Profits, Patriotism, and Sunny Bermuda

Stanley Works, a tool-making firm in Connecticut whose revenue last year totaled around $2.6 billion, isn't usually a big news-maker. But it's getting some attention since it announced late last week its intention to reincorporate itself in Bermuda. Yesterday, the New York Times used Stanley Works as an example of the "growing number" of firms making such moves "to lower their taxes without giving up the benefits of doing business in the United States." Such firms generally keep their headquarters in this country and need do little more than set up an address and pay a fee to the government of Bermuda. But the maneuver means they can avoid taxes on income from markets outside the United States.

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What a slimy move, right? In the post-Enron moment, that's an easy case to make. "There has been a corporate culture of engaging in over-the-line practices," Sen. John Kerry complains Tuesday in a Wall Street Journal article on the trend. "There is no business reason for doing this, other than to escape U.S. taxation," complains another senator, Republican Charles Grassley, in the Times. And Rep. Charles Rangel chimes in, too, noting that such companies "choose profits over patriotism."

OK, then. Who are the nefarious non-patriots that stand to benefit? Well, Stanley Works says frankly that it's making this move to lower its tax costs. In fact the company estimates it will save $30 million a year—which qualifies as a "business reason" to most people. That will be good for its earnings. Earnings are what drive share prices, so it will probably be good for the company's shareholders. (The company thinks so. In a press release its CEO says: "The business, regulatory and tax environments in Bermuda are expected to create considerable value for shareowners.") Who are those shareholders? According to this data compiled on Yahoo! Finance, mutual funds that hold shares of SWK include the Fidelity New Millennium Fund, the T. Rowe Price Equity Income Fund, American Century Growth Fund, and the Vanguard Index 500 Fund, which is one of the most popular funds in America. In other words, there's a reasonable chance that one beneficiary of Stanley Works' off-shore scheme might well be you.

This exercise reminds me that pretty recently, profits were patriotism. Fortune lately complained about "the cult of the shareholder," which began in the 1980s "when corporate raiders forced CEOs to 'maximize shareholder value.' " I love those quotes around maximize shareholder value, as if that was some weird and exotic phrase that needs to be held at a safe distance, preferably with tongs. But you don't have to think back very far to remember when the notion of the citizen-shareholder was on the front lines of a ballyhooed Main Street/Wall Street alliance, which was supposed to be good for everybody: Companies would stay focused on the bottom-line goal of making America's 401k portfolios rise, ensuring that we could all retire 10 years early, or something like that. This behavior is now considered part of that "corporate culture of engaging in over-the-line practices."

What Stanley Works plans to do might sound sleazy, but it actually doesn't appear to cross over any existing line. And this trend would not be simple to stop. The only ideas in the air right now seem to be a) shaming companies out of doing something that would boost the bottom line; or b) altering tax laws so that the United States is just as attractive to firms as Caribbean havens are. Obviously the latter suggestion doesn't do much to address lost tax revenue.

What about the shame option? Well, it's probably good news that there's at least some level of public debate on the question of whether what's good for shareholders is really good for everybody. What I'm less certain about is whether enough people have worked through the full implications of their outrage—I have a feeling that a lot of investors these days want companies to be paragons of civic responsibility and keep earnings growing at a pace that will turbocharge their retirement accounts. In other words, they are clinging to the great American tradition of wanting it both ways. But we'll see. The Stanley Works proposal must be approved by share owners in an April vote. What'll it be, folks? Shaving expenses by $30 million, or paying a fair share of corporate taxes—in other words, profits or patriotism?

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