Family run companies and responsible tax payment

CSR reporting by family firms

Family, Italians are fond of saying, is sacred. That sentiment carries into the business world, where 94% of the nation’s companies are family-owned. Italy is not alone. Publicly owned multinationals may dominate in terms of economic clout, but small (and not-so-small) family firms greatly outnumber them the world over. Even big businesses listed on the stock market are not immune to the personal touch, with an estimated one in three of the S&P 500 index of the US’s largest listed firms in fact controlled by their founding families.

Detailed research focusing on the corporate social responsibility of practices of family-owned firms is limited, particularly in respect to disclosure. This study of the reporting practices of 98 family-owned businesses therefore fills a notable gap. Its key findings are three-fold. The first is positive: family-owned companies tend to report more than publicly owned firms. The second two, not so much: family firms are shown to offer less detailed and less diverse information, and the information they do provide tends to be less compliant with recognised reporting standards.

Why is this? The authors turn to the precepts of institutional theory for an answer. Institutional theory essentially examines how companies respond to external factors, such as laws, norms and societal values. Family-owned businesses have one important additional factor that public corporations can ignore: the influence of family members. Similarly, those family members are less beholden to shareholders (especially for non-listed firms). Individual goals and values, therefore, can quickly become corporatised.

This creates a very different dynamic with respect to corporate social responsibility, which subsequently feeds into how policies and practices are disclosed. Family firms, for example, typically put a high priority on reputation and legitimacy in their communities. It’s their own name on the factory gates after all. Hence, there is a desire to disseminate responsibility data widely, so-called “explicit CSR”. Unlike public firms, however, stakeholder relations tend to be highly informal. Suppliers are seen as old friends and employees as part of the family. Formal communication, therefore, is not their style. Nor is “passive” compliance with institutional norms. Family firms are too autonomously minded.

One practical implication from the research is that family firm managers do “not assume” that advice in corporate social responsibility reporting manuals is universally applicable. Instead, they should approach standard practice in light of family influences on their organisation’s behaviour and adapt them to suits their firm’s “distinctive characteristics”.

Giovanna Campopiano, G, and De Massis, A, (July 2015), “Corporate Social Responsibility Reporting: A Content Analysis in Family and Non-family Firms”, Journal of Business Ethics, 129: 511-534.

Responsible tax payments

Much has been written in the media about corporations shirking taxes over recent years. The ability of large companies to negotiate investment-related tax breaks in developing countries, as well as to exploit national and international legal loopholes, enables them to adopt a pick-and-chose approach to how much tax they pay. In the academic sphere, such ethically dubious behaviour is interpreted as a subject for scholars or legal and fiscal studies, not corporate social responsibility.

Companies pay tax, but not enough

Hence the importance of this timely paper that introduces the ethical element of tax payment into academic debate. Drawing on a base study of 82 companies operating in India, the authors interrogate tax return data for 2000-2002 to explore two central hypotheses. First, that the Indian subsidiaries of multinational companies pay more than domestic Indian firms in tax. And second, that, among Indian subsidiaries of multinational companies, those with a strong corporate social responsibility ethos pay more than those without such an ethos. The data proves both to be sound. On average, multinationals are shown to pay 10% more than local firms in tax, while those with a good CSR reputation pay 6-9% more than their less reputable peers.

The reason has nothing to do with legal compliance. Tax obligations, the authors suggest, are effectively a “moral free space” in which large companies are left to “chart their own way”. What pushes multinationals operating in India to pay more is a desire to protect their reputation. Contrary to media reports, weaker enforcement actually heightens awareness of the reputational risks associated with “irresponsibility” – a charge large foreign companies wish to avoid. The fact that firms with strong ethics pay more makes logical sense, but it is welcome to see it empirically proven. It is also welcome to have evidence that tax is finally being seen as part of the corporate social responsibility agenda.

Even so, the data reveals one major concern: the sample firms still post tax returns that are “significantly lower” on average than nominal tax rates in India (21.7% compared with a nominal figure of 35%-40%). No one sector or industry stands out, suggesting all companies – however ethical – will be tempted to exploit the institutional avenues afforded them to optimise their tax burden. To counter this “structural problem”, as the authors define it, authorities in developing countries should become more stringent with firms (both local and foreign), as well as bolster tax collection efforts.

Muller, A, and Kolk, A, (July 2015), “Responsible Tax as Corporate Social Responsibility: The Case of Multinational Enterprises and Effective Tax in India”, Business & Society, 54(4): 435–463.

From campus

Principles for Responsible Management Education, a UN-endorsed alliance of universities and business schools, announced 17 new signatories last month. The list of new members includes four UK institutions: Imperial College London and the Universities of Kent, Swansea and Nottingham Trent. PRME now counts more than 5,000 signatories from more than 80 countries.

Boston College’s Centre for Corporate Citizenship is hosting a webinar on 5 August at 12pm ET entitled, “The Road to Paris: Business leaders call for universal climate agreement”. The webinar is in association with the We Mean Business Coalition. 

India  Italy  Academic news  Business School Bulletin 

comments powered by Disqus