ESG performance, board diversity and tax avoidance: empirical evidence from the UK

Abstract

Purpose: This paper aims to investigate the effect of ESG performance and board diversity on tax avoidance practices of FTSE350 companies before and after the COVID-19 pandemic from the stakeholder theory perspective. Design/methodology/approach: Using random-effect regression analysis on data from 2017 to 2023, the study analyzes ESG scores and various tax avoidance measures pre- and post-COVID-19. A two-stage least squares regression analysis using instrumental variables is used to address endogeneity. Findings: Results show that gender, age and network diversity reduce tax avoidance, while skill diversity has no effect, and nationality diversity increases it. High ESG scores lower tax avoidance, but higher governance scores increase it. Findings hold across different tax avoidance measures, sectors and pre/post-COVID-19 periods. Research limitations/implications: Future research should explore the roles of board committees and external governance mechanisms and investigate tax avoidance in small- and medium-sized enterprises. Practical implications: The findings highlight the need for policymakers to enforce board diversity and promote ESG practices to encourage ethical tax behavior. Companies can reduce tax avoidance and enhance moral standards by prioritizing stakeholder interests. Social implications: Promoting board diversity enhances social equity, supports ESG practices, aligns corporate actions with societal values and fosters a sustainable business environment. Originality/value: The paper expands existing research by analyzing the combined effects of board diversity and ESG performance on tax avoidance. It offers recent UK evidence on tax avoidance determinants, emphasizing behavioral changes pre- and post-COVID-19.