Tax Policy Challenges in the 21st Century

S. 607I. General Introduction

Referring to the directors of joint-stock companies, Adam Smith already noted in 1776 that ‘being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own’.Indeed, in most medium and large companies, the separation of ownership and control may create conflicts of interest between managers and shareholders leading to mismanagement or even fraud.

In order to ensure that managers maximise shareholders’ profit and to prevent agency problems, companies set up corporate governance policies, which can be defined as the ‘procedures and processes according to which an organisation is directed and controlled’. Corporate governance ensures that managers make the decisions which are in the companies’ best interests, which improves the companies’ long-term competitiveness. Corporate governance benefits society at large by promoting the trust required for the good functioning of the market and by contributing to economic growth and employment.

As taxes are one of the main costs of companies, good corp...