A sustainable (tax) business model (II)

In this second article about sustainable business models, I will dive into governance, ethics and transparency. Building trust and a strong reputation in the market, to instill confidence in investors, to manage risk and achieve operational efficiency, involve stakeholders, and so on and so forth are all reasons why good governance and transparency are essential for a business model.

Business ethics

Every company must uphold the highest standards of honesty, integrity, and accountability in all of their transactions. My experience in the field of taxes allows me to regularly advise clients on matters of tax ethics and conduct. Legislators in charge of taxes supposedly facilitate conversations like these. Serious consequences result from unethical tax practices. Penalties up to 100% of the unpaid taxes are no exception. Clients are usually interested in learning about countries with low tax rates when we talk about setting up operations abroad. The truth is that most businesses would opt for a country with a lower corporate tax rate if given the choice between two countries with similar business climates. I don't see any problem with that if we are seriously considering establishing business in that country, which includes hiring employees, offices and so forth. However, we are going down the wrong road if we establish a foreign legal entity only to funnel money through in order to take advantage of the lower tax rate. Such conduct is no longer acceptable from an ethical standpoint. For instance, the laws have gotten much tougher in this area in the Netherlands. More rigorous substance requirements are imposed on the so-called financial flow through entities. For companies to be eligible for tax treaty benefits and avoid being labelled as shell companies, they need to fulfill substantive requirements. One such condition is having an office space that can accommodate your needs for at least 24 months and book salary costs of 100,000 euros in the Dutch entity. When these conditions aren't satisfied, data is shared with the country that pays the rent, royalties, or interest (the source state).

Accountability

What does accountability really mean? In business, accountability refers to an individual's or company's need to account for their actions, accept responsibility for them, and reveal the consequences in a transparent manner. When I worked in-house for a big multinational for many years, one thing I noticed was that it was common for people to be appointed to lead big projects (such as SAP implementations, business restructuring projects, or mergers) but then they would be promoted to a different position once the project got into implementation. If major errors are discovered during implementation, the project leader won't be held responsible for the project, because there is a new project lead. This is not what accountability should look like. Employees ought to face the music for any mistakes they make on the job. From CEO to the person at reception, everyone.

Transparency

Reveal the consequences in a transparant manner. If you make a mistake, don't hide it under the carpet. As a result of their rigorous quality control procedures, a healthcare provider discovered that a lead—which transmits electrical impulses from a pacemaker to the heart—could fail under specific conditions. Upon learning that any patient with such a lead in their body would need to have surgery to implant a new pacemaker and lead, the business promptly notified all patients (through their physicians) of this fact. A really annoying and difficult message, as you might expect. The corporation acted in accordance with their obligation, disregarding the potential financial ramifications. As a result, physicians were so impressed that they increased their purchases of the company's medical equipment. The strategy of transparency led to an increase in revenue! Not long after that, a major rival experienced the same problems—technical difficulties with one of their devices—but they chose to keep quiet about it for as long as they could. Someone lost their life as a result, and, as you can expect, chaos ensued. Because they hid the problem for as long as they could, that competition almost went into bankruptcy. An example why you have to reveal the consequences in a transparant manner.

Good governance

Good governance is essential for a long-term company's success because it keeps everyone's interests in check and makes sure the company runs smoothly and ethically. Governance involves many different elements, like accountability, strategic decision-making, stakeholder engagement and risk management.

Risk management is a key building block of good governance. Environmental, social, and governance (ESG) hazards are vital to sustainability, and good governance helps identify, evaluate, and reduce them. It enhances the company’s ability to withstand and adapt to economic, environmental, and social changes and crises. I always make sure to incorporate risk management methods when I develop a business model. After we've settled on a plan for the company's production and distribution management as well as the "how" and "where" of its primary tasks, the next step is to put that plan into action by establishing procedures, delegating responsibilities, and establishing review intervals.

To effectively meet the interests, wants, and concerns of all stakeholders, it is crucial to include appropriate stakeholder management into the process of establishing a business model. This requires careful consideration of several critical factors. Determine who your internal and external stakeholders are. Understand the expectations and needs of all your internal and external stakeholders. Create a strategy for communicating with stakeholders that specifies who to contact and when to contact them. To get your message out, use a variety of mediums including social media, email, newsletters, and meetings. Establish explicit governance policies that specify roles, responsibilities, and decision-making. Be transparent in operations and decision-making.

(to be continued)