This week 27% of Barclays shareholders 'revolted' over decisions made in favour of using their firm's spare cash, to pay top managers' bonuses, rather than dividends. Alison Carnworth, chair of the bank's remuneration committee, talked about in the future attaining a 'balance of rewards between shareholders and employees'. The fact of the matter is that Barclays CEO Bob Diamond and Chris Lucas, finance director had been awarded bonuses close to the maximum defined by the bank even though the share price was down by a third, dividends had stagnated and profits have fallen. You can see why the shareholders are angry, shouldn't bonuses be paid based on good stewardship? As far as the dividend issue, they may, or may not have had the accumulated profits to pay them but that's a separate issue, as is the subject of the bonus, deserved or not. Barclays shareholders are having trouble separating the two.
When it comes to the issue of enhancing shareholder wealth, each company will have its own dividend policy; loans, bonds and preference shares may impose restrictions limiting company control. Warren Buffet talked about 'the circumstances under which earnings should be retained and under which they should be distributed'. Allocation of this capital he said was 'crucial'. But what does the dividend policy say about a company? It anything.
Dividend decisions can be logical and almost predictable and if all else is constant, may be able to add or subtract value. Patterns emerge which give an indication of firm performance to the outside world. As a shareholder, would I be happy with steady increases year on year, volatile movements in an unpredictable fashion or to accept what ever remains following positive NPV projects? Or, would I prefer that no dividends were paid (through choice) and all monies reinvested, after all surely the share price would reflect any added value. Or would it?
In 1961 Modigliani and Miller developed the 'dividend irrelevancy proposition' and like their work on capital structure it requires certain assumptions to be made. The basic idea is that regardless of the dividend payout, large, small or not at all, the share price would remain unaffected and therefore becomes irrelevant. What would M&M have made of the Barclays fiasco? None of their assumptions covered banker's bonuses surprisingly, but what they did assert is that whether a shareholder receives rewards in the shape of dividends or not, value is enhanced purely through the firm's acceptance of positive NPV projects alone. In a year where the choice is made to invest in positive NPV projects, rather than pay dividends, liquidation of (some) shares would provide income required by the shareholder (instead of the dividend payout) and the sale price would reflect value added by the projects and create a 'homemade dividend'. In the real world of course the transaction would incur charges.
Assuming I'm the shareholder, would I rather the company invested in positive NPV projects, returned cash to me or kept it on their balance sheet? Am I an independent investor or a pension fund? What is my investment motive? It is long term or short term? What level of tax payer am I and am I expecting a return from a regular dividend or through a capital gain? The opposing view of the residual approach would be for a company to target a particular group. Sounds plausible, almost common sense since multi million pound organisations seldom do anything without a well thought out strategy. The 'horse' is built for the 'course' so to speak.
An unexpected change in dividend pattern is regarded as a sign of how the directors view the future prospects of the firm. A potential investor may make investment decisions based on historical dividend patterns, depending on their requirements, should they need regular predictable amounts or as and when payouts. It is this change in pattern which leads to changes in share price because it's taken as a reflection of the results of the last year, the director's view of the future and the strength of the business. In short it's a bit of a PR exercise.
Where the decision is taken to reinvest profits, rather than pay out dividends, this can be viewed as increasing the perceived risk level due to the future uncertainty of dividend payments, thereby reducing the share price. An alternative approach would be to pay out all funds to shareholders then issue new shares in order to raise funds for investment. There doesn't seem to be a perfect way to return cash to shareholders, this is one of the many decisions faced by managers who need to act with the company's best interests at heart. Almost a by-product of the decision making as far a dividends goes is, do dividend decisions affect share price? There is no one categorical answer, simply evidence to show both opinions therefore when I next make my big investment decision, I will consider all of the above but most importantly, I will ask myself as the shareholder, what are my requirements and expectations and if the firm can fulfil them, then that's the investment I'll go for.
