by Ted Franks
A disappointing roadshow lunch
In 2016, I attended a roadshow lunch for an upcoming initial public offering (IPO). This was of course in the “good old days” before the pandemic. It was a biggish launch, so maybe 100 of us crammed into a room in a grand West London hotel.
As we juggled laptops with dinnerplates, the CEO stepped up to the lectern. He was leading a global business with over £1bn in revenues and over 9,000 employees. The first thing he wanted to talk to his potential investors about? The company’s clever tax structuring.
I found this profoundly depressing. Though the silver lining was I could put my laptop away and concentrate on lunch. We stayed well away from the IPO and watched as the firm repeatedly disappointed investors. Its stock lost half of its value relative to the index over the next two years. I’ve not used the name here to protect the guilty. But do contact us at WHEB if you want to know who it was!
Tax and quality
We are impact investors first and foremost, and our first focus is on the social and environmental benefits of the products that companies sell. But we do integrate environmental, social and governance (“ESG”) analysis into our work. And tax is a classic ESG issue: somewhat buried in the detail and loaded with asymmetric risks. A company’s tax profile is something you want to be able to understand, get comfortable with, and then move to the back burner. But if you can’t, then that’s a pretty clear warning sign.
Like many other ESG issues, tax also tells you a lot about management quality, and about how the senior leadership sees the world.
As the saying goes, it’s important to pay taxes: we use them to buy civilization. But in the day-to-day, taxes are just one of the administrative costs of doing business, like insurance. There’s a sensible amount of time to be spent making sure you’re paying the right amount. Beyond that, good management teams move on to bigger things.
Towards a global agreement on corporate tax
So here at WHEB we’re pleased with this quarter’s move on tax from the G7. The headline is about setting a minimum global corporate tax rate of 15%. The bigger picture is a years-long effort (lead, amongst others, by the OECD) to stop it being quite so easy for multinationals to avoid tax.
This isn’t the end. There is so much devil in the detail that there is more devil than detail! And not withstanding objections by a small number of European countries and, perhaps more meaningfully, Senate Republicans, there is at least an emerging consensus.
For us, this makes good sense. 15% isn’t a high number, and it’s hard to argue that it’s not a fair share. The global yardstick is now clear. It is not meant to be the most any company pays, by any means. We will still need to do our work to understand what a logical rate looks like for each of our companies. But if they are paying less, globally, than this number, then that will be a very clear signal. And there will be even less reason for companies to contort themselves into clever international structures.
Management teams should welcome this initiative too. International tax is complicated, even if you’re not trying to game it. This harmonisation should bring simplification.
Building back better
It is not hard to see a broader significance of this too. For decades, until the middle of the last one, the developed world marched to a neo-liberal tune. That meant small government and limited interventions. It also fetishized low taxes.
But the worm has turned. Governments are emboldened. Industrial policies are back in fashion. We are seeing major spending programmes in all the major economies. With record low interest rates, much of this is being funded by deficits. But it is only logical that taxes will need to share some of the burden. And that fits with the new way of thinking.
This is another reason why investors should welcome a coordinated international response. There is enough to think about in varying global stimuli, without having to second-guess tax behaviours. With a bit of luck and hard work, we could push tax back down the agenda where it belongs. And not have investors and management teams ruin good IPO meetings talking about it.
Ted Franks is the Fund Manager for the Pengana WHEB Sustainable Impact Fund and helped to found WHEB Asset Management in 2009.