Tax executive advancement.

Tax Executive Advancement

I. Introduction

The dawn of the decade may be the appropriate time to take stock of the profession of the senior corporate tax executive. How have we done? Indeed, how do we measure how we have done? Several articles in The Tax Executive during the 1980s demonstrate the profession's progress. These articles confirm a general elevation of titles of the senior tax executive. This advancement for the profession is occurring despite a flattening of the corporate organizational structure. Congratulations, tax executives! Your report card is good.

The goal of this article is to correlate the senior tax executive's title with the employer's size and tax complexity, to provide some guidance in evaluating the profession, and to document the tax executive's enhanced position within the corporate structure.

II. Background

In the July 1984 issue of The Tax Executive, Professors Anderson and Arlinghaus reported the results of a survey of the 1981 Fortune 500 companies which sought information about tax departments. In that article, the senior tax executive is described as a Director of Tax (or similar title). Of those responding to the survey, 37.5 percent reported that they considered the Director of Tax a corporate executive officer.

The results of a follow-up survey by the same authors was published in the Summer 1986 issue of The Tax Executive. The survey, which was sent to the 1984 Fortune 500 list of companies, revealed that a 10-percent increase (to 47 percent) in the companies that considered the Director of Taxes to be a corporate executive officer. Table 9 of the 1986 article provided the "Title of the Individual at Corporate Headquarters Having Direct Primary Responsibility for Overall Tax Function," as follows:

                                             Number of
     Title                                   Responses
     Director of Taxes                          91
     Vice President Taxes                       33
     Assistant Treasurer/Director of Taxes      23
     Manager of Taxes                            9
     Vice President/Director of Taxes            7
     Vice President/Tax Counsel                  6
     Assistant Treasurer                         5
     Assistant Controller                        5
     Various Other Titles                       52
          Total                                231

In order to focus on the increased recognition of the senior tax executive by corporate management, the data are summarized and reordered into four categories: (i) any title beginning with Vice President, (ii) any title beginning with Assistant, (iii) Director, and (iv) Manager. (The "Various Other Titles" category was dropped entirely.)

                               Number of
                               Responses   Percentage
  Vice President (all forms)      46          26
  Assistant Officer               33          18
  Director                        91          51
  Manager                          9           5
      Total                      179         100

The two Anderson/Arlinghaus articles document an increase in recognition of the senior tax executive as a corporate executive officer, with the July 1986 article providing a benchmark for comparing tax executive titles.(*)

(*) The Tax Executive published a third article by Professor Arlinghaus in its July-August 1989 issue. This 1989 article surveyed TEI's membership (approximately 4,300 individuals who are employed by the 2,000 largest companies in North America). The responses indicated 35 percent of the corporations considered the chief tax person to be a corporate executive officer. Yet, 55 percent of these corporations had assets less than $1 billion. The 1986 Anderson/Arlinghaus article indicated 42 percent of those corporations had less than $1 billion in assets. Since size is a significant factor, as shown below, the July-August 1989 article was not considered comparable to the earlier articles for this purpose.

III. A Proposed Evaluation Tool

The July 1986 Anderson/Arlinghaus article concluded that the larger the corporation, the greater the tendency to rate its senior tax executive as a corporate executive officer. This spawns the question whether larger corporations with more diversity tend to provide their senior tax executive with a higher title. As the following analysis makes clear, the answer is yes.

In analyzing the issue, the 1988 Standard & Poor's (S&P) 500 companies are used instead of the Fortune 500 because it is easier to evaluate the S&P company attributes using Compustat computer techniques. Specifically, the titles of the senior tax executives in 419 of the S&P 500 companies were identified using the Tax Executives Institute (TEI) Membership Roster and The Tax Directory (published by Tax Analysts). Four groups were created: (i) Vice Presidents (including other full officer titles); (ii) Assistant Officers; (iii) Directors (Chief Tax Counsels were included in this group); and (iv) Managers. The number of companies with the aforementioned titles are, as follows:

  Title                      Number    Percentage
  Vice President              163          39
  Assistant Officer            52          12
  Director                    161          38
  Manager                      43          11
      Total                   419         100

A comparison of these percentages with those in the July 1986 Anderson/Arlinghaus article shows the title elevation of senior tax executives.

The companies in the four groups were then evaluated based on several criteria to find whether the groups had different quantitative characteristics. The criteria were based on the Internal Revenue Service's Coordinated Examination Program Case Identification System. Since the IRS had already developed this system, the goal was to obtain the scoring by company, group the results in the four categories identified above, and evaluate them. The IRS declined to release the company scores on the ground the scores constituted "return information" under section 6103(b)(2), (Most of the information, however, came from the annual reports of the companies.)

Consequently, another scoring system, based in part on the IRS system, was developed. Total assets, sales, number of operating entities, and multiple industry status are part of the IRS system. Standard Industry Classification (SIC) codes and business segments - available in the Compustat system - were substituted for number of operating entities and multiple industry status. The scoring system is set forth in Table 1 at the end of this article.

