Which corporate laws determine or limit managers’ choices? This contribution
answers this question and elaborates on corporate managerial discretion with regard to
international tax planning and corporations’ social responsibilities.
International tax planning has become a societal issue. The shift of tax burden to individuals and
SMEs has created the feeling of inequality, especially in the aftermath of economic crisis. People
have started to pay more (negative) attention to large international companies that earn immense
profits but have the possibility to achieve a very low effective tax rate. Therefore, according to
the public, businesses are not free to do as they wish to increase their income, market share or
alike (Jallai 2017). In this contribution, we do not focus on the question whether companies or
states
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are to blame for the existing tax planning practices. We focus on the question whether
corporate governance leave multinationals elbow-room with regard to the degree of tax planning.
Thus, we approach the topic of tax planning from a corporate perspective. Is aggressive tax
planning – paying (almost) nil corporate income tax by keeping with the letter of the law while
completely undermining the spirit of the law - for multinational corporations indeed an
obligation and not a matter of “personal choice”?
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Based on different corporate governance
traditions we explore whether corporate managers have a choice with regard to tax planning and
if so then what needs to be taken on board.
In this paper, we relate the issue of choice to CSR, which is often conceptualised as a matter of
voluntary choice. CSR assumes that (managers of) multinational companies enjoy some kind of
discretion. We will argue that CSR could be seen as a tool for good tax governance. The fact that
taxes are of utmost importance to sustain our society, places them at the heart of the idea of CSR.
This contribution proposes that tax should be an integral part of a company’s CSR strategy. In
light of this, we will discuss to what extent and what kind of responsibilities companies have
towards society. Moreover, in case corporations would want to improve their tax governance
under the auspices of CSR, do corporate governance rules allow for it and under which
conditions? We argue that corporations should stay away from tax planning practices that would
qualify as corporate social irresponsibility (CSI).
Corporate governance (CG) “concerns the manner in which corporations are regulated and
managed” (Du Plessis et. al. 2015, p. XXV). Corporate tax governance is a complicated affair for
corporations themselves are complex organisations. In every-day business-making, corporations
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Vice President for Sales and Operations, Northern and Central Europe Google.
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States are also important players on the international tax market, competing with one another by using taxation to
create a favourable investment climate to attract business.
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Here we use the term ‘letter of the law’ as shorthand with regard to tax planning that exploits the technicalities or
differences between tax systems by making use of ‘a bewildering variety of techniques (e.g. multiple deductions of
the same loss, double-dip leases, mismatch arrangements, loss-making financial assets artificially allocated to high-
tax jurisdictions)’; (Piantavigna 2017, p. 52).
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have to consider much more than just tax. Moreover, in their decision-making processes
corporate boards need to consider many (conflicting) interests. For instance, from a business
perspective, tax is also seen as a cost and costs should be kept low. Low costs satisfy
shareholders (at least in the short-term) (Erle 2008, p. 205). However, the general public expects
companies not to use all the existing legal possibilities to minimise their tax liability (Avi-Yonah
2014; Gribnau and Jallai 2016). Aggressive tax planning thus may imply reputational risks.
Here, businesses may face a conflict. On the one hand, corporations should enhance, maybe even
maximise, shareholder value and satisfy shareholders’ demands; on the other hand, companies
should contribute their fair share to society in the form of taxes.
Of course, this assumes that corporate responsibility presupposes different choices the board can
make. Thus, the question is, what kinds of interests should corporate boards consider while
deciding on tax planning strategies? Should they prioritise shareholders’ economic interests and
choose therefore as aggressive tax planning as possible? Or should the board be willing to pay
more (than the minimum in accordance with the letter of the law), if that is necessary in order to
meet (ethical) responsibilities towards society at large? In this sense, members of society are a
company’s stakeholders, whose interests can be advanced by tax payments spent on
infrastructure for transport and communications, social security, education, healthcare,
environmental protection and other public goods. However, corporate governance systems might
seem to force managers to exclusively focus on shareholder value at the expense of stakeholders’
interests (see e.g. Schön 2008) – or so Google’s Matt Brittin seems to suggest. Does corporate
governance therefore (in)directly oblige multinationals to engage in aggressive tax planning and
limit their possibility to engage in CSR? And with regard to CSR, how does one translate a
company’s voluntary responsibility into taxation? Does CSR demand managers to use their
discretion like an ideal(ised) citizen, paying a fair share in taxes, or sufficiently to meet a certain
threshold - i.e., not to act in an irresponsible way?
Based on the described situation and conflicts, the main research question of this contribution
reads as follows: how can managers of a (multinational) corporation translate the commitment to
CSR into a responsible tax planning strategy within the limits set by corporate governance? First,
the issue of management accountability and choice will be dealt with. What is corporate
governance and what kinds of obligations does it set for the managers? Do they enjoy discretion?
As it will be argued, there are two existing theoretical frameworks, according to which corporate
decisions should prioritise either shareholders or stakeholders interests. We will investigate these
theories and find out whether managers have a choice to act in the wider interest than purely
shareholder value maximisation. Furthermore, we will research what different corporate
governance models and their underlying theories require in this situation. Based on that, we
investigate whether corporations have conflicting responsibilities towards shareholders and other
stakeholders in their tax planning. And if so, which one prevails?
As for methodology, this contribution explores managerial discretion within various corporate
governance systems and relates this to CSR and tax planning. Thus, this interdisciplinary
research comprises three different perspectives: corporate law, taxation, and applied business
ethics. Corporate governance and business ethics are used to better understand the managers’
responsibilities towards shareholders and stakeholders in the context of tax planning. Moreover,
international tax planning is placed in an area between corporate social responsibility (CSR) and
corporate social irresponsibility (CSI).
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This contribution is subject to several limitations. First, it focuses only on multinational
enterprises; wealthy individuals and their tax planning practices are not the focus of this
contribution. Second, this research does not provide an extensive analysis on CG theories. Thus,
our starting point is the statement of Matt Brittin who seems to prioritise shareholders’ interests
exclusively; on the other side, we explore the opposite view – stakeholder theory, which strongly
reacted to the one-sidedness of the shareholder value theory. Therefore, we focus only on a very
specific aspect of corporate governance: the question whether corporate managers have the
possibility of influencing tax planning under CSR.
2. Corporate Governance and the Duty of the Managers
Do corporate managers have a choice? In order to answer this question, we need to find out what
the legal responsibilities of managers are in the first place. Therefore, we turn to corporate
governance regimes, in order to understand what is legally expected from corporate managers.
Thus, in this section we give a brief overview of what corporate governance is and what is the
main legal responsibility that managers have according to corporate governance rules.
Corporate governance is about the governance of corporate entities and their activities. It refers
to the way power is distributed within a corporation and the decision-making process with regard
to the use of this power. Corporate governance is generally understood as sets of rules and
principles for how a (large) company is regulated and managed (Du Plessis et. al. 2015, p.
XXV). Corporate governance originates with the birth of corporations. In ‘An Inquiry into the
Nature and Causes of the Wealth of Nations’ of 1776, Smith even then writes:
The directors of such companies, however, being the managers rather of other people's
money than of their own, it cannot well be expected, that they should watch over it with
the same anxious vigilance with which the partners in a private copartnery frequently
watch over their own .... Negligence and profusion, therefore, must always prevail, more
or less, in the management of the affairs of such a company. (Smith 1776, p. 741).
Smith thus points to the need for the supervision of managers because of the (legal) separation of
ownership in capital from the control over that capital - i.e. the management of a business. In the
same vein, nowadays there is an underlying assumption in most of the corporate governance
literature that corporate managers “operate with self-serving motivation” (Buchholtz et. al. 2008,
p. 329).
