With global banking organisation HSBC dominating headlines over the last few days for allegedly facilitating tax evasion, corporate fraud is at the forefront of people’s minds. And the government’s too, it seems, with chief secretary to the treasury Danny Alexander recently announcing that companies that fail to prevent tax evasion could also face penalties. The same subject, albeit in a slightly different guise, has been dominating conversations across the pond, with the US Internal Revenue Service (IRS) estimating that corporate tax evasion led to around $67 billion in losses. But surprising new research shows that the answer to curbing corporate fraud such as tax evasion might be as simple as appointing more females in executive roles.
In a survey of 1,700 CFOs from 43 countries carried out in 2012 by multinational accountancy firm Ernst and Young, an incredible 15 percent admitted they would be willing to commit fraud to win business. And 4 percent said they would be willing to intentionally misstate financial performance. In the same study two years later, 7 percent of CFOs revealed that they would consider misstating company finances to deal with the tough economic climate. These are discouraging statistics in themselves, and even more so when you consider how many more would also engage in similar activities but were not willing to admit it. And with CFOs often being first in the line of fire when it comes to combatting fraud, it paints a distressing portrait of unethical corporate culture.
However, recent research has revealed that the appointment of a female CFO leads a company to make more ethical decisions when it comes to tax. What’s more, having women on the board of directors can be essential for making ethical financial decisions. The study, co-authored by Wake Forest University School of Business and the University of North Carolina- Wilmington, looked at the link between CFO gender and board gender diversity, and corporate tax evasion. Through analysing data spanning 20 years to 2011, they came to the astonishing conclusion that women CFOs were less likely to evade taxes than their male counterparts.
Ya-wen Yang, one of the authors of the report, said:
“Studies have found that women and men make ethical decisions differently, and that overall, women are more ethical and less likely to take risks than men. But for gender diversity to fully benefit a company, there needs to be a critical mass of women in both executive roles, like the CFO, and governance roles, like directors.”
This “critical mass”, according to the study, means women need to make up at least 30 percent of a company’s board of directors before the positive effects against corporate fraud bear fruit. Even more interestingly, when there’s an all-male boardroom, having a female CFO does not affect corporate tax evasion. But by just having one woman on the board, the female CFO is seen to make more ethical decisions. Conversely, where there’s a male CFO, having females on the board of directors actually has a detrimental effect and can lead to more tax evasion.
“Our findings are consistent with other studies and show how much the gender of the person in a leadership role affects the behaviour of the board and their decision-making process,” explains Yang.
Research from recruiter Egon Zehnder revealed that the number of female CFOs in the FTSE 100 stood at a pitiful 11 as recently as December 2014, and women made up only a quarter of FTSE 100 board members (although having risen encouragingly from 15.6 percent in 2012). Whether the surprising findings from this new study has any effect on the hiring of more women in executive and corporate leadership roles remains to be seen.