Sources: FT, Arnold, BBC News Website
Sunday, 29 April 2012
Sunday, 1 April 2012
Optimal Capital Structure
WACC (or Weighted Average Cost of Capital) can be used as an investment tool when deciding whether to invest in a given project. If the return on the project is higher than the WACC the company is creating value, if the return is lower than the WACC, the company is shedding value. Organisations apply hurdle rates to projects they consider, this is the minimum rate of return required by an investor or manager on a given project, the higher the risk, the higher the hurdle rate.
The capital structure (or how a company funds its operations and growth) of a business is a critical decision for a company, should the business be funded through debt or through equity? Or what proportion of each? Debt financing usually offers the lowest cost of finance because it is tax deductible however as the company's debt increases, so does the risk. The optimal capital structure will allow an organisation to maximise its value through an acceptable cost of capital and risk level. A company's debt to equity ratio will provide a picture of how risky the company is.
A company more heavily financed by debt will be more risky. Peacocks has been described as having an 'unsustainable capital structure' (J Pope of KPMG) which lead to their sale out of administration to Edinburgh Wollen Mill in February this year after being unable to secure refunding of £240m of its £750m debt.
During its expansion, Peacocks floated on the stock market but the CEO Richard Kirk was unhappy with the valuation and lead a management buy out with backing from financial institutions including Goldman Sachs. It is this debt which is at the centre of the problem. Peacocks had suffered from tough economic conditions and the banks refused to provide further working capital. In April 2010, the stores appeared to have made a profit of £27m but this was reduced to a pre tax loss of £56m after bank loans and overdrafts.
The relationship between debt and a company's capital structure is complex, it can both increase and decrease a company's WACC because although a higher proportion debt decreases the WACC because its cheaper than equity, it also increases the WACC because shareholders want more returns for a higher level of risk. The question is, can the way a company is financed add more value for shareholders? And if it can, what is an acceptable risk level? Interest and repayments back to lenders won't go away, profits do. If a company doesn't make a profit, it has the option to withhold dividend payments, not so with repayments. Shareholders appreciate a certain level of risk, they respond to it through the market, the question is how much is too much?
The discussion surrounding an optimal capital structure is not a new one. It is widely acknowledged that the balance of gearing has an impact on the overall value of an organisation however, Modigliani and Millar (1958) argue that a company's capital structure has no impact on the WACC and therefore no optimal structure exists because the company is valued on risk alone. One of the flaws in the argument is the assumption that no taxation exists. That's like saying Santa doesn't exist, it's just not true. Thankfully in 1963 M&M updated their theory to include tax (but not Santa).
It seems to me that compromise is the only option, with a reasonable compromise being the point before shareholders want higher returns because of increased debt and the resulting increased risk. It's a bit like tightrope walking, one push and you're off!
BBC News website, Arnold
Sunday, 25 March 2012
Socially Responsible Investment
There are many definitions of SRI, usually involving words like sustainable, ethical and responsible but what is SRI?
A Scottish youth minister suggested their share of the £9m government fund to help those areas particularly hit by youth unemployment could be sustainable investment. Quite true. If the result is that thousands of young people find work who would not have if they didn't have access to this fund. We know the benefits of reduced unemployment, the ability to feed the local economies etc. Would it be as simple as that? Can you just throw money at unemployment and make it ok? Probably not so what's being sustained? And in any case, couldn't we say all government spending was socially responsible since it all contributes to the welfare of society?
Back in January a UN panel said that governments must look beyond the standard economic indicator GDP. In their view, sustainability is about reducing poverty and improving the quality of life for millions of people, not profit, and the financial crisis was (at least in part) caused by short termism and did not reward sustainable investment.
'Sustainability', it's used so often these days, in so many different contexts from tuna fishing to fossil fuel excavation but what does it mean in regard to investment? And what's the priority? Sustainability or a good return? Do you have to be able to afford to be sustainable?
