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A self-regulating world

01 May 2016 by Alexandra Jones

Ethical behaviour is something that regulators cannot enforce

The fourth largest offshore law firm, Mossack Fonseca, based in Panama, had 11.5 million sensitive documents leaked to the press last month. Several high profile celebrities and politicians were associated with activities critics suggested amounted to aggressive tax avoidance.

Most of the companies named in the documents are not operating illegally, but the accusation is that they are used as a way to hide earnings and pay less tax in the country in which the income has been generated.

Whatever your opinion might be, these documents have led to calls for more consistent tax regulation – some argue that if all countries had better aligned tax rules, there would be less incentive to divert income through offshore vehicles. Yet this close international cooperation is perhaps a pipe dream.

A broader debate centres upon ethical conduct, in terms of what degree of tax mitigation is acceptable, and how regulators may enforce this. GoodCorporation explores this in more depth in their article, 'Tactical tax planning'.

It strikes me that ethical behaviour is something that regulators cannot enforce. Those who want to circumvent the regulations will always find a way to do so. Regulators can only devise rules to prevent certain identified tactics – they cannot eliminate bad behaviour entirely.

In our interview with Charles Handy, 'A self-regulating world', we explore the question of ethics and regulation. He observes that: ‘Big businesses may be smart but many are unethical. Companies rarely think about ethical issues when they are starting up – they just try to make money’.

Ethics are often an afterthought, one which safeguards a business from corporate scandal, rather than a core driving force. This is a mistake, not least – as Peter Montagnon states in his article, 'The new governance frontier' – because ‘boards cannot delegate the subject of ethics and values … The board has absolute responsibility for this.’

It is human nature to make rules work in your best interests, so having a regulatory system with any flexibility will always be open to exploitation by the unethical. However, I believe they will always be a minority. Introducing a draconian system which restricts business and presumes the worst would disadvantage everyone.

Alexandra Jones is Editor of Governance and Compliance

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