Starbucks’ tax arrangements store up trouble for the brand

This week Starbucks was identified as a company that has used creative accounting to avoid paying any tax in the UK for three years, a period in which sales reached £1.2bn, and when its senior executives were on record as praising the UK financial performance

A special report by Reuters explains how the accounting scheme works:

We have identified three cunning, although legal, methods by which Starbucks has been able to avoid paying taxes to Her Majesty’s Revenue & Customs (HMRC), Britain’s tax authority. They involve payments between companies that fall under the greater Starbucks corporate group. By charging subsidiaries high-priced royalty fees on intellectual property, requiring chunks of funds be allocated to other subsidiaries in the supply chain, and shifting money to low-tax areas via inter-company loans, Starbucks has been able to essentially make its reported profits in the U.K. vanish into the foggy London air.

The practice of charging royalties on intellectual property is a method pioneered by tech companies like Google and Microsoft, and is used by Starbucks to drastically reduce the amount of taxable income it must report. Starbucks charges its international operations, including its U.K. unit, fees in order to use various elements of the corporation’s intellectual property, such as its brand and business processes.

Starbucks’ high ethical standards

LWD had been following Starbucks as an example of a company placing diversity at the heart of its corporate values. Its own website reads:

“Aside from extraordinary coffee, Starbucks has made a business out of human connections, community involvement and the celebration of cultures. We’re committed to upholding a culture where diversity is valued and respected. So it’s only natural that as a guiding principle, diversity is integral to everything we do.

Starbucks is dedicated to creating a workplace that values and respects people from diverse backgrounds, and enables its employees to do their best work. We honor the unique combination of talents, experiences and perspectives of each partner, making Starbucks success possible. As such we expect our partners to act with a spirit of kinship, tolerance and humanity toward all customers making our brand welcoming to everyone.”

The welcoming brand

Starbucks places ethical standards at the heart of its operations. It leaves it more vulnerable to damaging attacks on its integrity through stories of its global financial arrangements.

Barclays in a spin. Bob Diamond goes, Marcus Agius comes back

[Update] In twenty four hours, the LIBOR scandal at Barclays bank results in exit of Marcus Agius as Chairman. Then CEO Bob Diamond quits, and Mr Agius returns as Executive Chairman through the revolving door of fate

Yesterday LWD noted the departure of Mr Agius, and speculated on the future of Bob Diamond. Diamond Bob had gone out of his way to reassure significant financial individuals in and outside Barclays that the story would fade away leaving financial institutions relatively unscathed.

Within twenty four hours, the matter had become the centre of a political as well as a financial storm. It seems that the establishment of parliamentary enquiries to investigate the LIBOR affair had resulted in a decision by Mr Diamond to quit immediately [BBC’s financial sleuth Robert Peston, 8.30 am, July 3rd 2012, shortly after the announcement was made public]

I speculated yesterday that Mr Diamond was a financial asset whose value could fall as well as rise. The fall was more rapid than I could have imagined.

A storm brews

The story is escalating as quickly as any I have followed over many years. In 24 hours there have been debates in the House of Lords and House of Commons. http://www.bbc.co.uk/news/uk-politics-18702653. Those impacted include very senior civil servants, the head of the Bank of England, the fomer head of Barclays, John Varley, high-profile political figures such as George Osborne [who seems to have some part to play in any political story in the UK at present]. Oh, yes, and various financial executives at Barclays and elsewhere who found yesterday a good day for resigning their posts.

Update [6th July 2012]

The Diamond performance to the commons committee attracted widespread attention. The opinions varied from ’10 out of 10’ [for avoiding any ‘confessional’ statement that might be held against him ], to much lower ratings for failing to convince the committee of his integrity [laughter at his perceived obfuscations], and an error of judgment in trying to be too familiar [use of first names . The committee was also rated in some commentaries, but I couldn’t find any assessment that was positive.

