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Corporate philanthropy: The redefinition of enlightened self-interest
Corporate Philanthropy: The Redefinition of Enlightened Self-Interest
EDWARD J. STENDARDI, JR.* St. lohn Fisher College
Three events in the 1980’s have caused the legitimacy of corporate philanthropy to be reexamined. The first two events-the election of Ronald Reagan and the subsequent election of George Bush-have resulted in a call for increased corporate giving to replace government cuts in certain social programs. The third event, the Tax Reform Act of 1986, provided reduced tax incentives for corporate giving. The result has been a renewed debate over the appropriateness of corporate philanthropy. The debate over corporate philanthropy is not new; it has existed for decades. What is new is how American corporations are now dealing with philanthropic activity. They are no longer content to justify their giving on the basis that they will receive some general, unspecified benefit from a grateful society at some time in the future. Many firms view their corporate giving as a form of investment, and they require a concrete, measurable return from their philanthropic activity. This article examines the reasons for the shift from philanthropic giving to social investing. The debate over the legitimacy of corporate philanthropy is not new. It stems from the Smith Manufacturing Company Case. In this 1954 case, the Supreme Court established the “business judgment rule.“’ Prior to this case, firms were only allowed to make contributions that were in direct relation to their shareholders’best interest. After this case, corporate managers were free to make contributions that in their judgment would promote the corporation’s interest. As a result of the Smith Manufacturing Case and the establishment of the business judgment rule, the debate over whether philanthropy was legitimate corporate activity began. Milton Friedman made a strong case against corporate *Direct allcorrespondence to: Edward J. Stendardi, Jr., Department Rocheser, New York 14618. Telephone: (716) 385-8000. The Social Science Journal, Volume 29, Number 1, pages 21-30. Copyright @ 1992 by JAI Press Inc. All rights of reproduction in any form reserved. ISSN: 0362-3319.
of Management,
St. John Fisher College,
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philanthropy by maintaining that managers are the agents of the owners of the firm (the stockholders) and, as such, have a responsibility to conduct the business in accordance with the best interest of the shareholders, which is generally to increase profits.2 If the shareholders wish to support a charitable cause, they can do so as individuals. They don’t need the manager to make this decision for them. Friedman added that when firms engage in philanthropic activity, they are, in effect, spending someone else’s money for a “general societal interestYT3 If the contribution reduces returns to shareholders, the manager is spending the shareholders’ money. If the contribution causes prices to increase, the manager is spending the customers’ money. If the contribution results in wages that would be lower than otherwise, the employees’money is being spent. In a sense, the manager is wrongfully assuming a role that rightly belongs to an elected government, the redistribution of income. In contrast, Keith Davis argued for philanthropy as a legitimate corporate activity by maintaining that in order to be successful, firms must maintain good relations with all of their key stakeholder groups.4 Stockholders are one such group, but other stakeholder groups include customers, employees, government, the communities in which they do business, and society, in general. Davis further maintained that if the gap between business’ economic way of life and society’s needs increases sufficiently, this will create an incongruence, and society will act to reduce this incongruence by limiting business’ rights and actions. Henry Beers, past chairman of Aetna Life and Casualty, echoed this concern when he stated that “the survival of our economic system may well hinge on the extent to which business practices good citizenship.“j
THE EVOLUTION OF PHILANTHROPIC GIVING AS ENLIGHTENED SELF-INTEREST The principle of enlightened self-interest emerged as an attempt to bridge these two disparate views concerning the legitimacy of social responsibility in general and corporate philanthropy specifically. In its original form, socially responsible behavior like philanthropy was motivated by the belief that the corporation would receive a general benefit at some point in the future for being perceived as socially responsible by the various constituencies that it had to deal with. These benefits included the hope that as the corporation was perceived as a socially responsible corporate citizen, (and philanthropic activity was one way of creating that impression), employees would be more motivated to work for that firm, customers would be more inclined to buy the firm’s products, municipalities would be more hospitable to the enterprise located within their borders, and government at all levels would be less inclined to regulate. This belief recognizes the fact that philanthropy is a two-way street, that a “healthy corporation cannot exist in a sick community.“6 Charles E. Taylor, Director of Corporate Contributions and Community Affairs for Standard Oil of Ohio summed up this view when he stated succinctly that “to do good, you must do good.“7 Accordingly, corporations contributed to colleges and universities in the belief that these institutions would produce qualified graduates who could be employed at some point in the future. Donations were made to rebuild cities or to enhance
Corporate Philanthropy
23
their cultural climate in order to make it easier to attract employees or to maintain customer loyalty or favorable treatment by government. The key attribute of this early form of enlightened self-interest was the belief that the firm would benefit at some point in the future, but that these benefits were neither immediate, certain, nor quantifiable.