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Thus, corporate governance should set certain rules and principles for company
management in order to decrease possible negative externalities that might rise from such self-
interested behaviour of managers. In the other words, corporate governance should prevent
managers, who do not run the business with their own capital, abuse their power at the expense
of the capital owners’- shareholders’ - interests. The most complex tension in the corporate
governance debate that has not been solved yet is how to balance “the profit-making objective of
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Nowadays the managers’ self-serving motivation is conceptualized as agency theory, according to which one
person (agent) has to make decisions on behalf of (or that affects the) another person (principal). Corporate
governance rules should offer a safety net in case there occur conflicts between agents and principals. Agents are
usually corporate managers and principals are stakeholders, while shareholders are often considered as the most
important group of stakeholders. See more on agency theory: Eisenhardt 1989; Desai 2008, p. 14 who point at the
centrality of the agency problem to the intersection of corporate governance and taxation.
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corporations and company officers against broader social responsibilities owed to the wider
community” (Du Plessis et. al. 2015, p. XXV). The focus of this contribution is, however, on
managers’ discretion: would managers abuse their managerial position at the expense of
shareholders’ interests when they promote the interests of (other) stakeholders in the company?
In order to answer this question, we need to better understand what corporate governance is.
The concept of corporate governance can have varying definitions. Many theoretical definitions
of corporate governance reflect the concern for the supposedly self-serving motivation of
managers related to the separation of ownership and control. For instance, Shleifer and Vishny
define corporate governance as “the ways in which suppliers of finance to corporations assure
themselves of getting a return on their investment” (Shleifer and Vishny 1997). However, there
is need for control of those who have to realise this return on investment. La Porta, Lopez-de-
Silanes, Shleifer and Vishny define corporate governance as “a set of mechanisms through which
outside investors protect themselves against expropriation by the insiders” (La Porta et. al. 2000,
p. 4). Friese, Link and Mayer aptly summarise the common general elements as “the sum of all
mechanisms of control and supervision that are aimed at ensuring the successful operation of a
business in a corporate form and in this respect to remedy the effects of the separation of
ownership and management” (Friese et. al. 2008, p. 364).
If we look at the attempts of commissions and regulatory authorities to define CG we also see
different definitions. For instance, according to the UK Cadbury Commission, corporate
governance is “the system by which companies are directed and controlled” (Cadbury 1992,
para. 2.5). The direction of the companies should be controlled to protect investors. According to
the Dutch Corporate Governance Code, corporate governance is about good governance and
supervision of listed companies; it regulates relations between directors, auditors and
shareholders.
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So corporate governance concerns mechanisms to supervise the behaviour of
different actors. According to its preamble, the Dutch point of departure is that the corporation is
“a long-term alliance between the various parties involved in the company.” The Dutch Code
refers to different actors - the stakeholders. Such stakeholders are, according to this Code, “the
groups and individuals who, directly or indirectly, influence – or are influenced by – the
attainment of the company’s objects: i.e. employees, shareholders and other lenders, suppliers,
customers, the public sector and civil society.” The Code states that “the management board and
the supervisory board have overall responsibility for weighing up these interests, generally with a
view to ensuring the continuity of the enterprise, while the company endeavours to create long-
term shareholder value.”
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Furthermore, according to the OECD “corporate governance involves
a set of relationships between a company’s management, its board, its shareholders and other
stakeholders. Corporate governance also provides the structure through which the objectives of
the company are set, and the means of attaining those objectives and monitoring performance are
determined” (OECD 2015b, p. 9). The OECD further notes that “the purpose of corporate
governance is to help build an environment of trust, transparency and accountability necessary
for fostering long-term investment, financial stability and business integrity, thereby supporting
stronger growth and more inclusive societies” (OECD 2015b, p. 7).
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“Corporate governance gaat over goed bestuur van beursgenoteerde bedrijven en het toezicht daarop. Het regelt
verhoudingen tussen bestuurders, commissarissen en aandeelhouders. De overheid heeft wetten opgesteld voor goed
en eerlijk bestuur van bedrijven. Ook is er een gedragscode: de Corporate Governance Code.”
<https://www.rijksoverheid.nl/onderwerpen/corporate-governance> accessed 14.07.2016.
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Preamble point 7.
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These examples show that there are differences in definitions and therefore also to a certain
extent in the principles of corporate governance. Such various definitions indicate different
starting points - supervision mechanisms protecting first and foremost shareholder interests on
the one hand, or taking also explicitly into account stakeholder interests on the other hand. Both
positions are hotly debated. We will discuss these different starting points further in this article.
In this contribution, we approach the corporate governance debate from the perspective of tax
planning. An important distinction is made between the shareholder perspective and the
stakeholder perspective on corporate governance. Some authors argue that the differences
between these two conflicting views have become smaller (Stout 2012, p. 26). To a certain extent
this can be agreed with, especially considering that there are many globalised multinationals
operating in an international setting. This convergence notwithstanding, tax matters provide
nuances, which still make it a difficult debate. This is because taxes are not only an expense, but
also have a moral aspect which apparently confuses companies (see e.g. Gribnau 2015; Gribnau
and Jallai 2016). Taxes, therefore, have a societal and an economic dimension; they are
important contributions to a sustainable society while they can also be seen as a cost element for
a company. This provides us with questions such as, for example, whether managers should view
tax planning from the perspective of the shareholders or from the ethical perspective, which
demand to take companies’ societal obligations into account?
Corporate governance theories are largely based on theories of companies, and on the question to
whom should a corporation be responsible and accountable – shareholders or stakeholders.
Among economists, there has long existed an understanding that corporations should generally
be run so as to maximise its owners’ – shareholder – value (Berle and Means 1968; Friedman
2002, p. 133). This view directly relates to the central focus of this contribution: do
multinationals and their managers have any choice in tax planning, and therefore, ethically
responsible tax governance, and, if so, how should they choose whether they should satisfy their
shareholders or society at large, or maybe both?
3. Whose Interests Should a Corporation Serve – Shareholders or
Stakeholders?
Amongst corporate law scholars, there have long existed two prevailing theories when talking
about the essence of a corporation: shareholder theory and stakeholder theory. These two
theories reflect upon to whom corporations should be responsible and accountable. To a certain
extent convergence has developed between these theories.
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Consequently, there is less
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The alleged convergence between the two systems has probably much to do with globalisation and growth of
international business making. It is, however, not entirely clear what this convergence exactly entails. In 2002,
shortly after the Enron scandal, leading US CG scholars Hansmann and Kraakman argued that there is an
international convergence towards the ‘standard’ model of corporate governance – the shareholder model since it is
the best / strongest to work, according to the authors (Hansmann and Kraakman 2002, pp. 56-58, 76). On the other
hand, there are scholars who criticise theories of convergence because corporate governance is very much attached
to national systems and therefore there is no possibility for one general international system (Farrar 2005, pp. 11-
13.) In this vein Mallin (2007) notes that “while recognizing that “one size does not fit all” in terms of corporate
governance, institutional investors are increasingly converging on the basics of good corporate governance,
encompassing such areas as basic shareholder right, independence of directors, and presence of key board
committees.” For further discussion in the context of tax planning these two systems still offer various insights to
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disagreement nowadays in regard to the board’s discretion to also serve wider stakeholders’
interests as well as shareholders. However, managers like Google’s Matt Brittin seem not be
aware of this convergence, especially in the context of tax planning. They seem to stick to an
out-dated conception of the shareholder primacy. In order to convince these kinds of managers,
we address the question of managerial discretion by presenting the two theories in a traditional,
rather black-and-white way, though without leaving out nuances evidencing some convergence.
