Expenses and extravagance

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Latest figures show that MPs are spending £78m a year on expenses. The spend covers employing staff, travel, office costs and accommodation in central London. However, as the allegations against The Telegraph’s former owner Lord Black show, when big expenses crop up in private business, eyebrows tend to be raised.



Entertainment


The first base for any calculation of legitimate business expenses is you own income and lifestyle.  It is reasonable to expect that when you’re going about your company’s business, you will use services broadly similar to those you normally enjoy.


It follows that if you live in comparative luxury in the stockbroker belt, your everyday needs will differ somewhat from someone who lives on state benefits on a caravan site.  One man’s lunch at the Ritz Grill is another’s Big Mac.  


With this in mind, courts will usually conclude – within reason – that you have not acted dishonestly when you expend the company’s money extravagantly in pursuit of a recognised business objective.  Striving to win an important order or clinch a deal would merit the expense.  Throwing a party for your wife and her friends, conversely, is unlikely to be seen as having a readily discernible business objective.


Property


Demonstrating you company’s success by managing it from extremely opulent surroundings has become an acceptable form of corporate extravagance.  Again, within reason, courts will regard such decisions as a matter for the board of the organisation concerned.


However, when a business acquires residential property in glamorous and fashionable parts of the world where it has no obvious business to conduct, this standpoint is likely to change.  


A board of directors finding it necessary to acquire a luxurious residential retreat for their conferences that happens to be in close proximity to a celebrated golf course, racetrack, salmon stream or shooting estate, may invite closer official scrutiny.   


If companies can find legitimate reasons for conducting their affairs in lavish circumstances and surroundings – perhaps because they are dealing with foreign nationals who occupy the highest tier of rank in their home countries, for example – they may escape accusations that their gross extravagance borders on dishonesty.   


Remuneration, bonuses, incentives and gifts


When we turn to the subject of pay packages we enter much more thorny territory.  If corporate luminaries have contractual arrangements in place that give them huge rewards in return for delivering for success, shareholders usually give their consent, grudgingly or otherwise.  However, problems usually arise when their performance ceases to impress, or even fails, but the rewards continue to roll their way.  


As was the case with the Hollinger Group, shareholders will eventually unseat those whose greed exceeds their abilities in the boardroom.  When the principal shareholder also happens to run the business, the machinations become complex, falling between the various stools of civil law, contract law, company law and tax law.  


As recent events in the US and elsewhere have shown, it is extremely difficult for the authorities to exert an external controlling influence on the affairs of very large, fleet-footed international organisations.  At this level, corporate governance is in the hands of the officers of the company, who are almost a law unto themselves.


Perks


Again, there seems to be a sliding scale of acceptance that relates to a company’s size and stature.  A small local plumbing business operating a racing stable as a loss-making sideline for the directors’ enjoyment, is likely be viewed differently to a major multinational dabbling in bloodstock investments.  


Most directors understand the legal implications of their company paying for cars, gold cufflinks, Saville Row suites, expensive entertainment and international travel.  If they don’t, their accountants probably will.  


The authorities are much more likely to sit up and take notice when the ‘perk’ is an obvious indulgence of an outside interest.  A rally car, powerboat, light aircraft or seagoing vessel, perhaps. If the only business justification is to carry the company logo for a real or hypothetical new audience, there could be a legal case to answer.  On the other hand, corporate sponsorship of  broadcast sporting events is seen as a perfectly proper promotional outlay.


Sector-specific outlay


One can’t escape the conclusion that this bias extends to the sector of business you’re in, too. What is seen as normal promotional expenditure in, say, the film, television, fashion, advertising or sports entertainment sectors, might be frowned upon as wild extravagance in manufacturing, engineering or grocery retailing.  It seems to have something to do with profitability and margins, too.  


Heavy personal expenditure on corporate largesse by someone dealing in high value, high margin jewellery or works of art under the banner of an international brand may well be seen as acceptable.  Expenditure of equivalent proportions by a company making machine tools may not.


When does corporate generosity become bribery?


The final issue to consider is the point at which a demonstration of corporate gratitude or encouragement becomes bribery.   A £250 lunch with a £200 bottle of 1st Cru Burgundy, plus £50 for a taxi to the airport, could be ‘business as usual’ for a theatrical agent discussing a US$5m film role for one of their West Coast clients.


However, £500 in cash in a brown envelope handed to a materials buyer on a construction site negotiating the price of £5,000 worth of roof joists, would simply be regarded as blatant bribery.  


Once again, matters seems to depend on the sector, the circumstances, the size and proportionate value of the business under consideration, the income and lifestyle of the participants, and the form the inducement takes.


That said, even in the highly-charged corporate wheeling and dealing atmosphere of the Hollinger Group, there are limits.  A few millions in bonuses here and there, or    £50,000 for a new product launch party is probably OK.  


By any measure, taking US$50,000 out of the till for your wife’s birthday party, as Lord Black did, is definitely taking the unwritten corporate ‘double standards’ rule for an unacceptable ride.

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