THE DEBATE OVER THE LEGITIMACY OF CORPORATE PHILANTHROPY IN THE 1980’S The principle of enlightened self-interest has not resolved the debate. In fact, the debate over the legitimacy of corporate philanthropy has accelerated in the 1980’s. Shareholders of some corporations have sued in an attempt to curtail corporate philanthropic activity. For example, shareholders of the Dayton-Hudson Company-one of the few corporations which donates 5% of its pre-tax incomehave filed shareholder resolutions to eliminate or reduce these contributions. Shareholder resolutions such as these have appeared on 195 proxy statements from 1979-1985.’ Three specific events have caused the issue of corporate philanthropy to resurface and intensify in the 1980’s. The first event was the election of Ronald Reagan in 1980 and his subsequent reelection in 1984. According to his conservative view of government, many of the activities which had been considered the responsibility of the federal government since the “great society administrations” of the 1960’s rightly belonged in the private sector. Philanthropy, in particular, was one such activity. A study conducted by the Urban Institute estimated that the non-profit sector would lose thirty-three billion dollars in federal support during the period 1982-1985.9 As government funding for education, the arts, and other social programs was reduced, increased giving from the private sector, private individuals, and corporations was expected to offset the decline in government support. The second major event was the passage of the Tax Reform Act of 1986 (TRA86) which reduced the maximum marginal tax rate for both individuals and corporations. The maximum rate for individuals was decreased from 50% to 33%, while the maximum corporate rate was reduced from 46% to 34%. TRA-86 also ended the provision which allowed individuals who did not itemize their deductions to deduct their charitable contributions. Both of these provisions of the new law provided less of an economic incentive for individuals and corporations to contribute to charitable organizations. The disincentive for individuals who did not itemize was obvious; they could no longer deduct their contribution, and their aftertax cost was, therefore, 100% of their contribution. The disincentive for corporations and individuals who did itemize was less obvious. Charitable giving by both of these groups is tax deductible within prescribed limits which are infrequently reached. Both the individual who itemizes and the corporation bear a higher after-tax cost for their philanthropic giving since the value associated with the deduction is less due to lower marginal tax rates. The third event was the election of George Bush in 1988. Due to his own conservative ideology, he is unlikely to try to reverse the Reagan-era trend toward a smaller role for the federal government in social programs. Also, even if he were
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24
Table
Giving Bill. $
Private
Philanthropy
1970-I
989
individual
Foundation
Corporate
Giving
Giving
Giving
TOtal
Year
1.
Vol.29/No. l/1992
Bequests
Bill.
% of
Bill.
76 of
Bill.
% of
Bill.