I urge students of leadership to get hold of a full copy of proceedings. Also note that for MBA business presentations (not to mention for Newsnight’s Jeremy Paxman) the interviewee would certainly be more promptly advised to deal directly with a simple question (but that’s a bit more advanced than media training 101)

The ancient business of money-lending as updated by Wonga

Wonga has been accused of being the latest success in the history of exploiting poverty through money-lending. Errol Damelin, Wonga’s founder, sees it differently

Wonga is another Google

Mr Damelin sees his company having a similar business model to firms like Google, Amazon, PayPal and Netflix:

“Wonga is a platform for the future of financial services, the digital revolution has not yet begun in financial services . .. Wonga is on a multi-year and multi-decade journey to build the future of financial services, using data and technology to make objective and unprejudiced decisions.

We have built the world’s first, completely straight-through processing system for credit, so when somebody comes to Wonga as an individual, or as a business-owner, and applies for a cash advance, the whole process is completely automated”

Responsible lending

The Wonga website explains its code of contact and its approach to responsible lending

Our service is designed to put you in control of your cash flow, for those occasional times when an unexpected expense catches you by surprise. Unlike most lenders, we enable you to choose exactly how much money you want to borrow – down to the last pound – and for exactly how many days. We don’t force you to borrow a fixed sum you might not need, nor do you accrue interest for longer than necessary. The amount you apply for and the length of the loan naturally affect the cost of repayment too, so you can make adjustments until you’re happy with all elements of your application.

Our technology enables us to assess applications in seconds and helps to ensure we only lend to people whom we believe are able to repay us – we simply aren’t interested in lending to anyone who isn’t. Because we carry out a credit check as part of the application process, you may also see an improvement to your credit history when you repay an online cash advance from Wonga. That’s because we inform our credit bureau partner of your trustworthy behaviour with any timely repayment.
We urge you to think carefully before applying for a Wonga loan, because we expect it to be repaid when you promise to. We describe the potential consequences of failing to do so, [and] offer tips for anyone already struggling with debt.

Applying for any form of credit isn’t a decision to be taken lightly. Please remember that if your Wonga application is approved, it becomes a two-way street and you’ll need to keep a serious promise. We want our relationship to be a happy and trusting one, so we lay out the facts as clearly as possible. Only you can decide whether to apply or not, however, so please only do so if you’re confident you’ll have the funds to comfortably make repayment on your chosen date.

The Business Model

The interest rates are explosively high. And yet, there remains a dilemma. A corporate spokesperson explains the rates in terms of someone deciding to take a black cab for convenience, even if it is expensive.

The Guardian newspaper explored Wonga’s business model.

Last week, [May 2012] the Office of Fair Trading launched a review of the payday lending sector in response to concerns that “some payday lenders are taking advantage of people in financial difficulty” and not meeting “guidance on irresponsible lending”. The OFT said it aimed to drive out companies that are not fit to hold consumer credit licences.

Wonga does not expect to be one of the companies driven out of the market, and the company’s advertising strategy tries to set Wonga aside from the myriad of evocatively named rival online companies that offer money if you Google payday loans.

Note to students of leadership

Wonga is a word found in English vernacular, where it (roughly) means money. Wonga sponsors Blackpool football club. Its business model repays a close study. Breaking news: The Economist examines Wonga’s business.

See also growing media attention to the underlying problems of people needing pay day bridging loans

Lei Feng is a Chinese role model and an example of servant leadership

March 5th is “Learn from Lei Feng Day”. A self-sacrificing soldier, Lei is celebrated in China as a role model of selflessness and modesty. Similarities with Servant Leadership are noted

Many LWD subscribers will be unaware of the story of Lei Feng and the esteem he is held in China. Lei’s fame arises from the days of Mao when he became a popular icon for the ideal soldier as ordinary hero. His fame remains today although the State now is opening up debate on such historical stories, for example through social media sites.

The Chinese social media site Sina Weibo is now providing an English language service

Sina Weibo correspondents were quoted extensively in a “China Daily article on Lei Feng recently [March 5th 2012] on the 49th anniversary of his death.