The shareholder theory marks “the importance of the primacy of the shareholder interest and the
enhancement of the shareholder value” (Farrar 2005, p. 5). The stakeholder theory, on the other
hand, presumes that “corporations exist to serve a number of different interests and not just
shareholders” (Farrar 2005, p. 5). Stakeholders are individuals (or a group of individuals) who
have “a commitment to a corporation that stems from the fact that they work for it, supply it,
purchase from it, live near it, or are affected in some way by its activities” (Mayer 2013, p. 32).
Naturally, also shareholders are (internal) stakeholders but since shareholders are stakeholders
who invest money in a company and are thereby also ‘the owners’, they are different from the
rest of the stakeholders.
These two theories represent also two theoretical models of corporate governance: the ‘market-
oriented’ Anglo-Saxon model and the ‘network-oriented’ Rhineland model of corporate
governance (see e.g. Wymeersch 2002, p. 231; Campbell and Vick 2007, pp. 250-252). These
models illustrate two diverging regulatory and business culture approaches towards stakeholders
and shareholders in company management (Habisch 2005, pp. 367-370). In the Anglo-Saxon
countries, such as the UK and US, directors of a company have a fiduciary duty towards its
shareholders. In the Rhineland model countries in Europe, such as Germany and the Netherlands,
managers have no judicial obligation to exclusively maximise shareholder value (see also
Reinhardt et. al. 2008, p. 11; Neri-Castracane 2015, p. 13). In German corporate law, which is a
representative of the Rhineland model, the concept of the plurality of interests exists:
“corporations are expected to abide by commonly accepted legal and ethical norms, and directors
are required to take account of the interests of the parties in addition to those of shareholders” –
stakeholders, thus (Mayer 2013, p. 40).
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European companies therefore also have to take into
account the interests of employees and creditors (Lambooy 2010, p. 56). For a contrasting
example, Sweden has a corporate governance system that lies in between these two ‘extremes’;
directors have the possibility to “interpret the company’s interests as extending beyond those of
the shareholders” but they are not obliged to do so (Mayer 2013, p. 41).
Donaldson argues that the differences between American/UK (shareholder) and European
(stakeholder) models of the corporation and corporate governance can be summarised by
“contrasting the extent to which the respective institutions of the United States and Europe either
embed or fail to embed the interests of the community in the governance of the corporation”
(Donaldson 2008, pp. 545-546). He further adds that in the US the focus lies more on “issues of
consider; especially when we aim to place tax planning in the context of CSR. Then the question of whose interests
managers should consider – shareholders or society at large – is raised again.
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In the same vein: Schön 2013, p. 1098; Muchlinsky 2007, pp. 341-342: “the classical Anglo-American model of
the single board corporation may not give adequate voice to the interests of stakeholders other than shareholders. By
contrast, the German dual board model has been supplemented by a mandatory allocation of seats on the supervisory
board for workers representatives under the co-determination laws (Mitbestimmung).” The participation of
stakeholders in the decision-making process is one of the premises (besides transparency and accountability), which
are common to both corporate governance and CSR (Lambooy 2010, pp. 49-104).
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individual liberty and economic freedom,” while in Europe the central point of interest is
focusing more on “class difference and community solidarity” (Donaldson 2008, p. 546).
For the context of this contribution, the differences between the two models raise the question
whether both these systems of corporate governance leave elbow-room for managerial decision
making. In order to answer that question, we focus explicitly on corporation managers’
responsibilities towards shareholders and other stakeholders, and examine whether these theories
have conflicting and common elements in this regard.
3.1. Shareholder Value Maximisation
One school of thought that supports the view that corporations should be run to increase
shareholders’ value originates from the writings of Milton Friedman (see e.g. Friedman 1970).
This neo-classical economic (or neo-liberal; Weyzig 2009) perspective is often presented as the
absolute opposite to the idea of possible social responsibilities of businesses. It is also referred to
as “Shareholder Value Theory” (SVT) or “Fiduciary Capitalism.” This theoretical approach
supports the idea that the only responsibility of business is making profits. Moreover, the
supreme goal according to this theory is “increasing the economic value of the company for its
shareholders” (Melé 2008, p. 55). Based on that, all other social activities that corporate boards
could think about, would only be acceptable in case obliged by law or in case they add to
maximisation of shareholder value (Melé 2008, p. 55).
Milton Friedman, the famous proponent of this essentially economic approach, argued in 1970
that the only one responsibility of business towards the society will generally be the
maximisation of profits to the shareholders, “while conforming to the basic rules of the society,
both those embodied in law and those embodied in ethical custom” (Friedman 1970, pp. 32-33).
This broad view on the basic rules of society is often not taken into account when Friedman is
quoted. Namely, in contradiction to the received view, Friedman is not opposing any social
responsibilities of a company, he is supporting a thin theory of CSR (Schwartz 2011, p. 56). To
his mind, it is justified that managers of a corporation that is a major employer in a small
community devote resources to providing amenities to that community or to improving its
government, because it is in the long-term interest of that corporation (Parkinson 2006, p. 9). But
for him it is a matter of generating goodwill rather than social responsibility (Friedman 1970, pp.
122-126). He labels this as acting from self-interest. Note, that self-interest thus may include a
commitment to certain social and ethical values - for example, in response to public pressure.
According to Schwartz, Friedman’s position could be summarised as a responsibility “to make as
much money as possible” (e.g. maximise profits) while complying with the “rules of the game”
or “basic rules of the society” in which the firm is operating (Schwartz 2011, p. 52). Such rules
of society include obeying the “law,” conforming to “ethical custom” (e.g. business norms where
you do business), and acting “without deception or fraud” (Schwartz 2011, p. 52).
There are, nevertheless, some unclear elements in Friedman’s theory for the purposes of this
contribution. For one thing, Friedman has not clearly defined what he means by “ethical
custom”. Schwartz believes that “presumably this consists of what would be considered
acceptable behaviour by the corporate community in the place in which the firm is doing
business” (Schwartz 2011, p. 55). However, it could well be the wider society rather than the
corporate community for Friedman considers “ethical custom” as part of the basic rules of
society. Moreover, as also shown above, according to Friedman companies should not engage in
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deception or fraud, even if by doing so they are maximising profits while abiding by the law
(Friedman 1970, pp. 32-33; Schwartz 2011, p. 55). Deception in this context may include “the
ethical obligation to act honestly, with sufficient transparency in one’s actions such that they can
be effectively evaluated by others” (Schwartz 2011, p. 55). Interpreted in this way, Friedman
again would leave room for ethical obligations beyond (mere) compliance with the legal system
(Clark and Grantham 2012, p. 32). To conclude, according to Friedman managers may engage in
practices that take into account the interests of stakeholders, though not solely of stakeholders, in
order to advance the long-term interests of the firm. Moreover, managers have elbow-room to
respect widely held social and ethical values, which are part of the rules of the game, in the long
term interest of that corporation.
The idea of shareholder value maximisation in general focuses on the predominance of property
relations (see e.g. Sternberg 2000; Melé 2008, p. 58). This means that shareholders, as the
owners of their investment (capital) should be protected against unreasonable spending.
