Matching employee sentiment with tax news

By Alistair Jones

SMU Office of Research & Tech Transfer– Even in an age of corporate social responsibility, the prime directive for most companies is to make as much money as possible for its shareholders. Part of this involves minimising the tax paid on profits.

Corporate income tax avoidance has become an art form at which leading companies excel, according to Nobel laureate Joseph Stiglitz. He notes that in 2018, 60 of the 500 largest companies – including Amazon, Netflix, and General Motors – paid no US tax, despite reporting joint profits (on a global basis) of around US$80 billion.

Why is the public not more disturbed by this?

“When we think about how stakeholders respond to companies being covered in the news for tax avoidance, we typically conjure an image of an activist standing outside a storefront with a sign calling on people to boycott the tax-avoiding company,” says Shaphan Ng, Assistant Professor of Accounting at Singapore Management University (SMU).

“There are numerous studies examining consumer responses to corporate tax avoidance, but these studies find little evidence that consumers react negatively to tax avoidance news,” he adds.

But while consumers may not concern themselves with the tax arrangements of the companies that provide their favourite products, new research co-authored by Professor Ng finds another interested party that does care – and it's not happy about it.

“In our study, we focus on a different and under-appreciated group of stakeholders – employees,” he says.

“Employees are an interesting group of stakeholders. On the one hand, [they] are just like the rest of us. They find it unfair that they have to pay their taxes when their employers are not paying any. On the other hand, employees might benefit when their employers do not pay any taxes [and they] could receive higher salaries as their employers are more profitable.

“We decided to pursue this project to find out how employees respond to [news of] their employer's tax avoidance,” he adds.

'I read the news today, oh boy'

The researchers hand-collected data on news coverage of tax avoidance activities by S&P 500 firms from January 2008 to December 2017.

“Corporate tax avoidance structures can be complicated and difficult for employees to understand,” Professor Ng says.

“News articles, however, tend to cover a company’s tax avoidance activities in a comprehensible way. As such, we believe employees would most likely find out about their companies’ tax avoidance through the news and respond to tax avoidance news.”

To measure changes in employee perceptions of their managers and firm after media coverage of tax avoidance, the researchers matched the news reports with employee ratings data from Glassdoor, a leading website where current and former employees anonymously review companies.

But could these reviews be biased, given that it's generally people with the most extreme views who are more motivated to post their opinions?

“Glassdoor differentiates itself from traditional online review sites by providing users with incentives to review their employers through its 'Give-to-Get' model,” explains Professor Ng.

“Essentially, Glassdoor requires employees to provide employer ratings or other information such as compensation information before they can access information on the website. Through this model, Glassdoor aims to reduce bias in company reviews by incentivising a broader array of employees, and not just employees with extreme opinions, to post reviews.

“Recent evidence from other studies suggests that the 'Give-to-Get' model employed by Glassdoor helps to mitigate bias in company reviews. Moreover, Glassdoor has a host of measures to prevent users and employers from abusing the reviews system. These measures include user email verification and content moderation.”

Employee discontent

The study finds that employee ratings of S&P 500 senior managers and firms decrease following tax avoidance news – and that employee concern about taxes increases after their companies are reported in the news for tax avoidance.

Employees in well-performing firms react less negatively to news of their company's tax avoidance as compared with other employees. Is this self-interest, or the power of success? 

“It could be a combination of factors, but we do find results supporting the 'power of success' argument,” Professor Ng says.

“We think that strong company performance mitigates the negative employee reaction to tax avoidance news. Employees at well-performing companies likely have more secure jobs, higher pay and better job prospects as compared to other employees.”

In other results, employees in consumer-facing businesses were found to be particularly negative about their firm's tax minimisation.

“We think that consumer-facing businesses are more susceptible to being negatively perceived and penalised for being socially irresponsible,” Professor Ng says.

“As a result, employees of these businesses could expect to face a backlash from the news, and react more negatively to the news. Moreover, consumer-facing businesses likely employ more employees that do not understand the benefits of tax avoidance to the company (such as store clerks, or warehouse workers),” Professor Ng says.

Power of perceptions

The study accords with extant research that finds employees do not clearly benefit from a company's lower tax payments, which could be a key to their discontent.

And the researchers found evidence that the proportion of raters who approve of their CEO’s performance falls following tax avoidance news. This resonates with leadership literature which asserts that employees want to see their leaders as ethical people doing the right thing.

But either way, disgruntled employees can affect the bottom line.

“Employees are strategic assets to companies and their perceptions of their companies and senior managers can affect firm value and success,” Professor Ng notes.

“Negative employee perceptions resulting from tax avoidance news may adversely affect firm performance. Moreover, Glassdoor is an important source of information for prospective employees. A lower rating may hinder a company’s ability to attract talent.”

The researchers hope that by shedding light on employees’ negative reaction to tax avoidance news, companies will carefully consider the possible ramifications before engaging in tax avoidance activities. Professor Ng intends to continue working in this area.

“As employee wellbeing becomes the focus of company policies in the wake of the COVID pandemic, I am eager to explore how employee perceptions shape companies’ accounting and tax policies,” he says.

Back to Research@SMU Aug 2021 Issue