“While Lei Feng’s name still resonates in China and elsewhere, some begin to wonder whether the spirit of the Good Samaritan is still relevant in an age of intense materialistic pursuit and whether the image of helping grandmas cross the road is somewhat outdated.”

@Guaiguaideayuan Radio host at Zaozhuang Station:

There is nothing wrong with Lei Feng Spirit. It’s not the fault of those “Lei Fengs” (those who follow Lei’s example) that the spirit is now challenged and even doubted by some. It’s the reality and people’s perception of the reality: we want more from the others and from the society, and when the desires can’t be fully satisfied, we blamed something or somebody [other than ourselves].

@Wenxinfoshan Sina Weibo user

Today the new definition for Lei Feng Spirit should be as follows: 1. Try to do good, no matter how small it is; 2, try to be responsible; 3, try to be independent and do regular self-introspection; 4, try to put yourself in the others’ shoes, as often as possible; 5, and try to persevere in everything you do.

Global values and ordinary heroes

Western readers tend to reject stories from the time of Mao as State propaganda. There is even debate about the very existence of Lei Feng as portrayed officially. We can liken this to Western ‘ordinary heroes’ such as Robin Hood whose existence is challenged but whose story is accepted and romanticised.

Xinghuaqi, the biographer of Lei Feng puts it this way:

We promote Lei Feng Spirit because Lei Feng is an “ordinary” hero. His “heroics” were done in his daily life, and we can do the same if we wish. His spirit isn’t about communism or socialism – nothing ideological – but about the basic human nature. If everyone could follow Lei Feng’s path, the community will become much healthier.

The similarity to the work of Robert Greenleaf on servant leadership is clear. According to Dilemmas of Leadership, [p 190] servant leadership is essentially about “the development of followers into morally responsible and autonomous leaders”. This idea cuts across 20th century leadership “maps” which place emphasis on “the fallacy of the industrial paradigm” [p 239] and subsequent ethical dilemmas.

Creative leadership needed for Remploy

The economic squeeze in the UK has hit Remploy, a government-backed scheme for people with disabilities, and a long-established component of the welfare system. The leadership dilemmas are clearer than satisfactory courses of action

The BBC takes up the story in March 2012

Remploy, which provides work for people with disabilities, is planning to close 36 of its 54 factories, putting more than 1,700 jobs at risk. Minister for Disabled People Maria Miller said the sites could be closed by the end of the year as they were not financially viable.

Remploy factories were established 66 years ago as part of the creation of the welfare state. Its workers are employed in enterprises that vary from furniture and packaging manufacturing to recycling electrical appliances and operating CCTV systems and control rooms. The government says “non-viable” factories should close, with the money, part of a £320m annual budget for disability employment, re-invested into other schemes to help disabled people find work.

It follows an independent review conducted by Liz Sayce, chief executive of Disability Rights UK, into the way in which the government spends its disability employment budget. Her report recommended that government funding should focus on support for individuals, rather than subsidising factory businesses. She recommended the cash should be diverted into the Access to Work fund, which provides technology and other help to firms for the disabled, whose average spend per person is £2,900.

The Department for Work and Pensions said about a fifth of that budget was currently spent on Remploy factories, but added that almost all of the factories were loss-making and last year lost £68.3m.

Remploy’s official website announced the change of policy [downloaded March 8th 2012].

The Remploy Board has proposed a series of significant changes to its operations as a result of the Government decision to reduce current funding for Remploy – this was announced to Parliament as part of a package of reforms to maximise the number of disabled people supported into work.Remploy will now consult with its trades unions and the management forums on the proposed closure in 2012 of 36 of its factories which it believes are not commercially viable, and on the potential compulsory redundancy of 1,752 employees directly or indirectly involved with these businesses.

During this consultation Remploy will consider all measures to avoid redundancies. Remploy will issue a consultation document on the proposed factory closures and will start discussions with the trades unions and the management forums to begin formal consultation on the proposals.

