Does public scrutiny on corporate tax decisions affect directors? Effects of responsible (irresponsible) corporate tax practices on director reputation

Abstract

In 2004, the Citizens of Tax Justice (CTJ) released a report that significantly raised public awareness of corporate tax avoidance practices in the companies that it scrutinised in the study. Using a six-year period straddling the CTJ event, we compare over time changes in external board seats held by incumbent directors serving scrutinised firms against those of their counterparts serving control firms with comparable tax practices but that were not scrutinised in the CTJ study. Incumbent directors in scrutinised firms with minimal tax avoidance practices gained more external board seats after the CTJ event than did board members in control firms. However, directors in scrutinised firms with aggressive tax avoidance practices neither gained nor lost more external board seats after the CTJ event than did directors in control firms. These findings provide little evidence that constituents in the corporate sector overwhelmingly favour tax minimisation practices as acceptable practices of conducting business operations. Rather, they provide evidence that corporate constituents, like their social peers, are somewhat attuned to the expectation for socially responsible tax practices. Lastly, we find that directors in scruitised firms with minimal tax avoidance practices are more likely to gain board seats from like-minded firms with responsible tax practices.