By JEFF SOMMER – NYT
NO taxpayer is obliged to pay the government a penny more than the law requires, the Supreme Court said in 1935. But the court also said no corporation was permitted to use “elaborate and devious” means — known nowadays as “gimmicks” — for the express purpose of evading taxes.
That ancient tension between legal tax avoidance and illegal tax evasion, and between a corporation’s self-interest and the fundamental requirements of a government and its citizens, remains at the heart of the American system. It was on full display at the Senate hearing last week on Apple’s tax practices in the 21st century.
“We don’t use gimmicks,” Apple’s C.E.O., Timothy D. Cook, declared in prepared testimony.
That statement seemed absurd to one expert witness at the hearing, J. Richard Harvey Jr., a professor at Villanova Law School. “Apple does not use tax gimmicks?” Professor Harvey testified. “I about fell off my chair when I read that.” Mr. Harvey said Apple had set up corporations in Ireland that were little more than empty shells. By exploiting gaps in international law, Apple’s tax strategizing saved the company $7.7 billion in 2011 alone, he said.
The hearing furnished an illuminating blueprint of Apple’s tax strategies, and was a riveting spectacle. But for anyone hoping that it would result in an swell of support for closing tax loopholes and repatriating hundreds of billions of dollars in cash held “overseas” by American corporations — in Apple’s case, actually deposited in Manhattan bank accounts — the event was something of a letdown.
Mr. Cook, after all, received rave reviews from senators in the room, starting with Rand Paul, the Kentucky Republican. Even before Mr. Cook took the stand, Mr. Paul posted pre-emptively on Twitter, “If there is anyone to blame here it is not Apple, it is Congress and the tax code it created.” And news reports afterward generally said Mr. Cook’s genial manner — and the aura surrounding Apple’s immensely popular products — effectively disarmed the Senate panel.
For Nell Minow, who has spent the last 27 years researching and advocating policies that she says are aimed at improving corporate America’s behavior, it was a difficult week. “With corporate governance battles, you get used to tilting at windmills,” she said.
Beyond the Apple hearing, she pointed to another prominent event that could be viewed as a corporate governance setback. That was a vote on whether the jobs of chairman and C.E.O. should be held by the same person at a major company, JPMorgan Chase. Splitting the two jobs — under the theory that an independent chairman offers meaningful oversight over a C.E.O. — has been a trend. In 2002, only 25 percent of Standard & Poor’s 500 companies separated the two roles. In 2012, some 43 percent did, according to a survey by Spencer Stuart, the executive search firm.
But at JPMorgan, shareholders voted last week by a roughly two-to-one margin against splitting the jobs, both held by Jamie Dimon. Like Mr. Cook, Mr. Dimon is often said to be an extremely effective leader, and his personal popularity may have been an influence. Heavy lobbying and aggressive tactics by the company also helped in the vote, which in any case was only advisory. (Even if it had gone against Mr. Dimon, he wouldn’t have been required to heed it.)
It’s possible that another factor introduced voting bias. Seven of the 10 institutional investors who are JPMorgan’s largest shareholders are themselves run by C.E.O.’s who are also chairmen. That was reported by Bloomberg News, which found that the top 10 shareholders held 29.5 percent of JPMorgan’s stock.
A cozy sense of entitlement is a tendency that separating the jobs is intended to combat,Erik Gordon, a professor of law and business and the University of Michigan, said in an e-mail.
“If you ask C.E.O.’s who also are chairs of their board whether it is a good idea to let another C.E.O./chair do the same thing, the answer is obvious: it is a very good idea,” he said. “That’s what they’ve told their own boards. It is hard to change corporate governance when people who like things just as they are control the votes. It’s like asking members of Congress to vote in favor of giving up their privileges.”
DOES splitting the two jobs improve a corporation? Not necessarily. Mr. Dimon suggested before the polling that he might leave JPMorgan if the vote for job-splitting prevailed, a move that some shareholders said would hurt the company.
But instituting checks and balances is good policy in government, corporate and otherwise, said Robert A. G. Monks, a shareholder advocate. Having an independent chairman is “a prerequisite of good governance but it’s not a guarantee,” he said.
Apple has had independent chairmen for years. Still, Mr. Monks contended, while it has been a colossally creative and successful company, it’s also been “an irresponsible corporate citizen,” for, among other failings, “gaming the international system” to avoid paying taxes. And such tax revenue, he said, is “badly needed right here in the United States.”
At the hearing, Mr. Cook said, “We pay every penny we owe.” Mr. Monks said that while this may be true, Apple’s tax avoidance hurts the country.
Ms. Minow put the idea a bit differently. Corporate behavior can be lethal for the body politic, she said. As a modern corporation, she said, Apple is “designed to offload as many costs as possible, and to keep as many of its revenues as possible” and is thus an “externalizing machine in the same way that sharks are killing machines.”
In the JPMorgan vote, Mr. Monks said, he was heartened by large numbers of negative votes cast against members of the board’s risk committee, an action that may portend a shake-up. JPMorgan lost $6 billion in a derivatives trading debacle in London last year — a reminder, he said, of the financial system’s vulnerability to feckless risk-taking by giant banks.
“It will take relentless effort by shareholders and by the government to make corporations behave like good citizens,” he said. Like Ms. Minow, Mr. Monks is a co-founder of the Corporate Library, a governance research firm, and of its successor, GMI Ratings. He is also the author of a new book, “Citizens DisUnited: Passive Investors, Drone C.E.O.’s and the Corporate Capture of the American Dream.”
Along with the setbacks, Ms. Minow said, corporate democracy has won victories. Earlier this month, she said, Hess, the oil company, agreed under pressure to appoint three dissidents to its board and to separate the jobs of chairman and C.E.O. “Every so often,” she said, “if you tilt at windmills long enough, you’ll find that one of them falls over.”