The news item that’s capturing my attentions this weekend relate to Lord Adair Turner, the Chair of the FSA (UK equivalent of the SEC, btw), and his proposed Tobin tax on bankers’ deals. It’s being reported and commented upon in the UK media but less so internationally.
· http://www.prospectmagazine.co.uk/wp-content/cache/supercache/www.prospectmagazine.co.uk/2009/08/how-to-tame-global-finance/index.html
· http://www.ft.com/cms/s/0/980e9ec8-92f2-11de-b146-00144feabdc0.html
· http://www.telegraph.co.uk/finance/comment/tracycorrigan/6101533/Lord-Turners-answer-to-the-financial-crisis-raises-more-questions.html
· http://www.independent.co.uk/news/business/comment/hamish-mcrae/hamish-mcrae-lord-turners-tax-is-a-trauma-too-far-for-our-biggest-foreign-earner-1778376.html
· http://www.guardian.co.uk/business/2009/aug/27/turner-tobin-tax-economic-policy
Whilst critics of the proposals have been quick to wave the usual autopilot flags about “protecting London’s status as a financial center” and how financial institutions and bankers would “leave London in droves” if such a tax is implemented, there are merits to the proposals — albeit, it could be strategically positioned better than Lord Adair’s approach and more targeted in its applicability.
Instead of reacting to the idea of it the way media pundits who have little or no direct experience of banking, I’m going to try to be practical about it and highlight what considerations the banking community are likely to be taking into account.
Here are a few challenges with taxing bankers’ deals:
(1.) Almost no banks are going to readily disclose the bonus structure by which they reward their deal-makers and revenue generators. It’s part of how competitive advantages are maintained by attracting and retaining top talent.
Therefore, getting any idea of the appropriate rate of Tobin tax is going to be difficult and would depend on self-administration/regulation by the individual banks to comply if the tax is introduced.
(2.) Transaction values can be difficult to pin down precisely and are dependent on the accounting rules and jurisdictions applied, particularly those involving privately-owned entities or those not listed on the major exchanges.
This would make like-for-like Tobin taxation to apply across all transactions tricky to administer and achieve.
(3.) Post-transaction valuations are also variable so it’s not always clear what contribution the bankers have made to any increases in valuation — if any — and which part is attributable to the company’s management and which to external market forces like customer loyalty and goodwill.
This is all before we need to pin down the exact people who did most of the work on the transaction — typically the Directors, Associates and corporate finance bag carriers who receive less of the transaction bonus than the lead rainmaker(s). Therefore, to tax each individual banker on a transaction at the same level would be inappropriate. The duration of a transaction would also affect the quantity of bonuses involved.
All these factors considered, the principles of Lord Adair’s proposals seem to be socially responsible ones: to make the global banking community more accountable and to increase their contribution towards socially useful activities rather than “socially useless” ones.
Coincidentally, I was discussing something related with my friend Marta whilst in Spain. About 5 years ago we had an idea for a socially responsible website to distribute goods handmade in developing economies like Peru, South East Asia and some African states. As part of the model I thought up there was also a program oriented at corporations to increase their global consciousness about social responsibilities. The other side of the equation was a ploughback into the indigenous population of 25 percent of net profits, investing in infrastructure like schools and clean water.
Marta and I revisited this model during my trip and she noted that the global financial crisis was surely making us all aware that business, as a whole, has to become more socially responsible. I pointed out that Harvard MBAs have proposed and been signing up to their own Ethics Code:
· http://www.thecrimson.com/article.aspx?ref=528381
· http://www.nytimes.com/2009/05/30/business/30oath.html
· http://www.businessinsider.com/harvard-business-students-take-dumb-ethics-pledge-2009-5
However, what’s still missing — and is a commercial opportunity gap — is the creation of companies with the types of tools, products and services which can help this and the next generation of corporate leaders to PRAGMATICALLY commit to a new modus of ethical decision making, implementation and behavior.
It’s one thing to study about Hobbes, Locke, Smith’s “invisible hand of good” et al as part of an Ivy League / Oxbridge / Top 10 MBA course on business ethics and tick the boxes which say, “Yes, we know about codes of ethics as well as corporate tort, balance sheet restructuring and Porter’s competitive matrix” and another to have tools — and here I mean tech ones — with which to systematically abide by and implement according to codes of ethics signed up to…….
Tools, products and services which foster not only changes in mindset but, more importantly, CHANGES IN ACTION.
Otherwise we’ll find ourselves in (yet another) cycle of repeated economic and corporate irresponsibility. It’s not an easy or overnight fix but it does require collective imagination, will and optimism.
The Tobin tax — although a step in the right direction — is not that imaginative. Tax is a word that’s universally hated. In Chinese, the word’s homophone is the same as for the word “broken, shattered and splintered” and “rotten in character” (yes, seriously).
It’s preferable to think of the Tobin tax instead as a “COS” (contribution optimizing society). It would be a variable percentage amount — rather than a fixed annual rate — allocated by financial institutions, from their transactions, towards local communities and enterprise that’s distinct from the budget allocated for promotional and PR activities or their lending practices. Variable according to the reporting month in which the transaction is booked on the balance sheet in the financial accounts.
Only time will tell whether the global financial institutions care purely about making money for themselves and several handfuls of top bankers or whether they care about local communities and the rest of the world too.