In the second stage, Remploy will work with the Department for Work and Pensions to explore whether the remaining factory-based businesses and CCTV contracts could exit from Government ownership and, if so, agree how this might be achieved.

Dismay and anger

Unsurprisingly, the story has been met with dismay and anger from those affected. One source with experience of the Remploy factories told Leaders we deserve “It’s a difficult one. Remploy started after the war [of 1939-1945] for disabled soldiers, but that’s changed over the years.”

Creative leadership

The debate will rage on. Many who engage in it will be close to the pain. Others will be close to deeply held beliefs about socialism, and the nature and level of state intervention. There is still space for creative leadership here.

Big Pharma’s Philanthropy

Drug giants announce a plan to deliver vaccines at cost to the poorest regions of the world. Moral leadership or pragmatic response to protestors?

Tudor Rickards

This week [June 2011] a plan was announced by GlaxoSmithKline (GSK), Merck, Johnson & Johnson and Sanofi-Aventis to cut drug prices through an international vaccine alliance. A week later, Bill Gates and Pime Minister David Cameron got in on the act supporting Gavi.

Gavi

Gavi is a partnership for funding mass vaccination programmes in developing countries. Glaxo CEO Andrew Witty told the BBC about the plan:

If you’re in Kenya or a slum in Malawi or somewhere like that there is no capacity for those people to contribute to [profits to invest in future drugs], so they have to be helped out by the contribution from the middle and the richer (countries).

He struck a balance between the philanthropic benefits of the scheme, and the business model of Big Pharma to generate funds for future investment by maintaining high prices on their proprietary drugs.

Enter Bill Gates and David Cameron

A week later, Bill Gates and Prime Minister David cameron pledged their support to GAVI

The medical plight

The medical plight of many countries is illustrated by the case of Dr Freddie Coker, a pediatrician in Sierra Leone’s capital Freetown. Dr Cocker tells of his fight against diseases which result in child mortality rates of 50% which could be saved by drugs if made available.

“I’m very excited. As a doctor, I usually spend sleepless nights trying to see how much I can contribute to reducing the infant mortality rate among under-fives in my country. I’m quite happy.”About 40% of cases we see are due to diarrhoea diseases. The mortality rate can be as high as 50%.”The earlier a child is commenced on treatment, the better the outcome.”

The next step in a long campaign

Students studying leadership will be familiar with the case of Glaxo Smith Kline’s Jean Pierre Garnier (Dilemmas of Leadership, Chapter nine). The case outlines the dilemmas of morality versus profits.

Some call him a humanitarian. He has been awarded the Legion d’Honneur by the French government. He has indisputably taken GSK several rungs higher on the ladder of altruism than any other drug company. But at the end of the day, he says, he runs a for-profit company. And if people are still dying of AIDS in Africa, it is because their governments are ineffective, or do not care. It is not to do with the greed or indifference of the pharmaceutical companies. His vision is clear. He is willing to supply not just antiretrovirals but other medicines poor countries need for epidemics, such as malaria, at cost, he says. Combivir, [a dual combination AIDS drug], sells at $1.70 a day. For a Malawian woman .., it might as well be the price of a flight on Concorde. His answer is twofold: order from GSK in bulk, perhaps for the whole of sub-Saharan Africa, and the price will drop. Secondly, persuade the rich countries to support the Global Fund so that poor countries will have the money to buy GSK’s drugs.

A moral dilemma

Drug companies face a dilemma between two morally right options. The first is to do everything possible to ameliorate suffering through their medical products. The second is to secure enough revenues to invest in the drugs of the future. Big Pharma receives criticisms for its financial model and its marketing methods for influencing the medical professionals. Is this story a case of moral leadership from within their ranks? Or is it pragmatism, and at least partially a result of protests and stakeholder pressures? And in any case, should the ends be welcomed, regardless of the motives?

To go more deeply

News Medical provided a summary of editorial opinion pieces on this story.