% of
$
Total
$
Total
$
Total
$
Total
1970
21.0
16.2
77.1
1.9
9.0
0.8
3.8
2.1
10.0
1971
2 3.4
17.6
75.2
2.0
8.5
0.9
4.8
3.0
12.8
1972
24.5
19.4
79.2
2.0
8.2
1.0
4.1
2.1
8.6
1973
25.7
20.5
79.8
2.0
7.8
1.2
4.7
2.0
7.8
1974
27.0
21.6
80.0
2.1
7.8
1.2
4.4
2.1
7.8
1975
L8.h
23.5
82.2
1.7
5.9
1.2
4.2
2.2
7.7
1976
32.1
26.3
81.9
1.9
5.9
1.5
4.7
2.4
7.5
1977
36.3
29.6
81.5
2.0
i.i
1.8
5.0
3.0
8.3
1978
39.0
32.1
82.3
2.2
5.6
2.1
5.4
2.6
6.7
1979
43.7
16.6
83.8
2.4
5.5
2.3
5.3
2.2
5.0
1980
48.7
40.7
83.6
2.8
5.7
2.4
4.9
2.9
6.0
1981
55.5
46.4
83.6
3.1
5.b
2.5
4.5
3.5
6.3
1982
60.4
48.5
80.3
3.2
5.3
2.9
4.8
5.5
9.1
1983
65.0
53.5
82.3
3.6
5.5
3.3
5.1
4.5
6.9
1984
73.3
60.7
82.8
4.0
5.5
3.8
5.2
4.9
6.7
198.5
79.8
65.7
82.3
4.5
i.6
4.4
5,s
5.2
6.5
1986
87.2
71.7
82.2
5.2
6.0
4.5
5.2
5.8
6.7
1987
93.7
76.8
82.0
6.4
6.8
4.5
4.8
6.0
6.4
1988
104.4
86.7
83.0
6.1
5.8
4.8
4.6
6.8
6.5
1989
114.7
96.4
84.0
6.7
5.8
5.0
4.4
6.6
5.8
Sourcr~ C~wng UsA 1990-The AnnualReportcm Philanthropy
inclined to try to increase the role of the federal government in social areas, he would be constrained by the continuing problem of the federal budget deficit and his own campaign promises on new taxes. Consequently, there will be an increased reliance on the private sector, and not the federal government, to fund new and, in some cases, ongoing social initiatives. The result of these three events has been a call for an increased level of philanthropy in general including increased corporate philanthropy. The major contributions to philanthropic activity are individuals, corporations, and foundations. A study conducted by the American Association of Fund-Raising Council estimates that individuals contribute 83.0% corporations 4.6%, foundations 5%,, and bequests 6.5% of total philanthropic giving (see Table 1). Willard Butcher, Chairman of Chase Manhattan Bank, has referred to the level of corporate giving as “frankly appalling.” On the other hand, shareholders are filing lawsuits to block the philanthropic activities of the firms in which they invest. The call for increased corporate philanthropic giving has caused the debate over the legitimacy of corporate philanthropic activity to resurface and intensify.
Corporate Philanthropy
25
THE SHIFT FROM CORPORATE PHILANTHROPY TO SOCIAL INVESTING It is ironic to note that at exactly the time corporate America is being asked to increase the level of corporate philanthropy, they are having difficulty maintaining their existing level of support. There are several reasons for this increased difficulty. The first is the fact that American corporations presently face a much more competitive global environment than they did in 1954 when the Smith Manufacturing Case gave them more discretion in supporting philanthropic activity. Today American corporations face much more intense global competition. The results of this increased competition has been decreased market share and decreased profit margins, both of which make the funding of corporate philanthropy more difficult for American corporations. Today, these same firms are finding their profit margins squeezed due to increasing costs of production coupled with the inability to raise prices due to global competitiveness. This profit squeeze makes it more difficult to fund corporate philanthropic activities. A second reason was mentioned earlier in the article. As marginal corporate tax rates were decreased in the 1980’s, this resulted in an increased after-tax cost of contributing to corporate philanthropy. The third reason for the increased difficulty of funding philanthropic activity is the fact that Wall Street has taken an increasingly short term view since the 1980’s. Philanthropic contributions are an expense (albeit a deductible one) which reduces earnings in the period in which the contribution was made. Wall Street has demonstrated a willingness to punish firms that deliver disappointing earnings, and corporate executives are reluctant during times of reduced profit margins to take actions which will further decrease earnings without a tangible, quantifiable economic benefit. Consequently, firms are under constant pressure to produce the short-term earnings necessary to satisfy the managers of large investment portfolios (mutual funds, pension funds, and insurance companies). lo The fourth reason is related to the third one. The era of hostile takeovers which began in the 1970’s was accelerated by the financing opportunities provided by the junk bond market in the 1980’s. In an environment where hostile takeovers of “undervalued firms” (firms who trade at a price below their break-up value) are more likely, corporate executives are increasingly reluctant to take steps that will decrease earnings (even in the short-term) and perhaps result in a decrease in share price because this would increase the chance of attracting the attention of a corporate raider. Consequently, the primary characteristic of modern corporate philanthropy is that it is intended to produce a more specifi:c, more measurable benefit in a relatively short time period. Contemporary CEO’s are compelled to use all of the firm’s assets at their command to maximize their firm’s earnings and Boards of Directors are demanding a more market driven, bottom line approach to philanthropy.” Philanthropy is viewed as another method to achieve business objectives, and these social investments must have a discernible payback for the firm. The president of the John Deere Foundation maintains that there is more of an expectation of a quidpro quo in corporate giving programs, when a firm gives, it expects to get