Table : TABLE 1

                               Scoring
      Amount                   Points
 From        To
           Assets ($ Million)
      0       500                1
    501     1,000                2
  1,001     2,000                3
  2,001     5,000                4
  5,001    10,000                5
 10,001    15,000                6
 15,001    20,000                7
 20,001    25,000                8
 25,001    35,000                9
 35,001    50,000               10
 50,001    75,000               11
 75,001   100,000               12
100,001   200,000               13
200,001   300,000               14
           Sales ($ Million)
      0     1,000                1
  1,001     2,000                2
  2,001     3,000                3
  3,001     5,000                4
  5,001    10,000                5
 10,001    15,000                6
 15,001    20,000                7
 20,001    25,000                8
 25,001    50,000                9
 50,001    75,000               10
 75,001   100,000               11
100,001   200,000               12
200,001   500,000               13
            SIC Codes (#)
      0         1                1
      2         5                2
      6         9                3
     10        13                4
     14        17                5
     18        22                6
     23        30                7
     31        50                8
         Lines of Business (#)

One Point Per Line of Business, Max. = 8

The results of the scoring documents a wide dispersion in each of the four groups, though there are few corporations whose senior tax executive was a Manager which scored high. The averages show logical progression:

                               Scores
                                       SIC     Business
  Title               Assets   Sales   Codes   Segments   Totals
  Vice President      5.4      4.2     4.2     4.3        18.1
  Assistant Officer   5.0      4.0     4.5     4.4        18.0
  Director            4.1      3.5     4.1     3.8        15.6
  Manager             3.6      2.8     3.3     2.7        12.5

A slight anomaly in the results is that the Vice Presidents scored lower than the Assistant Officers for SIC Codes and Business Segments. A partial explanation is that the Vice Presidents category contains a large representation from the financial sector of the economy and that banks, while having more officer titles than other sectors, have few SIC Codes and Business Segments. On the other end of the spectrum from banks is the utility industry: companies in this category are less generous with titles than the other sectors.

Clearly, different industries have different cultures concerning title hierarchy. In addition, a particular corporation within a given industry, as with any bureaucracy, will have its own rules about who carries the key to the executive washroom.

IV. Flattening Corporate Hierarchy

Corporations are reducing the number of management layers to try to become more efficient. A recent article in The New York Times by Peter T. Kilborn describes the trend, as follows:

Responding to tougher global competition and the threat of being taken over, companies thinned out management ranks to become more efficient and profitable during the 1980s. It means fewer layers of hierarchy and thus fewer rungs on the corporate ladder. (N.Y. Times, Feb. 27, 1990.)

If a given profession - such as that of the tax executive - has been granted higher titles when corporations are eliminating layers of titles, relative progress must be acknowledged.

V. What is in a Title?

Other than increasing self-esteem, why should the corporate tax executive strive to be an officer? Stated differently, how is the corporation better positioning itself by making the senior tax person an officer? Consider the following:

A. An important consideration is that the senior tax person, like other members of upper management, must think long-range. Corporate tax executives are typically embroiled in audit controversies stretching back a decade or more but must also plan ahead at least five years. As an officer and member of upper management, the tax executive is a natural for strategic planning.

B. The tax function must cross nearly all lines of authority and responsibility in an organization. Being an officer can facilitate both the efficient gathering of needed information and the provision of advice. Promotional and political skills are needed, but an officer's title enhances an individual's effectiveness.

C. A position of authority in a corporation can provide extra clout in the legislative arena. A legislator may well view a corporate officer more favorably that a nonofficer, imbuing his or her representations with more credence than granted to the statements of an individual considered a technician. In addition, as upper managers come to realize the growing importance of their companies' involvement in the legislative arena, they may choose to be represented by corporate officers.

D. Taxing agencies will require powers of attorney from nonofficers seeking to represent a corporation. An officer of the taxpayer is not required to provide that documentation. In addition, an officer can be a more effective negotiator because he or she has the authority to bind the corporation without seeking further approval.

E. Finally, the granting of officer status to the tax function constitutes recognition by upper management of the significant financial impact that taxes have on the corporation.

The foregoing notwithstanding, the other side of the coin should also be viewed: why would upper management choose not to have the tax function headed by an officer? First, upper management may still view the tax function as involving strictly technical compliance work. If this is the view, little headway can be made in providing the higher level services of planning and earnings enhancement. Second, the tax function may be considered a large exposure that is best kept under scrutiny. Third, upper management may not want to provide an officer's title in the tax function in an attempt to maintain other officers' authority. Finally, as previously stated, there is a general trend toward fewer management layers.

Thus, there are arguments that can be advanced both for and against the elevation of the tax function's authority. Whatever the reasons, it is clear the decade of the 1980s has seen the corporate tax function rise in importance and authority. An ever-increasing number of corporations have recognized the tax department to be a vital part of upper management.

VI. Conclusion

The position and status of corporate senior tax executive has been elevated in the past decade. Survey results presented in The Tax Executive have documented the change. Recognition of increase in importance of the senior tax executive has occurred despite flattening of the corporate organization chart. An analysis of the S&P 500 companies shows that nearly 75 percent of the senior tax executives have the title Vice President or Director (evenly divided between the two). There is some correlation between the size and diversity of the companies and the title of the senior tax executive. Reasons for the elevation of the tax function in large corporations are explained. Finally, the profession should acknowledge the progress that has been made, continue to work hard to justify the ground gained, and aspire to even higher goals.

James R. Murray is Director, Corporate Tax for PacifiCorp in Portland, Oregon. Mr. Murray is a member of Tax Executives Institute's Portland Chapter, and has previously served as Chapter President as well as a Regional Vice President of the Institute. He currently chairs TEI's Corporate Tax Committee and represents the Portland Chapter on the Institute's Board of Directors. Mr. Murray received his B.S. and M.T. degrees from Portland State University, and is a member of the American Institute of Certified Public Accountants and the Oregon Society of CPAs.