The Good Man Jesus and the Scoundrel Christ

Book Review: The Good Man Jesus and the Scoundrel Christ, Philip Pullman, Canongate Publishers, 2010

Pullman’s retelling of the Christian story is inevitably a controversial work. The author’s creative twist is to provide “a story about a story” in which Jesus has acquired a twin brother Christos

The literary conceit permits a mythic tale in which Jesus is presented as the radical charismatic, with Christos offering the benefits of setting up a formal institution to carry the words and work of Jesus forward. It is not difficult to see how the basic idea permits a creative writer to explore deep theological and philosophical issues. Which is what Pullman does, in a deceptively lucid style. Sally Vickers, noted that

The Good Man Jesus and the Scoundrel Christ was bound to become something of a hornet’s nest. Known for his dislike of organised religion and the unflattering portrait of God..Pullman has been branded as a latter-day anti-Christ. [This book] was written at the prompting of one of Pullman’s admirers, the Archbishop of Canterbury Rowan Williams – who asked Pullman during a public debate why having tackled God he had neglected to write about the figure of Jesus – the Pullman version of the Gospel stories is inevitably, well, unchristian. What it is certainly not, however, is anti-Jesus – which is the book’s main point.

Pullman says of the work: “The story I tell comes out of the tension within the dual nature of Jesus Christ, but what I do with it is my responsibility alone. Parts of it read like a novel, parts like history, and parts like a fairy tale; I wanted it to be like that because it is, among other things, a story about how stories become stories.”

The way myths work

Pullman is a supreme storyteller who knows better than anyone that a myth needs no justification. Myths give us the facts. They are not the “facts” of testable evidence but of a different order of reality… The truths which myth deals in are more like the fundamental data of human consciousness; we have always played with them in an attempt to adumbrate life’s ambiguities and discover meaning

Another story?

Some weeks after reading the book I came across another tale of enormous potential consequences.

“Artificial life breakthrough announced by scientists” announced the headline. The story told of the most recent advance of Craig Ventner and his team of scientists in developing the first living cell to be controlled entirely by synthetic DNA. Dr Helen Wallace from Genewatch UK accused Dr Ventner of unethical motives: “He isn’t God,” she said, “he’s actually being very human; trying to get money invested in his technology and avoid regulation that would restrict its use.”

Now where did I come across that idea recently?

Are business schools educating for leadership?

Criticisms of Business schools have grown louder as the origins of the economic recession were analysed.

Over the last year or so there have been mounting criticisms of Business Schools, linked to the influence of some of the high-flying financial leaders who fell from grace during the credit crunch.

According to Yiannis Gabriel, in an article for Leadership journal the structure, ideology and ethos of MBA programmes are fundamentally opposed to an education of leaders … [more appropriate for] educating followers rather than leaders.

One interesting response came from Harvard Business School where students recently attempted to bring an ethical dimension into professional values espoused by MBAs.

The news encouraged me to dig out an unpublished note I had drafted while the Credit Crunch was still being set up by the exhuberent behaviours of bankers in the USA:

According to Della Bradshaw of the FT

Leadership became the hot topic in management education in 2001, following the terrorist attacks in the US. Almost every business school now has a leadership module on its MBA programme, as well as numerous short executive courses dedicated to the subject.

According to Mintzberg

Henry Mintzberg has won world-wide attention for his views on Business Schools. Henry believes they have lost their way – maybe they have never been on the right track.

One of his earliest influential ideas was the notion that much that passed for management was no more than the old managerialist notion of effective planning.

Essentially he had been pointing out way that creativity is a necessary component which has been largely ignored as a factor in effective management.

It is unsurprising that a call for action within the profession has come from within the student body rather than from the business institutions themselves. Naturally, the reaction may gain institutional support for pragmatic as well as for idealistic reasons. However, the mix of motives need not detract from the benefits to be gained if business leaders develop more awareness of the importance of an ethical stance in conducting their professional activities.

In What Ways should Ethics come into Creativity?