Managers are agents whose function is to maximise shareholders’ value (Keinert 2008, p. 60;
Logsdon and Yuthas 1997). Such a view is generally backed by a high level of distrust vis-à-vis
managers because of their self-serving motivation (Keinert 2008, p. 60). Friedman’s theory
considers the shareholder value maximisation as “the supreme reference for corporate decision-
making” (Garriga and Melé 2004, p. 54). However, what this theory initially does not consider is
the fact that shareholders are highly mobile. They have the possibility to pull back their
investment at any time (see e.g. Chang 2010, pp. 17-21). The role of shareholders has changed
through the time and has been affected by globalisation. If previously we could identify
shareholders as the owners of a corporation of which they owned shares, then nowadays it is
more complicated and we should consider shareholder as the owners of the shares rather than the
corporation. Focusing on multinationals, we see that “shareholders no longer personally identify
with the corporation they own” (Molz 1995, p. 791). Therefore, as Molz argues, “most owners
today only identify their ownership in the corporation as an investment” (Molz 1995, p. 791; see
also Mayer 2013, p. 34.). Such shareholders today expect that “the corporation should generate a
steady stream of increasing quarterly profits and higher stock prices” (Molz 1995, p. 791). If
such expectation is met, “the investors are satisfied and unlikely to question the decision making
in the firm.” Based on that, Molz argues that “this preoccupation with short-term financial
performance overwhelms corporate considerations for broader social issues in the decision
making process” (Molz 1995, p. 791, referring to Drucker 1986). The issue that we face here is,
however, that the high mobility of shareholders allows them to step out any time they wish; other
stakeholders usually cannot do that. Therefore, focusing only on the (short-term) shareholder
value is not in the interests of the company nor the economy neither society at large (see also
Chang 2010, p. 19). Moreover, shareholders’ short-term interest might be bad for the company’s
long-term interests. Nevertheless, we do recognize that due to the same mobility factor of
shareholders, managers might often be under pressure to satisfy their needs in order not to lose
the investment. This can, however, create negative externalities for the rest of stakeholders or
society at large. Nonetheless, fear that shareholders might leave is not equal to lack of elbow-
room in decision-making.
As explained above, shareholder value maximisation has long been the basis of Anglo-Saxon
corporate governance models (Melé 2008, p. 60). One of the common elements in the SVT
supporters’ argumentation is ‘freedom’; it seems to be the keyword of this theory. Depending on
the economic and political power one supports, this could be considered an argument for
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supporting this theory. Another strength of this model, according to supporters of the SVT, is
that it contributes to an efficient economic system. They maintain, in the wording of Melé, that
the best conditions for wealth creation are “conducting business for self-interest, presenting
profits as the supreme goal, and operating under conditions of free and competitive markets
within a minimalist policy” (Melé 2008, p. 60). Some authors have also added that the conditions
of the free-market economy help to create social benefit if negative externalities and trade-offs
would not exist (see e.g. Jensen 2000, pp. 35-78). If companies are free to make their own
decisions, the whole economy will benefit in the end. Therefore, the free market economy
supports the creation of a strong and developed economy whereas “the tax system permits a part
of the wealth generated to be shared by society through governmental mediation” (Melé 2008, p.
60). This naturally provides an interesting question from the perspective of taxation – would this
argument fail if companies avoid paying taxes? As we will briefly explain below, tax is an
obligation towards society that many aggressive tax planners fail to meet.
Despite the arguments which favour economic growth and development, shareholder value
theory has also gained a lot of criticism. As said, free market economy and focus on shareholder
value maximisation would be efficient for the economy where negative externalities do not exist.
However, they do exist. Therefore, some authors have criticized the SVT. For instance, Arrow
has argued that the market involves asymmetric information and that causes negative
externalities for some parties and the rest of the world (Arrow 1985, pp. 130-142; Arrow 1973).
This, in turn, “destroys the invisible hand of Adam Smith and the connection between the micro
and macro levels, and therefore the efficiency of markets” (Melé 2008, p. 61). Therefore, this
SVT approach might not be as beneficial for economic development as some tend to believe. In
addition, the fact that the shareholder value maximization approach is frequently connected with
short-termism, supports the arguments that it might not be efficient for the economy as a whole.
Short-term profit making rather than long-term corporate value maximisation is namely believed
to be rather negative way of running a business (see e.g. Melé 2008, p. 61).
Furthermore, Melé has argued that besides “self-interest and concern for profits” a successful
firm requires more: “trust, a sense of loyalty, and good relationships with all stakeholders and, as
a consequence, an enduring cooperation among those who are involved in or are independent
with the firm” (Melé 2008, p. 61; see also Hosmer 1995; Kay 1993; Kotter and Heskett 1992).
Nowadays, pure shareholder value maximisation that precluded any socially responsible
behaviour has to some authors been proven wrong in itself because shareholder wealth would
most likely decrease in case companies act in socially irresponsibly ways (Keinert 2008, p. 65).
Garriga and Melé argue that nowadays “it is quite readily accepted that shareholder value
maximisation is not incompatible with satisfying certain interests of people with a stake in the
firm (stakeholders)” (Garriga and Melé 2004, p. 54).
Based on the fact that extreme shareholder value maximisation theory is incompatible with
efficient economy and social welfare, Jensen has proposed the so-called enlightened value
maximisation theory (see Jensen 2000, pp. 49-50). He implies that it is more important to focus
on a long-term value-creating vision and organisational strategy as a whole instead of focusing
on pure value maximisation as a sole corporate strategy (Jensen 2010, p. 38). Jensen argues that
the basic principle of enlightened value maximisation is “we cannot maximize the long-term
market value of an organization if we ignore or mistreat any important constituency” (Jensen
2010, p. 38). Therefore, he continues, corporations need to keep good relations with stakeholders.
Pichet has elaborated on Jensen’s theory and argued for an ‘enlightened shareholder theory’,
11
according to which managers “must defend the firm’s long-term social interests” (Pichet 2011).
Furthermore, Pichet adds that in terms of ‘enlightened shareholder theory’, corporate board
composition practices should be changed so that it includes “different kinds of expertise” and
that it is “capable of integrating and understanding a company’s culture” (Pichet 2011). Thus, we
witness that even the most critical view on social responsibilities of companies has gained more
moral flesh on the profit bones. Proponents of shareholder value maximisation theory explicitly
stress the importance of good relations with stakeholders: taking into account the interests of
stakeholders and the wider society may advance the company’s interests. This leads us to the
opposite theory, the stakeholder theory that will be discussed next.
3.2. Stakeholder Theory
As CSR requires managers to take into account the interests of members of society, which are
seen as company’s stakeholders, the concept of ‘stakeholder’ needs further clarification.
Shareholder value theory has, as shown above, often been considered being too one-sided and
narrow. It has also gained a lot of justified criticism. Therefore, scholars have proposed
alternative approaches. Many authors have argued that corporations should be responsible to a
larger group of stakeholders than just shareholders (see e.g. Freeman 1984; Friedman and Miles
2006; Donaldson and Preston 1995; Melé 2008, p. 64). Thus, the interests to be served by
managers include those of the shareholders (who are internal stakeholders) as well as the (other)
stakeholders. This is advocated by the stakeholder theory, taking stakeholders rather than
shareholders as its point of departure.
What is a stakeholder? Freeman’s classic definition is often quoted. “A stakeholder in an
organization is (by definition) any group or individual who can affect or is affected by the
achievement of the organization’s objectives” (Freeman et. al. 2010, p. 207, quoting Freeman
1984; see also Friedman and Miles 2006, pp. 25-27). Stakeholder theory scholars describe a
corporation by placing stakeholders in the middle of it: “The firm is a system of stakeholders
operating within the larger system of the host society that provides the necessary legal and
market infrastructure for the firm activities. The purpose of the firm is to create wealth or value
for its stakeholders by converting their stakes into goods and services” (Clarkson 1995, p. 105).
The basic idea is that value creation is the result of interaction among groups which have a stake
in the activities that make up business. “Business is about how customers, suppliers, employees,
financiers (stockholders, bondholders, banks), communities, and managers interact and to create
value” (Freeman et. al. 2010, p. 24). In these relationships the principles of reciprocity and
responsibility are at play; for instance, “the local community grants the firm the right to build
facilities and, in turn, it benefits from the tax base and economic and social contributions of the
firm” (Freeman et. al. 2010, p. 25).
For Freeman and others, stakeholder theory is not an antipode to shareholder theory but “instead
a larger view about corporations that encompasses shareholder theory” (Freeman et. al. 2010, p.
