For the last three years, Boston Common has been part of the PRI’s collaborative engagement on tax transparency focused on 41 multinational Healthcare and Technology companies. The outcomes of this engagement were published in March by the PRI. The Healthcare and Technology sectors were chosen given their complex tax strategies (including reliance on intellectual property) and the need for more comprehensive disclosure – tax disclosure and responsible tax practices are emerging investor issues, especially in the US. Boston Common took the lead with Johnson & Johnson (US) and Dr. Reddy’s (India), and co-led the dialogue with Novartis. We also participated in discussions with several other Healthcare companies including Biogen and Novo Nordisk. The dialogues focused on global tax policy, tax governance, and risk management processes including board level oversight and country by country reporting.
As investors, we look at all financial transactions of a company and want to ensure that decisions are made both ethically and in a financially prudent way. Through the lens of responsible tax, we are able to assess how companies are managing financial resources, but also if they are adopting aggressive tax practices or have unsustainable tax rates, as these measures provide valuable insight into governance and risk-taking culture.
In the US, tax management is generally seen through a compliance and financial management lens. Accordingly, a number of the US companies contacted were unresponsive to repeated requests for dialogue in part due to a lack of a shareholder-friendly culture and/or other governance issues. As a global manager, we were also part of a number of non-US dialogues and we found that the quality of the dialogue, leadership practice, and industry collaboration were significantly more advanced with European companies. One core expectation of the investor group was the adoption of a global tax policy, which was broadly adopted by European companies. US companies lagged in this regard, with half still not adopting this approach – a reflection of the lack of robust uptake of responsible tax practices as a core governance issue within the US investor community. We need to move investors, especially in the US, away from reactive engagements in response to tax controversies and toward a more holistic approach.
As we look to raise the bar and improve maturity amongst US companies and investors on global responsible tax practices, we must shift the focus from compliance to a shared societal expectation, especially post COVID-19. Investors should use best practice guidance such as the GRI 207: 2019 Tax Guidance, which will be required for all GRI reporters in 2021, and the B Team Responsible Tax Principles. This needs to be supported by mandatory reporting, sharing best practices from other regions, and addressing the financial and societal impacts of tax avoidance, which costs governments between $100 and $600 billion annually. The reputational and legal risk is too high for companies in a post-COVID world to be seen as adopting risky and aggressive tax avoidance. Companies need to pay their fair share and responsible tax practices should be considered a core governance metric by investors.
The information in this article should not be considered a recommendation to buy or sell any security.