Social conscious, value based, morals, ethical investing which considers social and environmental factors, surprisingly SRI has it's roots in religion, I remember the sanctions against South Africa and protests at Greenham Common, people chose not to be connected, even through investment, to organisations (or countries) who behaved in a way in which they did not approve. They voted with their feet. But in today's global economic society can we be sure that what we invest in is socially responsible?
The way in which SRI is defined makes it subjective, what's an important moral issue to me based on my values and traditions may not be to you. What to you is an undesirable activity may to me to perfectly acceptable. Divesting securities means to remove selected investments from a portfolio based on certain social or environmental criteria, nice idea but it's not without cost. Shareholder activism also falls under this governance function whereby shareholders can apply pressure to avoid such practices as exploitative overseas labour.
But is it more expensive to invest responsibly? I assumed so until I read that the Domini 400 Social Index, the first benchmark for equity portfolios subject to multiple social screen, set up in 1990 had outperformed the S&P 500 every year since it's inception.
Social responsibility is the principle that companies should contribute to the welfare of society and not be solely devoted to maximising profits, but it doesn't look like you have to choose?
Sources: FT, BBC News. investopedia.com
A Scottish youth minister suggested their share of the £9m government fund to help those areas particularly hit by youth unemployment could be sustainable investment. Quite true. If the result is that thousands of young people find work who would not have if they didn't have access to this fund. We know the benefits of reduced unemployment, the ability to feed the local economies etc. Would it be as simple as that? Can you just throw money at unemployment and make it ok? Probably not so what's being sustained? And in any case, couldn't we say all government spending was socially responsible since it all contributes to the welfare of society?
Back in January a UN panel said that governments must look beyond the standard economic indicator GDP. In their view, sustainability is about reducing poverty and improving the quality of life for millions of people, not profit, and the financial crisis was (at least in part) caused by short termism and did not reward sustainable investment.
'Sustainability', it's used so often these days, in so many different contexts from tuna fishing to fossil fuel excavation but what does it mean in regard to investment? And what's the priority? Sustainability or a good return? Do you have to be able to afford to be sustainable?
Social conscious, value based, morals, ethical investing which considers social and environmental factors, surprisingly SRI has it's roots in religion, I remember the sanctions against South Africa and protests at Greenham Common, people chose not to be connected, even through investment, to organisations (or countries) who behaved in a way in which they did not approve. They voted with their feet. But in today's global economic society can we be sure that what we invest in is socially responsible?
The way in which SRI is defined makes it subjective, what's an important moral issue to me based on my values and traditions may not be to you. What to you is an undesirable activity may to me to perfectly acceptable. Divesting securities means to remove selected investments from a portfolio based on certain social or environmental criteria, nice idea but it's not without cost. Shareholder activism also falls under this governance function whereby shareholders can apply pressure to avoid such practices as exploitative overseas labour.
But is it more expensive to invest responsibly? I assumed so until I read that the Domini 400 Social Index, the first benchmark for equity portfolios subject to multiple social screen, set up in 1990 had outperformed the S&P 500 every year since it's inception.
Social responsibility is the principle that companies should contribute to the welfare of society and not be solely devoted to maximising profits, but it doesn't look like you have to choose?
Sources: FT, BBC News. investopedia.com
Sunday, 18 March 2012
Would you credit it?
Prior to the credit crisis, we took Woolworths for granted, did any of us ever think that one day it would no longer be a fixture on our high streets? Today, Twiglets and Sarson's malt vinegar are for sale. Whatever next? Buckingham Palace with a 'for sale' sign outside? It's surprising how many companies rely on borrowing and when that borrowing either becomes too expensive, or just isn't available any more, it spells disaster.
The abundance of inexpensive credit following the bursting of the dot com bubble and the Twin Towers attack meant that we could all have what we wanted, when we wanted it. We were encouraged to borrow at low rates to get those items we'd only dreamed of. There's lots of ways an individual can get hold of credit, big purchases usually come with a finance option, provided you've got a good credit rating. Credit cards with low rates, or even 0% were all the rage. Not any more.