206). They argue that the introduction of stakeholder theory entails an “invitation to a
conversation that forces managers and the public to examine together two questions ‘what is the
purpose of a corporation?’ and ‘to whom are managers responsible?’” To this he adds that these
two questions “have both ethics and business thoroughly embedded in them” (Freeman et. al.
2010, p. 206). This is clearly a non-positivist view.
12
Initially the stakeholder theory was introduced as “a managerial theory” for better strategic
management. According to Hansmann and Kraakman, “at the core of this view was the belief
that professional corporate managers could serve as disinterested technocratic fiduciaries who
would guide business corporations to perform in ways that would serve the general public
interest” (Hansmann and Kraakman 2002, p. 60). Nevertheless, they continue arguing, “while
managerial firms may be in some ways more efficiently responsive to non-shareholder interests
than are firms that are more dedicated to serving their shareholder, the price paid in inefficiency
for operations and excessive investment in low-value projects is now considered too great”
(Hansmann and Kraakman 2002, p. 60). This point of view reveals one of the most important
criticisms that shareholder theory supporters have towards the stakeholder theory – it is
considered to be economically inefficient. However, the stakeholder theory has also been
considered to be “a normative theory which requires management to have a moral duty to protect
corporation as a whole and, connected with this aim, the legitimate interests of all stakeholders”
(Melé 2008, p. 63). Whether protecting the corporate interests as a whole is always economically
inefficient is up to a debate.
Stakeholder theory, as any other theory, has its proponents and opponents who have pointed out
some strengths and weaknesses. For instance, in comparison with the shareholder theory,
stakeholder theory is considered to be more ethical, just and “more respectful of human dignity
and rights” (Melé 2008, p. 66). Therefore, stakeholder theory is strongly related with the concept
of CSR where corporations have wider responsibilities than purely towards shareholders
(Freeman et. al. 2010, pp. 21-23). According to Freeman and others ideas and concepts like CSR,
corporate citizenship and corporate governance “share a common aim in the attempt to broaden
the obligations of firms to include more than financial obligations.” Thus, the literature in this
field deals with “questions of the broader purpose of the firm and how it can deliver on those
goals” (Freeman et. al. 2010, p. 235). In their view, “the stakeholder idea can and should be used
as a foundational unit of analysis for the ongoing conversation around CSR” (Freeman et. al.
2010, p. 236).
Several authors believe that one of the strengths of the stakeholder theory is that it has replaced
the conceptual vagueness of CSR because it is addressing concrete interests and practices and it
focuses on the specific responsibilities to specific groups that are affected by business activity
(see e.g. Blair 1995; Clarkson 1995; Melé 2008, p. 66). It is somewhat difficult to really agree
with that, because stakeholder theory in itself is also a very broad and vague theory. Moreover,
stakeholders’ interests are many (see Weyzig 2009, pp. 418-419) and sometimes they may
conflict; what should businesses do then? In light of this question, however, one of the additional
strengths of stakeholder theory is that stakeholder management is not necessarily directed against
shareholders; it just considers a wider group of stakeholders than shareholders only. Therefore,
in corporate governance systems that attach weight to the stakeholder theory managers do have
sufficient elbow-room for decision-making (see also Schön 2008, p. 36).
Stakeholder theory is nevertheless sometimes criticised because (from the shareholder value
theorists’ perspective) it might pave the way for managerial opportunism (see e.g. Jensen 2000,
pp. 35-78; Marcoux 2000; Sternberg 2000). Sternberg adds that stakeholder theory “effectively
destroys business accountability … because a business that is accountable to all, is actually
accountable to none” (Sternberg 2000, p. 51). Also Jensen criticises the stakeholder theory as
developed by Freeman (1984) and others. He claims that any theory should provide the actors
(managers in this case) guidance on how to deal with multiple “competing and inconsistent
13
constituent interests” (Jensen 2000, pp. 44-45). Jensen argues that stakeholder theory presented
by other scholars does not explain how to deal with trade-offs that managers have to deal with.
Therefore, Jensen proposes a more advanced – enlightened – stakeholder theory. Enlightened
stakeholder theory requires managers to operate in a way to maximise the total long-term market
value of the firm (Jensen 2000, p. 51; Jensen 2010). Thus, the trade-offs the managers face need
to consider the long-term market value of the firm as an ultimate goal. This gives managers
elbow-room to assess which competing interests need to be prioritised in order to serve the long-
term goals and value of the firm.
Therefore, we see where the main conflict between the two approaches arises: shareholder theory
prioritises the economic interests of the company, while stakeholder theory sets society above or
on the equal level with pure economic interests. However, it is not the aim of this contribution to
argue in favour of one or criticise the other model. Nevertheless, for this contribution, we still
need to know how far managers are allowed to go in their tax planning decisions in taking non-
shareholders’ interests into account – as CSR encourages. How independent are they in their
decision-making and whose interest should they consider and prioritise? Moreover, does
prioritising one automatically exclude considering other interests?
4. Shareholders, Stakeholders and Corporate Governance
As shown above, these opposite theories have their strengths and weaknesses. The shareholder
value maximisation as an extreme that excluded the rest of the stakeholders initiated a response
in the form of stakeholder theory. This contribution focuses, however, on managerial elbow-
room with regard to tax planning within these theories. To be more specific, in this contribution
we question whether the CG regime that prioritises shareholder value maximisation allows it to
practice good tax governance. Are managers allowed to consider wider interests than just
shareholder value maximisation, as advocated by stakeholder theory, or is it really not ‘a matter
of choice’? Could managers in the shareholder model take stakeholders’ interests on board or
not? Therefore, we need to explore further whether companies that praise the shareholder value
theory should ignore all other stakes besides shareholders’
In the Anglo-Saxon system, managers have the fiduciary duty to fulfil the financial expectations
of shareholders.
9
However, the “the Delaware courts have never stated plainly that
management’s fiduciary responsibilities—the duties of care and loyalty — imply a general duty
to maximise profits without regard to competing nonshareholder considerations” (Millon 2011,
pp. 526-527). Thus, could they really be expected to plan their taxes as aggressive as possible in
order to increase the returns for shareholders?
Stout has argued that “the fiduciary duty of loyalty precludes officers and directors from using
their corporate positions to line their own pockets.” Nevertheless, according to her, managers
remain free “to pursue other, non-shareholder-related goals under the comforting mantle of the
business judgment rule” (Stout 2012, p. 29). She adds that “contrary to the shareholder primacy
thesis, shareholders cannot recover against directors or officers for breach of fiduciary duty
simply because those directors and officers favour stakeholders’ interests over the shareholders’
own” (Stout 2012, p. 29). Stout has later also argued that it is incorrect to assume that
“shareholders are principals and directors are shareholder’s agents in corporations” (Stout 2016).
9
See more on fiduciary duty e.g.: Lafferty et. al. 2012.
14
She claims that “corporate law treats directors not as agents of shareholders but as fiduciaries
who owe legal duties not only to shareholders, but also to the corporate entity itself” (Stout
2016). In the same vein, Schön argues that in Germany managers have discretion with regard to
the choice of tax planning structures, which is protected by the business judgement rule. Only in
quite extreme situations there will be a violation of their duty of care (Schön 2013, pp. 1091-
1092).
The UK corporate law system recently embraced the ‘enlightened shareholder value’ idea (Esser
and Du Plessis 2007, pp. 351-353); UK Company Law Review Steering Group 1999, p. vi). The
British Company Law Review Steering Group, established to evaluate the earlier regulation and
coordinate the UK company law revision in the beginning of 2000s (see e.g. Ferran 2005),
discussed in the process of revision that there is a difference between ‘enlightened shareholder
value’ and a ‘pluralist approach’. According to the former, directors should “pursue
shareholders’ interests in an enlightened and inclusive way” and according to the ‘pluralist’
approach “co-operative and productive relationships will only be optimised where directors are
permitted (or required) to balance shareholders’ interests with those of others committed to the
company” (UK Company Law Review Steering Group 1999, p. vi). The latter is thus a more
strongly stakeholder-oriented approach. In short, the UK has adopted the enlightened shareholder
value approach in its corporate governance system (see also Du Plessis et. al. 2015, p. 61).
