How Tax Evasion is Taxing on Reputation: What Nike Can Learn from Apple
On January 10, 2019, the EU announced a probe into Nike’s tax treatment in the Netherlands, where it believes Nike has been given a reduced tax bill at an unfair — or even illegal — rate. The commission stated that Dutch authorities calculated Nike’s tax rate based on rulings issued from 2006 - 2015, but ones that do not reflect Nike’s economic reality. The probe identifies Nike as another Big Business caught evading taxes in its home country by discreetly storing sums of revenue offshores.
This is not Nike’s first time in the news related to accusations of tax evasion. In 2017, Nike headlined media for shifting billions of dollars to tax-free banks in Bermuda. And while the water is murky on the legality of such practices (not all tax havens are illegal), the implications from such publicity will decrease Nike’s credibility.
Good Governance: Consistently an Important Reputation Dimension
Governance is the “doing the right thing when no one else is looking” dimension of reputation -- and it is critically important. For the top one-hundred global companies, perceptions on Governance — ethics, transparency, and fair business practices — have stayed consistently strong for the past seven years in how important it is to the public when evaluating corporate reputation. Governance remains the second most impactful driver of reputation, second only to Products/Services. Figure 1 shows the weight of importance of Governance on reputation, as a percentage out of 100%, from 2012 until 2018. In 2018, Governance comprised 15% of reputation.
Figure 1: Global Governance Percentage Impact on Reputation from 2012 - 2018
Why does this matter for Nike? When tax evasion scandals proliferate the media, and the public begins to question reputation, scores will begin to drop in Governance. Nike cannot afford to lose credibility here, when impacts reputation as much as it does.
The Risk of Tax Evasion: A Growing Threat to Corporate Reputation
As part of our proprietary RepTrak studies, we survey members of the Informed General Public to evaluate how accounting malpractices could negatively impact overall company reputation. The question we ask is: “Top management is investigated by regulators due to accounting malpractices and possible misrepresentations of the company’s financial statements, which could potentially result in legal prosecution.” We compared overall reputation scores before and after respondents were probed with this question, and found that potential financial malpractice decreases overall reputation by 9.3 points — reputation drops from a strong score of 68.9 to a weak score of 59.6.
But what does this mean? And how does it affect a company’s bottom line? Being caught in a hypothetical financial malpractice results in a 6% decrease in willingness to purchase from a company and a 2% decrease in giving the benefit of the doubt to companies. Companies not only lose credibility, but they actively lose support here too, as shown in Figure 2.
Figure 2: Top management is investigated by regulators due to accounting malpractices and possible mis-representations of the company’s financial statements, which could potentially result in legal prosecution
What Nike Can Learn from Corporate Evaders: Apple Case Study
If Nike were to take a lesson from other major US corporations caught evading or avoiding taxes — like Starbucks, Google, Apple, or Amazon -- it would understand the severity of such scandals and avoid the headlines at all costs.
Let’s take Apple, for example. Apple has a longstanding history of tax evasion. In 2012, prosecutors found that Apple was shifting profits to subsidiaries in Ireland deemed ghost companies, and in 2013, Apple was charged for it by the US Senate Investigative Subcommittee. While Apple agreed to pay $15.4 billion back in taxes in the EU, it was then revealed through leaked documents in 2017 that Apple had moved billions of untaxed dollars to the Island of Jersey.
What were the consequences? Apple’s Reputation and Governance scores have been in steady decline since 2011. But interestingly, in both 2013 and 2018, which were post-tax evasion scandal outbreak, Apple saw the most significant Reputation and Governance score declines, as seen in Figure 3. Repeated tax avoidance offenses have hurt Apple’s credibility. With a low average Governance score of 61.9, Apple can’t take any chances on perceptions of behaving ethically, or it will risk continuing to lose reputational merit in the eyes of the public.
Figure 3: Apple’s Reputation and Governance Scores, 2011 - 2018
Apple’s poor moral compass has not only tarnished its name, but brought down its support. From 2011 to 2018, Apple has seen a 17% decline in willingness to recommend and a 19% decline in benefit of the doubt, as Figure 4 highlights. While these declines cannot be attributed solely to Apple’s tax evasion, multiple casualties have not helped. Unfortunately, Apple’s linkage to tax evasion in the eyes of the public has a direct impact on its bottom line.
Figure 4: Apple’s Supportive Behaviors, 2011 - 2018
Next Steps for Nike
If Nike were to take any lessons from Apple, it should tread carefully in handling the accusations related to tax malpractice headlines at all costs. Specifically, Nike will need to proactively counter the reputation risks related to Governance by making sure the companies take actions to reinforce the belief that it is:
- Behave ethically
- Be a champion of fair business practices
- Communicate often and transparently
To continue to have a strong reputation, Nike will need to take decisive and affirmative action to rectify the situation. Fully cooperating with the EU investigation and managing media relations will play a critical role in helping to increase perception of good governance.