Bridge over ocean
1 February 2013 CFA Institute Journal Review

Responsibility in Paradise? The Adoption of CSR Tools by Companies Domiciled in Tax Havens (Digest Summary)

  1. Michal Szudejko

In spite of the ethically dubious nature of using offshore finance centers (OFCs) as a means of tax optimization, many of the companies headquartered in such countries proclaim adoption of certain corporate social responsibility tools. The author questions whether the claim of being socially responsible is valid for OFCs that use aggressive tax-evasion techniques.

What’s Inside?

The author attempts to fill a gap in the corporate social responsibility (CSR) literature. In particular, he examines the relationship between CSR and aggressive tax evasion through tax havens. The author first conducts an ethical evaluation of tax havens. He shows that such strategies, if multiple dimensions are taken into consideration, can be perceived as ethically dubious. Next, he analyzes a sample of large firms headquartered in two countries acknowledged to be tax havens (Bermuda and the Cayman Islands), focusing on how they apply CSR tools.

The research findings lead the author to question the substance of CSR tools. Specifically, he questions whether and how the presence of such tools benefits external stakeholders. For instance, is the proclaimed CSR documentation truly evidence of a given company’s determination to act in a more prudent manner than required by the bonding letter of the law? Or is such evidence merely a window-dressing exercise forced by surrounding expectations from society but in opposition to the actual business decisions the company makes?

How Is This Research Useful to Practitioners?

The author conducts an ethical evaluation of tax havens and then gathers elements from sample firms that describe CSR tools and policies. He questions the substance of CSR tools, believing that tax evasion through offshore finance centers is perceived as being ethically dubious.

On the one hand, being domiciled in a tax haven country enables corporations to increase their value and, simultaneously, shareholder wealth. On the other hand, corporations pay less tax in the countries where they run most of their business. This arrangement effectively decreases the government’s tax revenue (in the “home” country) and fails to fulfill at least some of the economic responsibilities that a corporation has to the society that surrounds it.

Most of the sampled companies have adopted codes of conduct. But they use the remaining CSR tools in a rather selective way, with an observable inverse relationship between the implementation of such tools and their cost. Interestingly, the more a given CSR tool would benefit external stakeholders, the more apparent the inverse relationship. The author proposes that the analyzed companies are assigning value to the internal control function of CSR tools (e.g., toward their employees) rather than using them as a method of promoting and ensuring accountability to the wider society.

Considering these outcomes, the author raises questions about the true value of CSR tools. In particular, he deliberates about whether CSR tools have economic, legal, or social substance. These tools might address the general expectations of society only superficially and not act as a serious commitment beyond binding legal or tax regulation.

How Did the Author Conduct This Research?

The author reviews CSR tools that are presented on the corporate websites of companies included in the sample. The tools he is particularly interested in are codes of conduct (provided that they refer to all employees of the organization in question), CSR standards, and social and environmental reports.

The content of each code of conduct is assessed based on the frequency of given items (e.g., mitigation of conflicts of interest) being mentioned. As far as CSR standards are concerned, the author attempts to identify whether companies follow chosen standards relating to environmental management, health and safety, labor conditions, and sustainability assurance. Finally, he searches the websites for CSR reports, including a subscription to the Reporting Framework of the Global Reporting Initiative and the United Nations Global Compact.

The sample analyzed consists of large firms headquartered in tax havens. In particular, 27 applicable companies are identified from the Forbes Global 2000 Index—23 in Bermuda and 4 in the Cayman Islands.

One potential downside of the research process is the bias related to using the corporate websites as a primary source. The author assumes, however, that the number of existing documents relating to CSR not presented on corporate websites could be as low as 3%. The other difficulty is in precisely defining a tax haven, as well as in identifying the companies using them—hence, the small sample size of 27 companies located in only two countries. The author indicates possible ways of removing the research bias and increasing the sample size, thus showing paths for further research.

Abstractor’s Viewpoint

The research presented in the paper is an interesting starting point for further developments in the subject literature. The methodology used reveals several weaknesses, and the author himself shows a few possible improvement techniques. Although any definite conclusions cannot be backed with absolute certainty by the findings presented, some fundamental questions may be asked. In particular, if the companies are reluctant to share their profits with the society they operate within, are the claims by these companies that they are socially responsible truly legitimate?

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