Therefore, corporate governance in the UK is not based on absolute shareholder primacy nor
shortism. Moreover, awareness has shown that an even more strongly stakeholder-oriented
approach should be discussed and cannot be put aside out of hand.
10
The group also pointed out
that the key company law provision in the UK is the directors’ fiduciary duties, according to
which directors have to “honestly (‘in good faith’) manage the undertaking for the benefit of the
company” (UK Company Law Review Steering Group 1999, section 5.1.18 (p. 39)). Hereby the
Steering Group indicated that the directors should act in the long-term interests of the company.
Advancing the successful operation of the corporation demands pursuing the interests of the
corporation. For instance, the courts of Delaware, the state in which most of the U.S.
corporations are incorporated, confirm the centrality of the company’s interests. Delaware case
law demands that managers should refrain from pursuing their self-interest and act in “the best
interests of the company.”
11
Such thinking is widespread in the Anglo-Saxon model of corporate
governance under the business judgement rule, according to which the managers are obliged to
act in the best interests of the company (as is the case in Germany and the Netherlands). In
addition, Parkinson has analysed the UK and other Anglo-Saxon case law and found that “courts
have in practice… accepted the justification of attention to wider constituents and interests as a
means of enhancing long-term shareholder value” (Parkinson 1994 as paraphrased in McBarnet
2007, p. 23).
It appears thus that in the Anglo-Saxon countries managers can – and even have to – take
foremost the best care of the business interest.
12
This means that managers have discretion in
pursuing the interests of the corporation and there is no major difference between the various
10
UK Company Law Review Steering Group (1999, section 5.1.42 (p. 50)) for example pointed out that “as a matter
of principle, the law should be changed to allow directors a discretion to sacrifice commercial advantage for ethical
or public objectives.”
11
See e.g. Neri-Castracane 2015, p. 10, referring to Aroson vs Lewis, 473 A.2d 805, 812 (Del. 1984); Kaplan vs
Centex Corp., 284 A.2d 119, 124 (Del. 1971); Robinson vs Pittsburgh Oil Refinery Corp., 126 A. 46 (Del. 1924).
12
Ibid.
15
corporate governance models in this respect. We advocate in this contribution that managers
should exercise this discretion carefully but not unduly cautiously.
5. Managerial Elbow-Room and Corporate Social Responsibility
We see that even the shareholder model, based on Anglo-Saxon regulators and courts, leaves
some room for managerial decision-making when running a company. However, considering the
previously discussed nuances in various corporate governance regimes - is there a possibility to
take CSR into account?
As argued previously, different corporate governance models entail specific principles that the
management board has to follow. We showed that these different principles still leave a
possibility of choices within these rules. Thus, according to Delaware company law, for listed
companies, the board is entitled with board supremacy and the business judgement rule, as well
as the case in the Netherlands and Germany. Also Enriques and others (2017, p. 98) confirm that
while in Germany, the UK and the US (as well as Brazil, France, Italy, Japan) the corporate laws
“do not compel spending on social causes, they do not prohibit either.” They also add that “even
in the United States, where fiduciary duties to shareholders are formally perhaps the strongest, in
practice directors enjoy wide latitude to further the interests of non-shareholder constituencies so
long as the decision is framed in terms of promoting long-term shareholder value” (Enriques et.
al. 2017, pp. 98-99). Moreover, even under the shareholder (long-term) value maximisation
obligation the directors can (under above-mentioned business judgement rule) make socially
responsible decisions “insofar as these decisions have a supposed business purpose” (Neri-
Castracane 2015, p. 15, idem Sheehy and Feaver 2014, pp. 387-388).
Even though researchers have not managed to prove a systematic connection between CSR
activities and financial performance as yet, the business judgement rule allows in principle for
managers to consider stakeholder interests even in shareholder value maximisation-minded CG
systems. Moreover, managers’ elbow-room is underpinned by the fact that the managers are
obliged to consider the best interest of the company. Therefore, to a certain extent managers are
free to decide how aggressive or responsible the company should be in relation to the societies in
which they operate. Naturally, management could have less room to manoeuvre if the majority
shareholders are short-term value-seeking. Nevertheless, there are certain things that managers
still can consider.
A company’s management may thus engage in CSR (for listed firms, there is a formal obligation
to disclose a CSR policy if they have one, and if they do not have, they still have to account for it
– ‘comply or explain’ (see e.g. Directive 2013/34/EU)). But what is CSR? The European
Commission gives a very brief definition of CRS, “the responsibility of enterprises for their
impact on society” (European Commission 2011, p. 6 (section 3.1)). Companies endorsing CSR
voluntarily accept obligations towards society. In this vein Carroll, a major contributor to the
field of CSR, makes an analytical distinction between a firm’s economic, legal, ethical and
philanthropic responsibilities (Carroll 1991; Carroll 1999; Schwartz and Carroll 2003; Jallai
2017). These obligations are not mutually exclusive. Economic and legal obligations are the
basis of the societal obligations that CSR companies voluntarily accept. Carroll’s well-known
view on CSR advocates ethical (and philanthropic) obligations on top of the obligation to comply
with the law. Carroll views ethical considerations as ‘beyond compliance’, and businesses
16
therefore have to go beyond what is required by the law. Indeed, one of the cornerstones of CSR
is that businesses voluntarily act over and above legal requirements (Parkinson 2006, p. 5).
Managers can, thus, use their discretion to engage in CSR, which entails going beyond
compliance with the legal rules. This indicates that managers are quite flexible when acting in
the best interests of the company under the concept of CSR. Moreover, most multinationals
already have a CSR strategy in place. This means that managers already have a certain room to
manoeuvre in place. As we have argued elsewhere, to our minds, tax should not be excluded
from a company’s CSR strategy - and thus included in its room to manoeuvre, which may entail
going beyond compliance with the law (Gribnau and Jallai 2016).
Having argued that there is a certain room for managerial decision-making, we are still left with
the question of how big that space is. As noted, the stakeholder oriented CG system strongly
supports CSR, while in the shareholder oriented CG system, the board has discretion to take into
account CSR-standards. Therefore, we could state that this elbow-room is the space between
corporate social responsibility (CSR) and corporate social irresponsibility (CSI).
6. Aggressive Tax Planning and Corporate Social Irresponsibility
As shown above, corporate governance allows managers discretion to take stakeholders’ interests
into account, and therefore engage in CRS. In this section we will argue that engaging in CSR
should impact business’ attitude towards tax planning. However, it is not easy to establish what a
socially responsible corporate tax policy in practice is. It is easier to agree upon what companies
should not do with regard to tax planning. In case of tax planning, therefore, the best interest of
the company is to stay away from corporate social irresponsibility.
6.1. CSR and CSI
Why do we take this concept of ‘corporate social irresponsibility’ on board? To our minds, the
concept of CSI is equally important as CSR - being its inseparable counterpart. Neglecting the
importance of the CSI concept allows for an incomplete conceptualisation of CSR (Tench et. al.
2012, p. 19).
As shown above, CSR businesses voluntarily accept the obligation to go beyond compliance
with legal requirements. However, it is not very clear what is meant by acting over and above
legal requirements. It does not provide clear-cut criteria and effective guidance. Does it entail
that CSR companies should behave like ideal (corporate) citizens? Should they behave better
than the average citizen? Moreover, what kind of behaviour does this ideal entail? Ideals are the
subject of much debate and the same goes for the means (strategy) to realise ideals: consensus is
often hard to reach. Thus the aspirational idea of accepting ethical obligations beyond
compliance with the law is quite ambiguous. Lacking clarity, defending and prescribing
behaviour beyond compliance to inspire corporate action will probably not be very convincing
and effective for business practice.
