‘Benevolent’ bosses are also more generous with their company tax information

For over a decade, there has been an increase in calls^[1] for multinational corporations to be forced to disclose tax information publicly. The idea is that enhanced transparency reduces tax avoidance and the use of tax havens.

There is also growing recognition that paying taxes is a corporate social responsibility. To date, voluntary corporate tax reporting regimes have had mixed success^[2].

High quality tax information is important as it allows stakeholders to assess corporate behaviour. People are able to better consider whether companies are doing the right thing. For example, investors and media want to know whether companies are using tax havens. Currently, it is only voluntary information that tells us this.

In our latest study^[3], we examine the influence of the chief executive on the decision to provide tax information. Specifically, whether chief executives’ moral characteristics influence their views on tax reporting. We found they do – that benevolent CEOs are more likely to be tax transparent.

Changes are coming

The voluntary nature of tax reporting in Australia is about to change.

Starting this financial year, companies that meet certain requirements must disclose their global group’s revenues, profits, and income taxes to the public. They will also need to disclose the global group’s activities and related party dealings.

Broadly, the rules will apply to large multinationals with an annual Australian turnover above A$10 million. This regime is known as public country-by-country reporting^[4].

This mandatory regime is the latest attempt by the Australian government to increase corporate tax transparency. Nearly a decade ago, the Board of Taxation produced a voluntary tax transparency code^[5].

It provides a framework for corporate tax disclosure to encourage large businesses to take the lead and become more transparent, and help educate the public about their compliance with Australian tax laws.

Many of our largest companies follow this voluntary code. However, the information provided is of mixed quality^[6].

The question remains: why? It is well understood that some companies view paying taxes as a mere legal obligation, while others see it as a social obligation. The same view is held when it comes to reporting tax information.

Why we need high quality tax data

Tax reporting is increasingly viewed as a way for entities to demonstrate compliance with their corporate social responsibility to pay taxes.

High quality data will tell stakeholders about tax practices including details on related party dealings, tax governance, and tax contributions. Companies that provide high quality data are those complying with the code recommended by the Board of Taxation. Investors and the media are then able to interpret the information to make informed decisions.

We know corporate social responsibility is influenced by corporate leadership, with the moral characteristics of board members affecting disclosure quality. One way to measure this characteristic is to determine a chief executive’s decision to be involved in not-for-profit leadership.

Like all strategic decisions, corporate tax policy and transparency are influenced by the preferences of its top leaders. We examine what leadership characteristics would contribute to a decision to provide high-quality tax reporting.

What makes a benevolent leader?

Specifically, we look at CEO characteristics to see if their charitable nature influences their views on tax reporting. Leaders who contribute their time and talent to not-for-profit organisations are likely to be charitable and are considered benevolent leaders.

Our study revealed that between 30% to 45% of chief executives in the top ASX 300 have leadership positions in non-profits. Those in the consumer staples sector lead the way at 54%. And 57% of women CEOs are benevolent, compared with 32% of male CEOs.

Given their benevolent nature, it might be expected these same leaders would be more likely to view paying taxes and providing the public with information as a social responsibility.

In our study, the top 300 Australian listed firms were analysed to see if CEOs who were also leaders at non-profits were more likely to run a transparent company.

Transparency was an indicator the leaders believed the public should understand the company’s tax practices and be provided with high quality tax information.

We discovered CEO benevolence is a moral characteristic that influences the tax disclosure quality of the top 300 listed firms.

Our study also finds CEO benevolence significantly influences voluntary tax disclosure quality. This suggests a company run by a benevolent CEO is more likely to see tax and reporting as a corporate social responsibility.

Leading in tax transparency

Our study shows benevolent leaders are more likely to be tax transparent.

The companies they lead publish high-quality tax information. When tax reporting is left to leaders to decide what information will be shared, leadership characteristics such as benevolence influence decision-making.

The opposite is also true. Leaders who do not act benevolently are likely to run a company that provides less tax information. This suggests they view tax obligations as being purely legal.

It is logical, therefore, that the government response is also legislative in the form of public country-by-country reporting.

Australia is one of the global leaders in corporate tax transparency. As we move to the new mandatory regime, it is important to understand what factors contribute to a company’s decision to provide high-quality information to the public.

Only time will tell whether regulation requiring disclosure will solve a current lack of quality information.

References

1. ^{^} increase in calls (www.oecd.org)
2. ^{^} mixed success (heinonline.org)
3. ^{^} our latest study (research.qut.edu.au)
4. ^{^} country-by-country reporting (www.ato.gov.au)
5. ^{^} voluntary tax transparency code (taxboard.gov.au)
6. ^{^} mixed quality (taxboard.gov.au)
7. ^{^} Andrey Popov/Shutterstock (www.shutterstock.com)