The literature of creativity distances the concept from ethical considerations. But this stance is thrown into question when it is examined critically. How are we to evaluate the creativity of an Oppenheimer or a Hitler, a de Sade or a Henry Ford?

A thought-provoking question

In what ways should ethics come into creativity? This thought-provoking question was posed by Marci Segal, founder of World Creativity and Innovation Week Marci is planning to present a paper on the topic. Her question [July 2009] drew attention to the fact that much of the literature on the creative process makes no reference to ethics. In that sense, the subject floats free of ethical considerations.

Artists take as a given that art stands above conventional morality. Many scientists still cling to the rationale that the pursuit of knowledge is morally neutral. Business leaders have favoured the licence to consider their only responsibility is to the financial health of their organizations.

Scientists, artists, and business leaders create their professional products and engage in their creative activities in bubbles which have in the past excluded considerations of ethics. These traditional beliefs are now changing.

The moral neutrality of scientific discovery

Scientists, card-carrying empiricists, have long argued for the moral neutrality of scientific creativity. In earlier days, pioneering figures such as Darwin, Newton and even Descartes managed to hold on to the ethical systems of their religious beliefs and kept them distinct from their discoveries which were eventually to challanges those beliefs.

But increasingly scientists have accepted the social responsibilities of science (or at least of scientists). The moral dimension can no longer be tacked on as an afterthought to the discovery process. The creation of the first atomic bomb in the Manhattan project is often quoted as a historical tipping point for awareness of social responsibilities of scientists. A recent paper by Penny Gilmer and Michael DuBois discusses the Manhattan project as an ethical dilemma that scientists may have to confront. No longer can ethics be tacked on to the creative process as an extra dimension in assessing the potential of a new idea or of its implementation.

More recently, scientific discovery has grappled with the ethical concerns of its potential ethical consequences. President Obama’s reversal of President Bush’s stance on stem-cell research is a current example of the ethical dilemmas of scientific research.

The morality of artistic creativity

Artistic creativity retains ancient beliefs in the purity of art, and its right to exist beyond reach of moral judgment. The view may sometimes be tackled legalistically, as in the famous trial in the UK of the publishers of Lady Chatterley’s Lover. Was Lawrence’s work creative art or pornography or both?

Artists have always deployed the weapon of challenging conventional notions of morality and ethics. Critics argue that the process is culturally benign and necessary. Artists help society to reflect on, and perhaps adjust its ethical beliefs. The cosy distinction between eroticism (OK) and pornography (Not OK) in artistic endeavours leaves many people uncomfortable.

Creative leadership and the Hitler problem

The terms creative leadership and transformational leadership are often used interechangably. Writings on transformational leadership have struggled with what is called the Hitler problem. Was Hitler ‘really’ a transformational leader? The dictator ticked most of the boxes of envisioning (creating) achieving enormous changes, however hateful the end or the means.

Hitler’s infamy derived from acts which were utterly contrary to the ethics of transformational (creative) leadership.

The ethics of production

In the literatures of creation and innovation, issues of ethics are largely peripheral to production and marketing considerations. One of the most widely-accepted taxonomies of creativity is the 4Ps of person, product, process, and press (environment). The 4Ps are rarely examined in the light of ethical considerations of products generated, processes engaged with, or of concerns of socially benign or malign environments.

Increasingly, the social benefits of production and growth are becoming tempered with considerations of resource depletion, and extravagant consumption. As with science, ethics is increasingly elbowing its way into the commercial world.

Ethics in or out

Should ethics be part of the professional training of artists, scientists, leaders, teachers, politicians? Or should it be granted independence, transcending the professions, and studied as a subject of itself? The debate deserves more attention than it has yet received.
Leaders we deserve welcome comments on this issue.

Acknowledgement

The Loyalty Wheel image is from
Volunteer Ethics, a site worth visiting. I found other sites with nice images of ethical models, accompanied by warnings about the unethicality of sharing their creative ideas with others …The creativity/ethics question again.