17
Therefore, in order to help managers in their decision-making process, we might turn to the other
end of CSR, so-called corporate social irresponsibility (CSI).
13
CSI seems to be a more
addressable concern. It is even indispensable to remedy certain shortcomings of CSR theories.
As Tench and others argue, “without the concept of CSI, CSR is eventually empty” (Tench et. al.
2012, p. 5). Armstrong has approached CSI as follows: “‘Social responsibility’ is difficult to
define. What should a manager do?” He argues that it t is “easier to look at the problem in terms
of what he should not do - i.e., at ‘social irresponsibility’.” A socially irresponsible act,
Armstrong continues “is a decision to accept an alternative that is thought by the decision maker
to be inferior to another alternative when the effects upon all parties are considered. Generally
this involves a gain by one party at the expense of the total system” (Armstrong 1977, p. 185
original emphasis)). Thus, he argues that it might be easier to find out what companies should
not do instead of dictating what they should do.
In this way, CSR becomes more clear by asking “the key question: what is not CSR?” (Tench et.
al. 2012, p. 8). In order to clarify what a corporation should not do, Armstrong argues that
corporate managers act irresponsible if they choose for an alternative decision that has more
negative externalities for other parties. Legal-but-irresponsible business is an example of the
exploitation of negative externalities - negatively impacting other businesses and society at large.
Such behaviour can be viewed “as anticompetitive between firms which also leads to counter-
productive outcomes for social welfare” (Clark and Grantham 2012, p. 30). Moreover, such
behaviour may be judged as unethical by using the Negative Golden Rule that “exhorts people
NOT to do unto others what you would NOT wish done unto you” (Clark and Grantham 2012, p.
33, referring to the work of Labiano and Gensler).
Clarifying what a corporation should not do probably adds to the effectiveness of CSR. Clark
and Grantham argue that clarity about what not to do may be more effective as guidance to
convince businesses to take action than a prescriptive approach. Proscription by defining
undesirable behaviour will be more successful because “acts which involve negative
consequences are much more salient than acts resulting in positive rewards” (Clark and
Grantham 2012, p. 33, referring to Janoff-Bulman et. al. 2009). Of course, CSR and CSI are
logically inseparable, they exist in practice and by “eliminating or reducing CSI, CSR will
significantly increase and become more effective” (Tench et. al. 2012, p. 5).
6.2. Paying Tax: An Obligation towards Society
How can one relate CSI to corporate (aggressive) tax planning? Most people will be aware of the
existence of all kind of tax schemes that enable corporate (and wealthy) taxpayers to avoid taxes.
They avoid paying tax legally, without engaging in (illegal) tax evasion, as they stay within the
boundaries of the (letter of the) law. Of course, taxpayers may structure their affairs to achieve a
favourable tax treatment within the limits set by law. Some (corporate) taxpayers, however,
command the kind of resources that enable them to do this in a very sophisticated and successful
manner, thus by paying hardly any (income) taxes at all they shift the tax burden to less expert
taxpayers.
13
The authors would like to thank Steen Vallentin and Andreas Rasche from Copenhagen Business School (and
other participants of the Workshop: ‘Taxation, Corporations and the State” that took place in Copenhagen Business
School, 27-28 June 2016) for introducing us to the concept of Corporate Social Irresponsibility.
18
Taxes are financial contributions which are inherent to (corporate) membership of society and
therefore part of a corporation’s obligations towards society. Taxes are payments to the state for
the benefit of society, rather than for the purpose of the state. In other words, the state is but an
intermediary who levies taxes on behalf of society. Businesses are part and parcel of society.
Members of society, citizens and business alike, reap massive benefits from society and the state.
They therefore should take into account benefits others provide them. These benefits create an
obligation to repay on grounds of reciprocity. As the political philosopher Rawls argues “we are
not to gain from the cooperative labors of others without doing our fair share” (Rawls 1999, p.
96; see also Gribnau 2017). This could be interpreted as an obligation of taxpayers to pay their
fair share (see also Happé 2007). This is however not an (ideal) obligation which easily translates
in clear-cut rules for (corporate) tax planning.
How then should CSR firms translate their (ethical) obligations towards society that go beyond
compliance with legal obligations in their tax planning strategy? After all, taxpayers engaging in
tax avoidance may perfectly comply with the letter of the law while violating the spirit of the law
– as the tax planning practices of many multinational corporations show. So compliance with tax
rules law does not tell us anything about the amount of tax a company pays. Sure, it may entail a
serious financial contribution to society but also hardly any payment at all. If so, it is clear this is
probably foremost an example of corporate irresponsibility rather than of (not realising)
corporate responsibility.
6.3. Aggressive Tax Planning as CSI
To our mind, managers of companies that claim to have a (strong) CSR strategy in place should
go beyond compliance with the letter of the tax law, for tax should be an integral part of any
CSR strategy (Gribnau and Jallai 2016). They therefore should include ethical considerations in
their tax decision-making framework. They evidently do not live up to their CSR commitment if
they engage in aggressive tax planning and pay no or hardly any (corporate) taxes at all. CSR
entails going beyond (strict) compliance with the law, so minimalist compliance with the letter of
law has nothing to do with CSR. On the contrary, aggressive tax planning is a clear case of
corporate irresponsibility – it involves a gain in corporate profits at the expense of (the common
good of) society. Moreover, aggressive tax planning is often considered unfair, unethical or even
immoral (see e.g. UK/PAC HMRC 2012, Q. 485, p. 40). Therefore, managers of CSR companies
should avoid this irresponsible fiscal conduct and go beyond minimalist compliance. Going
beyond (minimalist) compliance with the letter of the tax law has the merit of avoiding
irresponsible corporate behaviour. Thus, we propose to conceptualise aggressive tax planning in
terms of corporate irresponsibility rather than corporate responsibility.
Tax planning is a complex topic with many nuances, varying from aggressive tax planning to
legitimate tax planning responding to tax expenditures (incentives). Aggressive tax planning
often fits in the area between CSI and CSR, as presented by Tench and others (Figure 1).
Aggressive tax planning (which should be separated from tax evasion) is usually within the legal
rules – complying with the letter of the law – but it is often questionable whether it is within the
spirit of the law. Therefore, it is often perceived as socially unacceptable (see e.g. Jallai 2017).
However, there are also legitimate forms of tax planning - companies may for instance lower
their tax liability by making legitimate use of tax subsidies. Therefore, we see that tax planning
can have many gradations, which can be put on a continuum and should be evaluated on a case-
by-case basis. Nevertheless, the concept of CSI helps us to better understand the minimum
19
standards for acceptable tax planning from the perspective of companies’ obligations towards
society.
Figure 1: The CSI and CSR Continuum
Source: Tench et.al. 2012, p. 9.
Clark and Grantham see aggressive tax planning as a familiar example of irresponsible corporate
behaviour because it exploits negative externalities. Firm costs are thus transferred “to unwilling
or unwitting recipients, benefiting the firm at the expense of the total system.” In their view, tax
avoidance is “the gray area in which armies of accountants and lawyers help their clients to
outsmart their governments and stay steps ahead of the law, such that they can avoid paying any
more tax than the presently stipulated legal minimum” (Clark and Grantham 2012, p. 29). Maybe
they are a bit optimistic, because taxpayers using high-tech structures designed by tax advisers
often turn around the rules to their advantage, and therefore (even) around the “stipulated legal
minimum".