The abundance of inexpensive credit following the bursting of the dot com bubble and the Twin Towers attack meant that we could all have what we wanted, when we wanted it. We were encouraged to borrow at low rates to get those items we'd only dreamed of. There's lots of ways an individual can get hold of credit, big purchases usually come with a finance option, provided you've got a good credit rating. Credit cards with low rates, or even 0% were all the rage. Not any more.
For a company, credit rating depends on two things, the likelihood of the debt not being repaid (a default) and the extent to which the lender is protected in the event of a default. It's about level of risk, the higher risk the country, the lower the credit rating. The highest rating is AAA and this represents quality indicating the capacity to repay interest and principle is extremely strong. This week it's been reported Britain is in danger of losing its triple A status. Moodys and Fitch have put the rating on a 'negative outlook' while Greece's rating has improved to B-, Fitch's first uplift in rating since 2003.
Organisations who offer credit to their customers can buy insurance against the debt being unpaid. They can buy a policy which insures a percentage of the amount. Attitudes have changed, previously only certain customers, say those with a less than glowing reputation would be insured against, now in some companies it can be every customer. This type of practice oils the wheels of the economy and gives some protection against risk of default. It helps to ease the financial constipation which is unpleasant to say the least.
The wider implications of the credit crunch can be felt by many, we're all a bit more risk averse these days, if it can happen to Woolworths, it can happen to anyone.
Sources: FT, Arnold, BBC News website, business.financial post.com
Organisations who offer credit to their customers can buy insurance against the debt being unpaid. They can buy a policy which insures a percentage of the amount. Attitudes have changed, previously only certain customers, say those with a less than glowing reputation would be insured against, now in some companies it can be every customer. This type of practice oils the wheels of the economy and gives some protection against risk of default. It helps to ease the financial constipation which is unpleasant to say the least.
The wider implications of the credit crunch can be felt by many, we're all a bit more risk averse these days, if it can happen to Woolworths, it can happen to anyone.
Sources: FT, Arnold, BBC News website, business.financial post.com
Sunday, 11 March 2012
To buy (or merge), or not to buy (or merge)
There are many motivations for mergers or acquisitions and they certainly have an impact on share price, this week Alecto Minerals jumped 7.1% after completing the acquisition of Nubian Gold Exploration, an Ethiopian mining firm, International Power was lifted to its highest level in more than a year with the date approaching when GDF Suez can take full control. And yet it's an artificial change which can be as high as 30% but actually results in longer term shareholder wealth destruction.
It's been reported this week that Peugeot and General Motors (GM) are entering into a global alliance. With the specific aim of reducing costs and as long as the senior management can get along and the integrities of both companies remain intact, it should work well. It's neither a merger nor a full acquisitions, GM will own 7% of Peugeot and I think that in this case the right steps are being taken to increase shareholder wealth.
GM are strong in the global market, but not in Europe. Peugeot are weak in the world market but strong in Europe. Not rocket science is it? They've come together to create operating synergies (which will have the added benefit that they will reduce costs). Bringing the two companies together increases their buying power by combining their powers to achieve economies of scale. They're sharing some technical stuff too, platforms I think they call them but the cars will be different, they won't be the same car with different badges on as we've seen before with other manufacturers.
Both companies have had problems, Peugeot made a 500m Euros loss during the second half of 2011, it's Europe's largest car manufacturer and it relies on this market for its sales, but as we all know, the European market has been under pressure for some time. Peugeot have reduced their costs, improved their processes and diversified in an attempt to improve their financial position. GM were rescued from bankruptcy by the US government less than three years ago and rely on their strong performance in North and South America, Asia and China. That said it's quite an achievement for GM, they've turned things around showing the US were right to bail them out.
At the moment, production will stay with each individual company, I suppose it's a bit like an insurance policy, if things get tougher financially, they can pool production and close factories. It would be controversial, as would sharing top management but Nissan and Renault have done it and they've just reported further investment in at the Sunderland plant. And anyway, if it increases shareholder wealth, don't they have an obligation to consider it?