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something in return.” In fact, Charles T. Hogan, manager of corporate contributions for United Technologies Corporation, referred to the term “corporate philanthropy” as an oxymoron insofar as, by definition, the corporation is not motivated as much by need or altruism as it is by serving corporate interests and objectives.‘3 While the shift from general philanthropic giving to social investing has become widespread in the 1980’s, the movement does have historical roots. In the 1870’s, American railroad companies were large contributors to the early YMCAs in large part because they needed dormitories for their workers who were constructing the railroads.14 Also, Joseph Pulitzer used a form of social investing in trying to raise money to construct the pedestal for the Statue of Liberty by offering to print the name of each contributor in his newspaper. While this tactic was successful at raising money for the pedestal, it also increased circulation for his paper.” Perhaps the firm that has most fully developed and refined the process of social investing is American Express. They began what came to be known as “cause-related marketing” because they realized that the demographic profile of the customers that they wanted to reach for their cards was the same as people who were interested in the arts. This realization motivated them to sponsor the San Francisco Arts Festival in 198 1. The company tied its contribution to card use; it would contribute two cents every time an American Express card was used. The company exceeded its marketing goal and contributed $100,000 to the Arts Festival. American Express again gambled that it could do well by doing good in 1983 when the company decided to tie its contribution to the Statue of Liberty restoration fund to card use (one cent per charge) and new applications (one dollar per application). The program was a phenomenal success; card use increased 28% (they had estimated 19%), applications increased 45%, and 1.7 million dollars were donated to the restoration project.” This marriage of corporate philanthropy and corporate marketing is clearly demonstrated by the process that American Express utilizes to select the projects that it will sponsor. Fred Williamson, Jr., Vice President at American Express, states that the purpose of the process is “to build our business while helping a worthy cause in the communities in which we do business.“‘7 This process clearly demonstrates the primary nature of the business motive. The company first identifies the local area in which it wants to increase business. They then look for a worthy cause that they wish to support. Finally, they develop an appropriate advertising and promotional campaign. American Express has utilized this formula successfully dozens of times since the 1980’s. And, while the promotions have generated welcomed funds for the local charities, American Express executives freely admit that their main objective is to increase sales and improve bottom-line performance.‘” Once American Express successfully developed this shift from philanthropic giving to social investing, many firms began to utilize this concept in their giving programs. Although the details of these programs differ, the common denominator is the tangible benefit that the firm expects to receive as a result of its philanthropy. Examples of this type of activity include:
Corporate Philanthropy
27
Chesebrough-Ponds bases the amount of money that it donates to charitable causes to the number of coupons redeemed during a special promotion period. While the objective of these programs is increased sales, the non-profits receive the funds that they need.” Fleishman’s Margarine sponsored the U.S. Cross-Country Ski Team. In return for this sponsorship, team members wore blazers with the Fleishman’s logo during television interviews. Fleishman’s benefited economically from this sponsorship by being able to focus on the healthy aspects of their products.20 Carter Hawley Hale Stores, Inc., which operates Neiman Marcus, changed its contribution strategy from supporting a variety of charities to the funding of the arts to better reach the upscale consumer-their prime customer market.*l SCM Corporation, a diversified conglomerate, openly acknowledges that it sponsors museum exhibits for the publicity value. “SCM executives estimate that they would have to spend 51 million dollars a year for five years on advertising to reach SCM customers compared to the $200,000 a year the company now spends on museum sponsorship.“** “Champion International is in the paper business and, for that reason, much of the art it supports-photography, for instance, or new ways of using paper itself as art-is focused on paper, patronage that not so incidentally markets the product.“23 Hallmark, the greeting card company, sponsors fine art and design programs in order to promote the creative art talent that the company needs.24 Burger King in 1983 was contributing about $200,000 a year to the United Way, arts organizations, and other worthy causes. Burger King, at the time, was also experiencing major turnover problems; there were 2.5 changes per year in each job. In an attempt to deal with this problem, the company revised their giving programs and began investing $4 million a year in educational programs. Much of the funds went to support scholarships. These scholarships were tied to length of service; workers accrued $250 in scholarship credit for each three months of continued service, up to a maximum of $1,000 per year. This program was piloted in Atlanta and New York in 1984, and was implemented nationally the following year. The program was very successful; in its first year, it reduced the turnover rate by more than 50%.25 .
