A Catalyst for Change?

In this latest article Matt Falla talks about the future of business travel in a post-COVID-19 world where environmental concerns are high on the corporate agenda.

Society has been great at putting enormous pressure on polluters as greater attention is paid to their environmental social and governance (ESG) policies - ESG being a term historically relegated to corporate academia or used as a marketing term by firms wanting to publicise their apparent 'care' for the wider stakeholder audience. However now more than ever the 'E' is thrust into headlines as seen with the activists of Extinction Rebellion staging dramatic acts gluing themselves to the London Stock Exchange or spraying oil over Barclays headquarters etc.

However there is also a growing (and less provocative!) movement among the UK's largest allocators of capital who are seeing environmental concern move further up their agendas to the point of now shaping investment policies and causing large institutional investors to withdraw capital from organisations deemed to be detrimental to environmental sustainability.

Anecdotally organisations exist by virtue of their stakeholders and those perceived as undesirable will be rejected by society and face higher risk of failure. Curbing investor demand will place pressure on the share price and on the business valuation which if sustained will make it challenging and more costly to raise new capital.

A higher premium is demanded when investing in high-risk businesses (simply high risk high reward) so in the absence of slashing overheads or increasing turnover an increasing cost of capital will erode profits and if the business continues to be unacceptable to the market capital will flow elsewhere and the business will struggle. Take BP for example where the Deepwater Horizon disaster in April 2010 obliterated the value of its shares taking the price back to pre-1996 levels.

The market reaction was incredible as investors knew the hit would be significant but such an event was unprecedented so estimating the financial impact was practically impossible. Further driving the backlash against BP the media took no hesitation in filling articles with images of wildlife drenched in sludge and labelled Tony Hayward then CEO the 'most hated man in America'.

In turn with COVID-19 and the travel ban the media has pushed stories of residents in northern India being able to see the Himalayas thanks to the drop in air pollution dolphins reappearing in canals satellite images of China's industrial centres without smog etc with the claims of environmentalists often being taken with a pinch of sensationalist salt it's now really interesting to see this real-world proof of the environmental cost of mass transport and in such a short space of time. If this is to provoke a reaction from a society now accepting that organisational needs can be met without the requirement to travel and gather in meeting rooms is the entire concept of 'business travel' soon to be anachronistic?

The question is where in the hierarchy of 'essential' travel do you place attending to business matters? It's a question likely to divide opinion but pertinent against the backdrop of high technological competency and a society reluctant to travel where at the heart of domestic corporation tax law is the concept of 'central management and control' which seeks to determine an organisation's tax residency based on the jurisdiction in which the key strategic decisions are taken and is typically based on the physical location of those decision-makers.

Fortunately the constitutions of most corporate organisations are designed to protect against the risk of its residency being inadvertently displaced through restricting the ways in which the governing body (e.g. the Board) is composed conducts its affairs or how it can participate in key decisions.

It is imperative to have a comprehensive knowledge of the applicable constitutional requirements to mitigate the near-term risk of breaching hard-coded restrictions. However what remains uncertain is the approach of authorities over the longer term to businesses where they consider the centre of gravity of the governance process may have shifted from the entity's chosen jurisdiction either by choice due to convenience environmental concern health concerns or vulnerabilities or because travel restrictions over a prolonged period make it impractical (unless of course anyone is looking for an excuse to spend two weeks away from home!).

These factors may certainly have longer-term implications for corporate life - will they be a catalyst for radical changes to remove arcane practices such as meetings being 'deemed to be held where the Chair is present' or where tax law relied on the residence of the company's key decision makers and instead adopting a more holistic assessment of the substance of the organisation? We've seen tax law evolve considerably over recent years particularly with the advent of the 'economic substance' tests and mandatory disclosure regimes for cross-border corporate structuring which target a number of the vestiges of 'offshore' finance.

In any event tax is a primary revenue source for governments and so it will be interesting to see what strategies are adopted to restore cash reserves following the immense financial support given to national economies during lockdown. With this in mind it's crucial that we continue to be agile in our ability to assess and react to changes in this highly volatile environment.