By Alex Parkinson, Research Associate, The Conference Board
The question of whether corporate philanthropy actually generates business value is a perennial one. Solid empirical evidence to support the ubiquitous anecdotal argument is generally hard to come by, but earlier this year the European Corporate Governance Institute (ECGI) released research that attempted to fill this gap. At the surface, the interesting findings question whether there is actually business value from corporate philanthropy. But instead of answering the question once and for all, the report supports the argument that corporate philanthropy should be strategic, rather than just the purview of the CEO or senior leadership.
The report, entitled Agency Problems of Corporate Philanthropy, looked at contributions of U.S. Fortune 500 companies during 1997-2006. I’ve attempted to summarize the main findings from the research here (these are taken from an article on the Harvard Law School Forum on Corporate Governance and Financial Regulation):
- There is little support for the conventional idea that corporate giving is profit-enhancing. Instead, there is substantial evidence supporting agency theory. More specifically, CEO charity connections—a measure of the CEO’s personal preference for charity—increase the likelihood and the amount of corporate giving, whereas an increase in CEO ownership reduces the likelihood and the amount of giving.
- Corporate giving has a substantial negative impact on firm value through its impact on cash: the estimated marginal value of cash is 8.1 cents lower if a company raises its corporate giving from the sample median to the 75th percentile level.
- Approximately two out of three firms contribute to CEO-affiliated charities. Moreover, the average cost to a company from such contributions is larger than the combined costs of CEO corporate jet use and other perks and is comparable to a CEO’s promised cash severance payment.
- The share price reaction of the first disclosure by a corporation of “charity awards” shows a three-day cumulative abnormal return (CAR) of -0.87%, suggesting that shareholders perceive corporate donations that are related to company officers and directors negatively.
- Nearly 70 percent of charitable causes supported by corporate giving overlap with independent directors’ charitable interests, indicating that a strategic use of corporate giving is to support independent directors’ charity interests and thereby strengthen their ties to a CEO. This particular alignment of charitable interest is positively associated with excess CEO compensation.
Authors Ronald Masulis and Syed Reza conclude that these findings raise “serious concerns about the decision process surrounding corporate charitable contributions.” They go so far as to suggest that “securities regulators should consider requirements to promptly disclose insider-affiliated corporate giving, given that it can adversely affect minority shareholders.”
An evolving sector
These conclusions are valid, but there is an important point to note: corporate philanthropy has evolved considerably since the previous decade, increasingly becoming more associated with business strategy, and less with the desires of the CEO and other leaders.
This point is evidenced by the findings of our annual Giving in Numbers report, published by CECP in association with The Conference Board. For example, the latest research found that in 2013 a majority of companies (64 percent) made noncash gifts, including product, pro bono, and other in-kind contributions. In the 2013 edition, which looked at 2012 contributions, we found that noncash contributions accounted for more than 95 percent of the aggregate giving increase between 2007 and 2012.
The decision to increase noncash donations is often a strategic move. Computer manufacturer and technology company Dell is a good example: in 2010 it closed its foundation, citing a desire for “more flexibility to donate our products and services in areas where they could have the most impact.” Dell believed that this move would better allow it to provide essential funding, but also manpower, services and expertise to nonprofit partners. This strategy, said Trisa Thompson, Dell’s Vice President of Corporate Responsibility, was in response to the changing face of corporate philanthropy, which is no longer about writing a check and leaving the work to the charities.
In short, corporate philanthropy between 1997 and 2006 was very different to what is has become since then. And perhaps not so coincidentally, our latest research also found that between 2010 and 2013, companies that increased giving by more than 10 percent also increased median revenues by 11 percent, suggesting that corporate philanthropy is playing a role in enhancing business value (our analysis on this business value is admittedly not as robust as the authors’ for ECGI).
Nonetheless, the ECGI research arrives at important conclusions regarding corporate philanthropy when the giving decisions are made at the whim of a well-meaning, but misdirected leader. However, rather than debunking the “conventional idea that corporate philanthropy is profit-enhancing,” the research actually supports the field’s move towards more strategic giving since the recession. If the research considered corporate contributions after 2006, a critical juncture in the field, I think the findings would be very different, and even more important.
About the author:
Alex Parkinson is a Research Associate in the Corporate Leadership division of The Conference Board. He specializes in corporate philanthropy and sustainability. He is the Executive Editor of the Giving Thoughts blog and monthly publication series. Before joining The Conference Board in September 2013, Alex worked as a Senior Consultant in London and New York for corporate social responsibility (CSR) consultancy Context. He has advised some of the world’s leading multinationals on CSR communications and strategy development. Follow Alex on Twitter: @AlexParkinsonNY.