The only down side to this arrangement (excluding employee uncertainty) is from the perspective of the suppliers to the two car manufacturers. Because they're combining their buying power, will this put excess pressure on smaller firms to cut their prices? Could be a bit domineering and overbearing. Competition and bullying, it's a fine line.
There are so many benefits with this type of deal rather than an outright acquisition or a merger, they both get to keep their identities but have access to each other's markets, they're taking minimal risk but will reap the benefits from economies of scale, entry to new markets and increase their chances of survival. Only time will tell whether it works, it relies on shared vision, requires diplomacy, shared technical skills but most of all a desire to make it work.
Source: BBC News, FT, Arnold
It's been reported this week that Peugeot and General Motors (GM) are entering into a global alliance. With the specific aim of reducing costs and as long as the senior management can get along and the integrities of both companies remain intact, it should work well. It's neither a merger nor a full acquisitions, GM will own 7% of Peugeot and I think that in this case the right steps are being taken to increase shareholder wealth.
GM are strong in the global market, but not in Europe. Peugeot are weak in the world market but strong in Europe. Not rocket science is it? They've come together to create operating synergies (which will have the added benefit that they will reduce costs). Bringing the two companies together increases their buying power by combining their powers to achieve economies of scale. They're sharing some technical stuff too, platforms I think they call them but the cars will be different, they won't be the same car with different badges on as we've seen before with other manufacturers.
Both companies have had problems, Peugeot made a 500m Euros loss during the second half of 2011, it's Europe's largest car manufacturer and it relies on this market for its sales, but as we all know, the European market has been under pressure for some time. Peugeot have reduced their costs, improved their processes and diversified in an attempt to improve their financial position. GM were rescued from bankruptcy by the US government less than three years ago and rely on their strong performance in North and South America, Asia and China. That said it's quite an achievement for GM, they've turned things around showing the US were right to bail them out.
At the moment, production will stay with each individual company, I suppose it's a bit like an insurance policy, if things get tougher financially, they can pool production and close factories. It would be controversial, as would sharing top management but Nissan and Renault have done it and they've just reported further investment in at the Sunderland plant. And anyway, if it increases shareholder wealth, don't they have an obligation to consider it?
The only down side to this arrangement (excluding employee uncertainty) is from the perspective of the suppliers to the two car manufacturers. Because they're combining their buying power, will this put excess pressure on smaller firms to cut their prices? Could be a bit domineering and overbearing. Competition and bullying, it's a fine line.
There are so many benefits with this type of deal rather than an outright acquisition or a merger, they both get to keep their identities but have access to each other's markets, they're taking minimal risk but will reap the benefits from economies of scale, entry to new markets and increase their chances of survival. Only time will tell whether it works, it relies on shared vision, requires diplomacy, shared technical skills but most of all a desire to make it work.
Source: BBC News, FT, Arnold
Tuesday, 6 March 2012
Foreign Direct Investment
The interlinked nature of today's global economy means that what happens financially in one country can have consequences in many others. There are many key challenges for the economy, Christine Lagarde, Managing Director of the International Monetary Fund (IMF) identified the following three areas: sovereign debt, growth and instability. Growth needs to be just at the right rate too, not too fast, not too slow together with a balance of spending and cuts by governments, global output is predicted to be 3/4% lower during 2012 than 2011. In addition, the unemployment rates make some predict a 'lost generation'.
According to the 2011 World Investment Report (WIR 2011) foreign direct investment (FDI) has not bounced back to pre crisis levels, $1.24 trillion is still 15% down. Recovery is predicted though, but it will take two years (all being well). Once again developing and transition economies seem to be the ones to watch, half of all FDI is down to them and they generated record levels of outflows, directed mainly to other nations in the South, although FDI in the lowest developed countries fell and remains uneven. The importance of developing countries on the world economy isn't a new concept but these figures only highlight that there are positive aspects in today's economy, but probably away from the Eurozone. Demand from emerging markets is increasing,
It's not just the nations involved which are fresh and new and exciting, it's the way they get involved that's new and fresh and exciting. They're using new production and investment models to assist their integration into the global economic community and build their profile as not just players, but competitors. BAN Ki-moon says that their potential has to be unlocked and that frameworks are needed in order for developing countries to fully benefit.
