News & Views

A moral issue for investment consultants

News that Goldman Sachs had decided, however reluctantly, to pay their bonuses in the current tax rather than defer payment to the new tax year was widely welcomed.  No one had suggested that there was anything illegal about deferring payment of bonuses to after 6 April, thereby benefiting from the reduction of top rate tax from 50% to 45%, but many considered it immoral. 

Following on the offer by Starbucks to pay £20 million in corporation tax for the next two years, this was another victory for public pressure.

Goldman Sachs is probably the largest financial firm to have considered deferring bonuses, but it is not the only one.  I understand that several investment consultancies may be considering a similar approach to bonus payments to minimise the tax paid by their employees.  The commitment of many pension schemes to environmental, social and governance issues means this may not be a wise choice for consultants, given the questionable nature of such arrangements.

Are fund managers also considering similar arrangements? To date I have seen no comment from investment consultants on whether any fund management firms are considering deferring bonus payments to the next tax year.  Perhaps consultants are reluctant to raise this issue if they are considering a similar approach themselves, or maybe their moral antenna is not as finally tuned, as it perhaps should be.

Signatories to the UN Principles for Responsible Investment, as many consultants are, recognise that applying the Principles may better align investors with the broader objectives of society.  Deferring bonus payments to the following year rewards the individual at the expense of society.  It is difficult to understand how any signatory to the Principles, consultant or fund manager, could contemplate such an action.

If trustees believe that deferring bonuses to the next tax year is unacceptable behaviour by their advisers, then they should establish how their investment consultant intends to pay their bonuses for 2011 and, logically, all other advisers to the fund including actuaries and lawyers.  They should also establish whether their consultant has raised the issue with the schemes fund managers and, consequently, is in a position to provide information in this regard.  Ideally, this should be done immediately, and certainly before the end of the current tax year.  If so, pressure from trustees should then encourage consultants not to defer their 2011 bonus payments to the next year, as public pressure did with Goldman Sachs.  By contrast, finding out after the event that bonus payments had been deferred to avoid income tax, may leave trustees with a difficult decision.  If they consider this is unacceptable, then they have a choice between ignoring the issue, a difficult option if they are committed to strong governance, or terminating their agreement and appointing an adviser more in tune with their moral standards.


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8th February 2013