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Big Business Wants To Keep These Four Things Secret
How much do major U.S. corporations like General Electric pay in taxes, and where are their employees? They don't have to tell you. (Brian Snyder /Reuters)
Political spending by public companies will remain in the dark longer, now that the Securities and Exchange Commission has said it won’t be taking up the issue as a priority for 2014.
But the amount spent on political campaigns is just one in a long list of things about a company that are usually impossible to glean from the outside. Important information about America's biggest and most powerful companies that investors, journalist, and activists would really like to know remains under wraps, despite the thousands of pages of documents a publicly traded company files for public consumption in a given year.
Here are four of the things that transparency advocates would most like to see Corporate America open up about.
1) How much companies pay in U.S. federal income taxes
Given the amount of fighting and lobbying over the tax code, it’s a strange fact that no one can tell what any given company is actually paying in taxes. Publicly traded firms list a U.S. federal “current tax provision” number in their annual reports, but that’s an accountant’s estimate used to calculate earnings, not the actual sum of the company’s U.S. federal tax bill. And although firms also list the sum of federal, state and foreign income taxes paid, it’s not broken out among the different jurisdictions.
Frustrated by what I wasn’t finding in public filings earlier this year, I asked every company in the Dow 30 to disclose the amounts of their federal tax bills for the most recent year; they all declined.
Allan Sloan at Fortune magazine has suggested that, short of congressional action, the Financial Accounting Standards Board, a private group that establishes accounting principles, should require companies to disclose the information. So far, there have been no changes announced.
2) Where employees are located
Here, again, is a case where political rhetoric — in this case about job creation — outstrips what we actually know about companies and what they do. Companies do not have to disclose where their employees work, making it hard to track how their headcounts in the United States compare with their counts in other countries, especially as firms go increasingly global.
Companies will sometimes break down their employees by region or continent, but just getting a “North America” number doesn’t help an analyst or investor figure out how many of those employees work in the United States, Mexico or Canada. When they don’t disclose their worker counts, companies often cite competitive pressure. Of course there’s also plenty of political pressure, as no company wants to get called out for outsourcing.
Without the numbers, though, it’s hard to evaluate promises from firms that they’ll create jobs in this country if they’re granted a certain tax rule change, or if regulations are loosened. In February 2012, Rep. Gary Peters (D-Mich.)introduced a bill called the Outsourcing Accountability Act that would require companies to disclose how many of their jobs were overseas and how many were in the United States. The bill was defeated in the House by a 230-to-175 vote.
3) Where earnings come from
Until 1998, companies had to disclose the geographic breakdown of their earnings, sales and assets. Now, they only have to disclose sales and assets. Why does this matter? One of the reasons companies have been able to reduce their tax bills so much is they can shift their earnings from high-tax countries to low-tax ones. This is primarily done by tech and pharmaceutical companies because they rely so much on intellectual property, the kinds of assets that are easy to move from place to place on paper.
When you can’t tell where companies earn their money, it’s hard to track some of this aggressive tax planning. Not only that, but the lower disclosure standard has actually caused firms to alter their behavior, according to some recent research. Companies that don’t disclose where they make their profits are more likely to shift their income to lower their tax burden, says a May study by a group of professors from the Rotman School of Management at the University of Toronto and the Michael F. Price College of Business at the University of Oklahoma. The study found that between 1998 and 2004, firms that did not disclose where their earnings were dispersed geographically had worldwide effective tax rates more than four percentage points lower than firms that chose to continue disclosing that information.
With lawmakers trying to figure out how to reform corporate taxes — and regularly getting stymied in the process — the study suggests there’s an easy way to discourage income shifting that doesn’t require touching the corporate tax code at all. Just force companies to disclose the same information they used to reveal.
4) Why executives get paid as much as they do
This one’s tricky since there have been big strides in executive pay disclosure in recent years. Companies do disclose their executive pay structures. But good luck if you’re an ordinary person trying to understand a public company’s pay practices by reading its proxy statement, a document given to shareholders ahead of a company’s annual meeting.
“Governance analysts, we do this for a living, and we provide that information to major investors,” said Peter DeSimone, co-founder and deputy director of the Sustainable Investments Institute. “’But for an average investor, for a retail investor, it’s way too daunting. I couldn’t see an average investor going in and trying to figure out that information.”
“Proxy statements are written by lawyers,” said Robert Jackson, a professor at Columbia Law School who has also petitioned the SEC to force companies to disclose their political spending. “These are not meant to provide a clear sense of what’s going on in the company.”
And it’s not just the sheer complexity of the language. For all the pages spent describing executive compensation, important details are still often missing. For instance, DeSimone said, companies will say they link executive pay to employee safety, but then the firm doesn’t disclose what metrics they’re using — whether that’s the number of fatalities, injuries or work hours lost.
Banks, in particular, often describe their bonus practices in vague, qualitative terms.This can have broader ramifications for the government as it tries to monitor risks to the economy. Jackson has testified on Capitol Hill that regulators are not taking full advantage of new Dodd-Frank rules that force greater disclosure by banks on how they award bonuses. “Qualitative descriptions, in the absence of quantitative data, may well give regulators misleading information about bankers’ incentives,” Jackson testified.
Of course, with more disclosure requirements could comes more paper. But that just means it’s probably time for a clean-up of the whole process.
“Regulations have just been added ad hoc over the years, and you have a million and one lawyers and accountants running around,” said DeSimone. “Nobody’s really sat down and gone through the exercise and said: ‘Look at the mess we’ve now created. Let’s look at all of this and wipe the slate clean…and come out with a framework that’s a lot more manageable for investors and a lot more reasonable for companies.’”
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