The World Trade Organisation aims to help developing countries build their trade capacity, there are 153 members who negotiate changes to trade rules. The Doha round is the latest round of trade negotiations and its aim is to introduce lower trade barriers and revised trade rules, but progress is slow. The fundamental objective is to improve developing countries trade prospects. Director General Pascal Lamy said recently that if Europe wants to exit the current crisis it needs to have independent fiscal resources and focus on developing its competitive edge. Sounds like Europe is too risky, too interlinked financially and too expensive to me.
There have been uprisings in places like Syria and Greece because people are feeling the strain of social instability, high unemployment and austerity measures. There are arguments for focusing on the bottom of the pyramid, or those with a lower income, selling the lower priced goods to the biggest market. Sounds like developing markets to me. We've become a nation of high end consumers who would not know a good low cost product if we saw one. We're all about luxury and expense, does anyone reading this NOT have a smartphone? It's become the norm.
The more involved the emerging markets become in the global economy, the more organisations such as the ILM and WTO will impact upon them and in today's economic times, that may pose a risk in getting involved in crisis stricken countries. In addition the links between politicians and big business in developed countries almost puts developing markets at a disadvantage. If there was a recession in advanced markets, it would have a big impact on emerging markets, so called 'hot money' too can be damaging, flowing into and out of a country in the short term can damage their economy. If emerging markets are going to play what has become a developed countries game, there'll be winners and losers, who they are, only time will tell.
Sources World Investment Report 2008, 2011. World Trade Organisation. FT. Arnold
According to the 2011 World Investment Report (WIR 2011) foreign direct investment (FDI) has not bounced back to pre crisis levels, $1.24 trillion is still 15% down. Recovery is predicted though, but it will take two years (all being well). Once again developing and transition economies seem to be the ones to watch, half of all FDI is down to them and they generated record levels of outflows, directed mainly to other nations in the South, although FDI in the lowest developed countries fell and remains uneven. The importance of developing countries on the world economy isn't a new concept but these figures only highlight that there are positive aspects in today's economy, but probably away from the Eurozone. Demand from emerging markets is increasing,
It's not just the nations involved which are fresh and new and exciting, it's the way they get involved that's new and fresh and exciting. They're using new production and investment models to assist their integration into the global economic community and build their profile as not just players, but competitors. BAN Ki-moon says that their potential has to be unlocked and that frameworks are needed in order for developing countries to fully benefit.
The World Trade Organisation aims to help developing countries build their trade capacity, there are 153 members who negotiate changes to trade rules. The Doha round is the latest round of trade negotiations and its aim is to introduce lower trade barriers and revised trade rules, but progress is slow. The fundamental objective is to improve developing countries trade prospects. Director General Pascal Lamy said recently that if Europe wants to exit the current crisis it needs to have independent fiscal resources and focus on developing its competitive edge. Sounds like Europe is too risky, too interlinked financially and too expensive to me.
There have been uprisings in places like Syria and Greece because people are feeling the strain of social instability, high unemployment and austerity measures. There are arguments for focusing on the bottom of the pyramid, or those with a lower income, selling the lower priced goods to the biggest market. Sounds like developing markets to me. We've become a nation of high end consumers who would not know a good low cost product if we saw one. We're all about luxury and expense, does anyone reading this NOT have a smartphone? It's become the norm.
The more involved the emerging markets become in the global economy, the more organisations such as the ILM and WTO will impact upon them and in today's economic times, that may pose a risk in getting involved in crisis stricken countries. In addition the links between politicians and big business in developed countries almost puts developing markets at a disadvantage. If there was a recession in advanced markets, it would have a big impact on emerging markets, so called 'hot money' too can be damaging, flowing into and out of a country in the short term can damage their economy. If emerging markets are going to play what has become a developed countries game, there'll be winners and losers, who they are, only time will tell.
