How to consider tax in voting practices

Our commissioned research points to a missed opportunity to hold companies to account: 14% of investors assessed had disclosed at least one expectation and only 5% had disclosed expectations in all three areas of responsible tax management: tax policy; tax governance; and country-by-country reporting (CBCR).

Figure 2: Few investors outline their expectations on tax

Recommendation: Investors should articulate clear expectations regarding investees’ tax policies, relevant governance mechanisms, and tax disclosures includingpublic CBCR.⁴

Investors clearly articulating their views and expectations on tax disclosure is valuable for portfolio companies. It enables portfolio companies to understand investors’ stance and clarifies the type of resolution an investor is likely to support. For asset owners that outsource some or all of their voting to third parties, expectations should be communicated to investment managers and form part of the process when it comes to selecting, appointing and monitoring external investment managers.

Expectations on disclosures are particularly important as the lack of transparency is the primary barrier to assessing whether investee companies have implemented a responsible or aggressive tax strategy. Disclosures enable investors to make sound judgements about investee corporate tax practices and engage with portfolio companies in a more informed and constructive way.

Our research reveals that investors tend to formulate tax-related expectations without defining how they would use their vote to assert their positions. Only 15% of the investors assessed set out how they would use their votes if portfolio companies did not meet expectations (see Figure 3 below).

Among the investors that identified how they would vote, almost all said they would support a shareholder resolution but did not mention other votes. Only two investors stated how they would use the other votes available to them (e.g., reappointing directors or auditors). Even though tax is a board-level responsibility, only two of the investors that had disclosed expectations on board oversight had set out how they would use their votes if this expectation was not met e.g., vote against any or all director(s).

Figure 3: Expectations on tax are not informing how investors use their votes

Recommendation: To better effect changes in investee practices, investors should ensure the expectations and positions that they have defined on tax are reflected in the way they vote.

Investors should introduce tax considerations into voting policies and shareholder resolutions (see examples below). If these options are not available, investors should consider other stewardship mechanisms to advance responsible tax practices (see Step 3).

Introducing tax considerations into voting policies

Below is a list of situations where investors can consider how to use their votes.

• (Re)appointing board / audit committee members. Investors can specify in their voting policies that they would vote against reappointing any / all member(s) of the audit or risk committees given that tax usually falls within their remit. If circumstances do not allow the investor to vote against the members of these committees, investors could vote against any other board member. Investors can also vote against the chair of the ESG or sustainability committee to raise awareness that tax also falls within the scope of their responsibilities.
• Assessing mergers, acquisitions or reincorporations. Reincorporation into low-tax, secrecy or controversial jurisdictions should be given more consideration and any region that is on the EU list of non-cooperative jurisdictions is a serious red flag. However, the EU list contains only a limited number of jurisdictions, so investors should look at various sources to build their own list of controversial areas. Investors should carefully consider management’s motivations behind reincorporating in a controversial area and assess whether tax is a primary driver or consequence of the change in structure. Investors should engage further if not enough information is disclosed. Other factors (e.g., the company has a history of aggressive tax practices, or is not transparent) may inform investors’ votes.
• Reappointing an auditor / considering excessive tax advisory fees. Investors could set out in their policies that they would vote against reappointing an auditor where tax advisory fees make a significant portion of non-audit fees, as this may indicate that the company is dedicating significant resources to its tax planning (and excessive non-audit fees may undermine the auditor’s independence). Investors may want to question companies that do not provide sufficient information on other services provided by auditors.

Investors can use these votes when the company is not addressing significant tax-related risks or does not provide evidence of adequate oversight of the company’s tax strategy. Investors can identify criteria that would trigger a vote e.g., the investee company is fined; has ongoing tax disputes or significant unrecognised tax benefits for which insufficient information is shared with investors; the investee company’s tax practices are called out by policy makers; or the investee company has a low effective tax rate for which no explanation is provided, potentially suggesting risky practices.

Filing and supporting shareholder resolutions

Investors could signal in their policies clear criteria that would trigger support for a shareholder resolution e.g., resolutions requesting disclosures in line with the GRI Tax Standard 207 or asking the board to adopt a tax policy. Voting in favour of a tax-related resolution is a less forceful vote than, for example, voting against a board member. As such, investors need to be more ambitious in the criteria they use to support shareholder resolutions e.g., they may not vote against all investee companies that do not disclose CBCR, but they may want to support all shareholder resolutions calling for CBCR.

Investors can file resolutions to communicate their expectations on tax and can disclose in which circumstances they would do so. Effective shareholder resolutions should highlight the systematic impacts of corporate tax avoidance on investor returns as well as the tax-related concerns for the company in question (ongoing disputes, evidence of aggressive tax planning, controversial transaction, lack of transparency, etc.).

Communicating voting rationales publicly

For a vote to be an effective communication tool, investors should communicate with companies, as well as publicly, the rationale behind the vote. There are many reasons why investors would vote a certain way e.g., a vote against reappointing an audit or risk committee chair is not necessarily related to tax. Therefore, disclosing voting rationales prior to and after voting ensures companies get the right message.

Pre-declaring voting intentions publicly can also promote transparency and foster enhanced dialogue between investors and issuers. Investors can use PRI’sResolution Database to pre-declare and see other signatories’ voting intentions. 

Around half of the investors reviewed made at least one reference to responsible tax in their RI or voting policy. Among those that referenced tax, 40% identified tax as a priority issue for company or policy engagement, and around 43% indicated that they integrated tax considerations into their investment process. However, among these investors, only a small number had disclosed expectations for portfolio companies on tax disclosure, or tax more broadly.

The research exposed a notable disconnect in the way investors consider tax issues in their investment, engagement and voting processes. For instance, investors that communicated how they prioritised tax transparency in their investment processes did not have corresponding disclosure expectations. Similarly, several investors that had prioritised tax engagement did not outline the criteria for engagement or the tax-related principles that would determine how they would use their vote.

Recommendation: Investors should systematically address tax issues throughout their responsible investment approach. Voting policies should be reinforced by a coherent stewardship strategy.

Integrating tax into portfolio construction

Investors can integrate tax considerations within their portfolio construction, for example, by excluding some companies based on pre-defined tax-related criteria. They may also consider disclosing some of those criteria and ensuring it is consistent with the expectations for existing portfolio companies.

Investors should look at various indicators or metrics (using our previous engagement guides) to assess a company’s record on tax and inform their decisions. Tax is complex and one red flag may not always warrant exclusion, but it may justify engagement.

Combining stewardship tools to influence company behaviour

Voting and engagement should complement and reinforce each other. This connectivity is particularly important when engaging with companies that are slow to respond to investor demands, as is often the case when engaging on tax issues.⁵  Voting policies that embed expectations on tax can be a starting point and provide a clarified framework for corporates and investors to engage on. Companies that are at different stages in terms of tax responsibility and transparency may require a different combination of engaging and voting.

Voting may be used a first step, or investors can engage first, and then use their votes if the outcomes are not satisfactory. Investors can specify in their policies that they will vote against management where the company does not respond to engagement and / or meet the investor’s expectations. 

Engaging with policy makers and key stakeholders

A regulatory or policy shift can have wide-reaching consequences on tax transparency and practices. When a standard body or jurisdiction mandates some level of tax transparency, for example, this contributes to a level playing field for companies, and leads to companies publishing comparable information for investors. Nevertheless, it should be clear to investors that policy engagement and investee stewardship are complementary, not mutually exclusive.

Investors should support efforts to increase tax transparency by responding to consultations or communicating their positions to policy makers and / or standard setters. Investors can also engage with their proxy advisers.