Both IBM and Apple donate computer equipment to colleges and universities in order to establish a user base. John Akers, President and CEO of IBM stated, “IBM is not a philanthropy, we are a business.... Only individuals can be philanthropic and give money because it feels good. Corporations must justify giving away money to stockholders, employees and customers.“26
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CONCLUSION This recent trend toward social investing has been criticized on many grounds. First, some felt that the purity and nobility of the non-profit sector could be tarnished by commercialism. Second, it was feared that these investments would decrease traditional philanthropic giving. It should be noted that the budget for the American Express cause-related marketing efforts comes from their marketing budget and not from funds allocated for traditional giving. Finally, there was concern that social investing would undermine the financial basis of philanthropy, that the public would perceive a charity as “being taken care of” by a corporate sponsor and as a result individual giving, which accounts for over 75% of all giving, would dry up or that the Boards of the non-profits would bend to the wishes of their corporate sponsors.” While this phenomenon is too new to fully ascertain its overall impact on philanthropic giving, its proponents maintain that it represents a unique joining of business and charity for the greater benefit of each. They depict this relationship as a true “win/ win”situation. Business enhances its public image by being associated with a worthy cause and increases their sales in the process. The non-profit organizations receive the benefit of the donations along with increased public awareness made possible by the marketing expertise of the business.2R It is instructive to note the irony in this situation; in effect, philanthropy has come full circle. In the first half of the century, prior to the Smith Manufacturing Case, corporations were constrained by government from making philanthropic donations that were not in the “direct relation to their economic interest,” and now in the closing years of this century a “direct relation to economic interest” rule has been reimposed on them by the competitive global environment in which they exist.
NOTES 1.
2. 3. 4. 5. 6. 7. 8. 9. IO. 1I.
Louis W. Fry, Gerald D. Kim and Roger E. Meiners, “Corporate Contributors: Altruistic or for Profit?” Academy of Management Journal, 25: 95. Milton Friedman, “The Social Responsibility of Business is to Increase Profits,” NewI York Times Magazine. (September 13, 1970): 122-126. Ibid., pp. 125-126. Keith Davis, “Corporate Philanthropy is Inevitable,” Cal$ornia Management Review, 19: 14-20. John H. Filer, “The Social Goals of a Corporation,” Corporations and Their Critics (New York: McGraw-Hi11 Book Company, 1981), p. 271. “Charitable Investments: Is This Growing Practice True Jeffrey L. Koroach, Philanthropy?” Industry Week, 223, 1 (October 1, 1984): 32. Ibid., p. 32. Richard I. Morris and Daniel A. Biederman, “How to Give Away Money Intelligently,” Harvard Business Review,, (November-December 1985): 156. Martin A. Paley, “The Uses of Corporate Philanthropy,” Cornell Executive, 9, 2 (Spring 1983): 42-44. World, 4 (July-August Herbert Schmertz, “Patronage That Pays,” Communications 1987): 60. Patricia Caesar, “Cause Related Marketing: The New Face of Corporate Philanthropy,” Non- Prqfft World Report, 5, 4 (July-August 1987): 26.
Corporate
12. 13. 14. IS. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28.