According to Clark and Grantham this kind of tax avoidance is in stark contrast with the use of
tax breaks “in the spirit of their intentions, directing investment to areas of policy priorities, that
activity aligns with society’s larger interests” (Clark and Grantham 2012, p. 31).
14
But
companies that do not pay their fair share by engaging in creative tax compliance and exploiting
loopholes generate a negative externality, they argue: “a decrease in the amount of funds
available to government programs that hurts society.” Additionally, Clark and Grantham see this
behaviour as anticompetitive “for those businesses that pay their taxes appropriately, competition
with less scrupulous firms is made more difficult since they are essentially shirking their
financial responsibilities and gaining an unfair advantage, leaving an increased tax burden to
others.” To this we add that the tax burden is not only shifted to other businesses but also to other
taxpayers. Clearly these negative externalities allow for the conclusion that such corporate
14
They ‘define’ tax avoidance as “the range of business behavior between tax evasion (definitely illegal) and tax
seeking (very rare).”
20
taxpayers are acting irresponsible, rather than not acting in a socially responsible way, viz. not
living up to the ideal of paying a fair share. Moreover, Clark and Grantham argue that it would
be a more effective communicative device, leading to more benefit for society, to specify and
proactively censure these business activities “what they are: CSI” rather than “expose these
business activities as not CSR” (Clark and Grantham 2012, p. 31).
6.4. Corporate Tax Irresponsibility
In the previous section aggressive tax planning was analysed as a typical case of corporate social
irresponsibility, due to the exploitation of negative externalities because in this way this kind of
tax planning is defined as undesirable behaviour. Clarity about the negative consequences of
aggressive tax planning techniques creates more salience than prescribing multinationals to pay a
fair share. This probably is a more effective approach than invoking - the virtue of - corporate
social responsibility. However, there are two more reasons to prefer the term corporate social
irresponsibility to corporate social responsibility.
Firstly, there is no consensus in international tax theory and politics on the underlying values and
objectives of international tax law. Nor is there any general agreement on the principles for the
taxation of multinational companies. Of course, international tax literature reflects on principles
of international taxation. According to Avi-Yonah the entire network of double tax treaties
constitutes an international tax regime with common underlying principles (Avi-Yonah 2008, p.
3). These principles are the single tax principle and the benefits principle (Avi-Yonah 2008, pp.
8-13; see also other scholars advocating “principles” of international taxation, e.g. Kemmeren
2001; Smit 2012). However, international consensus on principles of international taxation is
lacking, without which it is impossible reach agreement on principles for the taxation of
multinational companies. So there are no principles of tax fairness available as yet, which flesh
out the ideal of a fair share in international taxation and offer multinational companies guidance.
The ideal of a fair share is therefore too vague, ambiguous and abstract to give clear guidance on
the amount of (corporate) tax to be paid by multinational corporations (see also Peters 2014, pp.
297-304; De Wilde 2015, pp. 55, 313-314).
It follows that the starting point should be to aim for consensus on a bottom line, that is, stricter
international tax rules to establish some minimum level of corporate taxation to make sure that
multinationals have a reasonable effective tax rate. Therefore, the aim should not be to establish
what paying a fair share - corporate tax responsibility - entails but what evidently should be
judged to amount to not paying a fair share - i.e., corporate tax irresponsibility. In practice, it is
far easier to agree on evident instances of injustice than on what counts as justice (Gribnau 2015,
p. 244). The same goes for corporate tax responsibility and corporate tax irresponsibility,
respectively. In passing, we note that the OECD’s Base Erosion and Profit Shifting project and
the European Commission’s Anti-Tax Avoidance Package initiative are doing this, creating a
minimum standard which would make it possible to put a halt to excesses of tax planning
(OECD 2013, OECD 2015a; EU ATAP 2016; see also Dourado 2016, p. 440).
Second, it makes little sense to talk about and demand going beyond compliance with the tax
laws (and treaties) without taking into account the specific economic nature of the (legal)
obligation to pay tax. For businesses, taxation is part of their cost calculation. Tax planning is
therefore a way to save in expenses. Moreover, taxpayers may arrange their tax affairs as they
wish. Both individuals and businesses may plan and structure their affairs to achieve a
21
favourable tax treatment within the limits set by law. In many jurisdictions this is settled in case
law (see e.g. ECJ C-255/02, para. 73). Taking tax considerations into account is perfectly
legitimate for persons and enterprises alike. So trying to mitigate one’s tax burden by way of tax
planning is in itself perfectly legitimate. In this sense taxpayers have discretion in structuring
their affairs with an eye to the tax consequences within the limits set by law. Nonetheless,
minimising one’s tax burden by exploiting the letter of the law (tax avoidance) may result in not
paying any (corporate) income tax at all. This kind of tax avoidance, i.e., aggressive tax
planning, therefore amounts to (completely) evaporating one’s (financial) obligations towards
society. For a CSR corporation, this clearly violates its voluntarily accepted ethical obligations
that entail going beyond compliance with the law. This kind of tax planning, although it is legal,
therefore clearly constitutes irresponsible corporate behaviour.
7. Conclusion
In this contribution, we analysed managers’ discretion and responsibilities in terms of
(aggressive) tax planning. The main question discussed was: do multinationals’ managers have
elbow-room with regard their tax planning strategy (should it be aggressive or does it not need to
be), and how should they choose whether they should satisfy their shareholders’ interests or the
interests of their stakeholders or even society at large?
We first dealt with the issue of management accountability and discretion. We elaborated on
corporate governance and on what kinds of obligations it sets for the managers. We discussed
two existing theoretical frameworks in a rather traditional monochrome way, according to which
corporate decisions should prioritise either shareholders or stakeholders interests. We reached the
conclusion that managers do have elbow-room in corporate decision making in both corporate
governance systems. We argued that a stakeholder-oriented corporate governance system leaves
more room for taking CSR on board. However, it does not mean that the shareholder oriented
CG system excludes all possibilities for considering stakeholder interests – it just does not permit
them to gain priority over (or even balance them with) shareholders’ long-term interests. This
was also shown by a brief comparison of the UK and Dutch corporate regulatory regimes. We
further showed that the elbow-room that managers have in both systems is in a space between
corporate social responsibility (CSR) and corporate social irresponsibility (CSI).
To conclude, how can managers of a (multinational) corporation translate its commitment to
CSR into a responsible tax planning strategy? A CSR firm voluntarily accepts obligations
towards society that go beyond (strict) compliance with legal obligations. Do these obligations
demand the conduct of some ideal (corporate) citizen? Sometimes the ideal of paying a fair share
of taxes is invoked, comprising a prescriptive approach. Advocating the ideal of a fair share of
taxes is a way of creating “aspirations and inspiring action to overcome inertia” (Clark and
Grantham 2012, p. 33). As shown above, such a prescriptive approach has its drawbacks.
Invoking virtues associated with corporate tax responsibility (‘paying a fair share’) is less
effective than clarity about aggressive tax planning and the negative externalities it that
generates. Indeed, clarity about what not to do, about the undesirability of this kind of tax
avoidance will be more easily convince businesses to take action and avoid aggressive tax
planning. There is moreover no international consensus on ethical principles that solidifies the
ideal of paying a fair share of taxes. Furthermore, this appeal to pay a fair share fails to
acknowledge the right of (corporate) taxpayers to structure their affairs in a tax efficient way.
22
With regard to aggressive tax planning, we therefore prefer the concept of corporate
irresponsibility to the concept of corporate responsibility. Managers of a (multinational)
corporation should use their discretion to avoid aggressive tax planning. Again, CSR
corporations voluntarily accept (ethical) obligations towards society that go beyond (strict)
compliance with legal obligations. Avoiding corporate irresponsibility (CSI), i.e., avoiding
minimalistic compliance with the letter of the law is the way for CSR firms to translate these
obligations towards society into their tax planning strategy.
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