Sources World Investment Report 2008, 2011. World Trade Organisation. FT. Arnold
Monday, 27 February 2012
Exchange Rate Risks, Ethics and Tax Avoidance
On Thursday David Cameron talked about an anti-business culture developing in the UK with wealth creation being referred to as 'anti social'. With all of the discussion of senior executive pay, big business is feeling 'un-loved'. The fact of the matter is that the UK economy is reliant on multinationals, they may represent only 2% of British companies but they are responsible for 38% of British industrial employment, 23% of service sector employment and four fifths of all spending on research and development.
The UK is home to half of all multinationals headquartered in Europe who presumably are there to minimise the company's tax burden.
For a business, what does achieving the most efficient tax result mean? There are ethical pressures to pay tax at the appropriate rate, in the appropriate country, at the appropriate time but what about those of your competitors who don't? The result will be that they will have higher cash reserves, lower cost financing and increased dividends. Back to the ultimate business objective, Shareholder Wealth Maximisation. In this context, moving or allocating profits to a low tax jurisdiction, your shareholders may say was an obligation.
Certain things would have to happen in order to create a level playing field with regard to tax avoidance, international co-operation and transparency being just two of them. The Tax Justice Network (TJN) produce a Financial Secrecy Index which ranks companies according to their secrecy and the scale of their activities. The members have a shared concern that tax avoidance causes poverty.
The World Economic Forum in Davos in January this year shared that view too, Nick Mathiason from the Guardian came up with five steps to end global tax evasion. The discussion at the WEF was about using this funds, (avoided tax) by big businesses, which could be accessed if we all pulled together, and we could use it to beat austerity. What a good idea. I wonder why we aren't doing that now? Seems simple.
Could it be because recently we have seen that individuals too have ways of minimising tax payments.The current UK top rate of income tax is 50%. They pay themselves though private companies and save themselves thousands just like Moira Stewart from Radio 2, (well, I'm old) top NHS civil servants and the student loans chief Ed Lester. But, won't they be spending their (available) money in this country which generates more wealth? If the government (be it Cons/Labour/Lib) got it, what would they do with it? Instigate more public sector reforms which costs millions and ultimately fail or use it to pay benefits to those who don't deserve it?
The Guardian reported on 23rd February that a spokesman for the Her Majesty's Revenue and Customs (HMRC) task force, targeting those individuals who evade tax, say they have found evasion to be as high as 75% in the selected group. They're targeting people who own property abroad, fast food retailers and market stall holders, i.e. small businesses. Something tells me they're missing the point. Back to upsetting big business.
Another real issue for businesses who import or export goods is currency related risks. In an extreme example, the sanctions in Iran have caused the rial to fall drastically against foreign currency which has resulted in businesses not only being exposed but suffering transaction and economic risk. Iranian students studying in other countries are unable to receive currency from families, only the rial which is reducing in value every day. Sanctions have been placed on Iran because of their nuclear activity and in this case it's not just the businesses who are directly effected by the devaluation, it's all of the population.
During the last quarter of 2010, money spent by big business on investment was down but UK exports rose by 2.3%, that's good news but ultimately puts those exporters at risk, however these risks can and are managed. A forward contract may at least provide some guarantee of what future costs may be but benefits may not be derived if rates are favourable. Businesses could insist that all trade, whether that be import or export, be settled in their home currency, thereby avoiding the exchange rate risk. That risk is then passed on to the customer. Not necessarily risk free then - you'd have to be in a pretty good position to expect that of your customers, no competitors and so on.
Netting is another method where inter-organisational currency debts are settled for the net amount, taking into account the 'some you win, some you lose' attitude. Matching inflows and outflows and concentrating on the part of the trade which remains unmatched can work for some. Gambling (in an educated guessing kind of way) on what you expect the currency market to do is also an option adding in a borrowing factor just to make things really interesting.