29
Philanthropy
American Association of Fund-Raising Council, Giving USA-The Annual Report of Philanthropy for the Year 1989, (1990) Chicago: Lipman-Hearne, Inc. 64-65. Claudia M. Christie, “Corporate Philanthropy,” New England Business, 4, 14 (September 6, 1982): 96. Morris, et. al., op. cit., p. 152. Caesar, op. cit., p. 16. Avery Hunt, “Strategic Philanthropy,” Across the Board, 23 (July-August 1986): 23. Philip Maher, “What Corporations Get by Giving,” Business Marketing, 69, 12 (December 1984): 80. Ibid., p. 80. Donn J. Tilson and Donald Vance, “Corporate Philanthropy Comes of Age,” Public Relations Review, 11, 2 (Summer 1985): 3 I. Philanthropy: A Strategic Approach Timothy Mescon and Donn J. Tilson, “Corporate to the Bottom Line,” California Management Review, 29, 2 (Winter 1987): 54. Ibid., p. 54. Ibid., p. 54. Schmertz, op. cit., pp. 60-61. Hunt, op. cit., p. 28. Ibid., pp. 27-28. Maher, op. cit., p. 87. Caesar, op. cit., p. 17. Ibid., p. 16.
REFERENCES American Association of Fund-Raising Council (1990). Giving U.S.A.-The Annual Report on Philanthropy for the Year 1989. Chicago: Lipman-Hearne, Inc. Caesar, P. (1987, July-August). “Cause Related Marketing: The New Face of Corporate Philanthropy,” Non- Profit World Report, 5 (4): 21-26. Christie, C.M. (1982, September). “Corporate Philanthropy,” New England Business, 4 (14): 96. Davis, K. “Corporate Philanthropy is Inevitable,” Caltfornia Management Review, XIX (I): 14-20. Filer, J.H. (1981). “The Social Goals of a Corporation,” pp. 271-276. Corporations and Their Critics. New York: McGraw-Hill Book Company. Friedman, M. (1970, September 13). “The Social Responsibility of Business is to Increase Profits,” New York Times Magazine, 33: 122-126. Fry, L.W., G.D. Kim, R.E. Meiners. “Corporate Contributors: Altruistic or for Profit?” Academy of Management Journal, 25: 95. Hunt, A. (July-August 1986). “Strategic Philanthropy,” Across the Board, 23: 23-30. Koroach, J.L. (October 1, 1984). “Charitable Investments: Is This Growing Practice True Philanthropy?” Industry Week, 223 (1): 32-33. Maher, P. (December 1984). “What Corporations Get by Giving.” Business Marketing, 69 (12): 80-89. Mescon, T.S. and D.J. Tilson. (Winter 1987). “Corporate Philanthropy: A Strategic Approach to the Bottom Line,” Calijornia Management Review, XXIV (2): 49-61. Morris, R.1. and D.A. Biederman. (November-December 1985). “How to Give Away Money Intelligently,” Harvard Business Reviews, Pp. 15l- 159.
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M.A. (Spring 1983). “The Uses of Corporate Philanthropy,” Cornell Executive, 9 (2): 42-44. Schmertz, H. (July-August 1987). “Patronage That Pays,” Communications World, 4: 59Paley,
61. Tilson, D.J. and D. Vance. (Summer
1985). “Corporate
Relations Review, I I (2): 26-33.
Philanthropy
Comes of Age,” Public
EDWARD J. STENDARDI, JR.* St. lohn Fisher College
Three events in the 1980’s have caused the legitimacy of corporate philanthropy to be reexamined. The first two events-the election of Ronald Reagan and the subsequent election of George Bush-have resulted in a call for increased corporate giving to replace government cuts in certain social programs. The third event, the Tax Reform Act of 1986, provided reduced tax incentives for corporate giving. The result has been a renewed debate over the appropriateness of corporate philanthropy. The debate over corporate philanthropy is not new; it has existed for decades. What is new is how American corporations are now dealing with philanthropic activity. They are no longer content to justify their giving on the basis that they will receive some general, unspecified benefit from a grateful society at some time in the future. Many firms view their corporate giving as a form of investment, and they require a concrete, measurable return from their philanthropic activity. This article examines the reasons for the shift from philanthropic giving to social investing. The debate over the legitimacy of corporate philanthropy is not new. It stems from the Smith Manufacturing Company Case. In this 1954 case, the Supreme Court established the “business judgment rule.“’ Prior to this case, firms were only allowed to make contributions that were in direct relation to their shareholders’best interest. After this case, corporate managers were free to make contributions that in their judgment would promote the corporation’s interest. As a result of the Smith Manufacturing Case and the establishment of the business judgment rule, the debate over whether philanthropy was legitimate corporate activity began. Milton Friedman made a strong case against corporate *Direct allcorrespondence to: Edward J. Stendardi, Jr., Department Rocheser, New York 14618. Telephone: (716) 385-8000. The Social Science Journal, Volume 29, Number 1, pages 21-30. Copyright @ 1992 by JAI Press Inc. All rights of reproduction in any form reserved. ISSN: 0362-3319.