There are many options to manage risks associated with currency exchange rates, the ultimate aim being that you (the management) aim for best value for the shareholder, but the tax question, that may not be so simple.
References: Hyrck and Andreoli (2005) Foreign Tax Strategies can be a boon to Multinationals. BBC news. Guardian news. FT. Arnold.
The UK is home to half of all multinationals headquartered in Europe who presumably are there to minimise the company's tax burden.
For a business, what does achieving the most efficient tax result mean? There are ethical pressures to pay tax at the appropriate rate, in the appropriate country, at the appropriate time but what about those of your competitors who don't? The result will be that they will have higher cash reserves, lower cost financing and increased dividends. Back to the ultimate business objective, Shareholder Wealth Maximisation. In this context, moving or allocating profits to a low tax jurisdiction, your shareholders may say was an obligation.
Certain things would have to happen in order to create a level playing field with regard to tax avoidance, international co-operation and transparency being just two of them. The Tax Justice Network (TJN) produce a Financial Secrecy Index which ranks companies according to their secrecy and the scale of their activities. The members have a shared concern that tax avoidance causes poverty.
The World Economic Forum in Davos in January this year shared that view too, Nick Mathiason from the Guardian came up with five steps to end global tax evasion. The discussion at the WEF was about using this funds, (avoided tax) by big businesses, which could be accessed if we all pulled together, and we could use it to beat austerity. What a good idea. I wonder why we aren't doing that now? Seems simple.
Could it be because recently we have seen that individuals too have ways of minimising tax payments.The current UK top rate of income tax is 50%. They pay themselves though private companies and save themselves thousands just like Moira Stewart from Radio 2, (well, I'm old) top NHS civil servants and the student loans chief Ed Lester. But, won't they be spending their (available) money in this country which generates more wealth? If the government (be it Cons/Labour/Lib) got it, what would they do with it? Instigate more public sector reforms which costs millions and ultimately fail or use it to pay benefits to those who don't deserve it?
The Guardian reported on 23rd February that a spokesman for the Her Majesty's Revenue and Customs (HMRC) task force, targeting those individuals who evade tax, say they have found evasion to be as high as 75% in the selected group. They're targeting people who own property abroad, fast food retailers and market stall holders, i.e. small businesses. Something tells me they're missing the point. Back to upsetting big business.
Another real issue for businesses who import or export goods is currency related risks. In an extreme example, the sanctions in Iran have caused the rial to fall drastically against foreign currency which has resulted in businesses not only being exposed but suffering transaction and economic risk. Iranian students studying in other countries are unable to receive currency from families, only the rial which is reducing in value every day. Sanctions have been placed on Iran because of their nuclear activity and in this case it's not just the businesses who are directly effected by the devaluation, it's all of the population.
During the last quarter of 2010, money spent by big business on investment was down but UK exports rose by 2.3%, that's good news but ultimately puts those exporters at risk, however these risks can and are managed. A forward contract may at least provide some guarantee of what future costs may be but benefits may not be derived if rates are favourable. Businesses could insist that all trade, whether that be import or export, be settled in their home currency, thereby avoiding the exchange rate risk. That risk is then passed on to the customer. Not necessarily risk free then - you'd have to be in a pretty good position to expect that of your customers, no competitors and so on.
Netting is another method where inter-organisational currency debts are settled for the net amount, taking into account the 'some you win, some you lose' attitude. Matching inflows and outflows and concentrating on the part of the trade which remains unmatched can work for some. Gambling (in an educated guessing kind of way) on what you expect the currency market to do is also an option adding in a borrowing factor just to make things really interesting.
There are many options to manage risks associated with currency exchange rates, the ultimate aim being that you (the management) aim for best value for the shareholder, but the tax question, that may not be so simple.
References: Hyrck and Andreoli (2005) Foreign Tax Strategies can be a boon to Multinationals. BBC news. Guardian news. FT. Arnold.
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