of Management,
St. John Fisher College,
22
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SCIENCE JOURNAL
Vol. 29/No. l/l 992
philanthropy by maintaining that managers are the agents of the owners of the firm (the stockholders) and, as such, have a responsibility to conduct the business in accordance with the best interest of the shareholders, which is generally to increase profits.2 If the shareholders wish to support a charitable cause, they can do so as individuals. They don’t need the manager to make this decision for them. Friedman added that when firms engage in philanthropic activity, they are, in effect, spending someone else’s money for a “general societal interestYT3 If the contribution reduces returns to shareholders, the manager is spending the shareholders’ money. If the contribution causes prices to increase, the manager is spending the customers’ money. If the contribution results in wages that would be lower than otherwise, the employees’money is being spent. In a sense, the manager is wrongfully assuming a role that rightly belongs to an elected government, the redistribution of income. In contrast, Keith Davis argued for philanthropy as a legitimate corporate activity by maintaining that in order to be successful, firms must maintain good relations with all of their key stakeholder groups.4 Stockholders are one such group, but other stakeholder groups include customers, employees, government, the communities in which they do business, and society, in general. Davis further maintained that if the gap between business’ economic way of life and society’s needs increases sufficiently, this will create an incongruence, and society will act to reduce this incongruence by limiting business’ rights and actions. Henry Beers, past chairman of Aetna Life and Casualty, echoed this concern when he stated that “the survival of our economic system may well hinge on the extent to which business practices good citizenship.“j
THE EVOLUTION OF PHILANTHROPIC GIVING AS ENLIGHTENED SELF-INTEREST The principle of enlightened self-interest emerged as an attempt to bridge these two disparate views concerning the legitimacy of social responsibility in general and corporate philanthropy specifically. In its original form, socially responsible behavior like philanthropy was motivated by the belief that the corporation would receive a general benefit at some point in the future for being perceived as socially responsible by the various constituencies that it had to deal with. These benefits included the hope that as the corporation was perceived as a socially responsible corporate citizen, (and philanthropic activity was one way of creating that impression), employees would be more motivated to work for that firm, customers would be more inclined to buy the firm’s products, municipalities would be more hospitable to the enterprise located within their borders, and government at all levels would be less inclined to regulate. This belief recognizes the fact that philanthropy is a two-way street, that a “healthy corporation cannot exist in a sick community.“6 Charles E. Taylor, Director of Corporate Contributions and Community Affairs for Standard Oil of Ohio summed up this view when he stated succinctly that “to do good, you must do good.“7 Accordingly, corporations contributed to colleges and universities in the belief that these institutions would produce qualified graduates who could be employed at some point in the future. Donations were made to rebuild cities or to enhance
Corporate Philanthropy
23
their cultural climate in order to make it easier to attract employees or to maintain customer loyalty or favorable treatment by government. The key attribute of this early form of enlightened self-interest was the belief that the firm would benefit at some point in the future, but that these benefits were neither immediate, certain, nor quantifiable.
THE DEBATE OVER THE LEGITIMACY OF CORPORATE PHILANTHROPY IN THE 1980’S The principle of enlightened self-interest has not resolved the debate. In fact, the debate over the legitimacy of corporate philanthropy has accelerated in the 1980’s. Shareholders of some corporations have sued in an attempt to curtail corporate philanthropic activity. For example, shareholders of the Dayton-Hudson Company-one of the few corporations which donates 5% of its pre-tax incomehave filed shareholder resolutions to eliminate or reduce these contributions. Shareholder resolutions such as these have appeared on 195 proxy statements from 1979-1985.’ Three specific events have caused the issue of corporate philanthropy to resurface and intensify in the 1980’s. The first event was the election of Ronald Reagan in 1980 and his subsequent reelection in 1984. According to his conservative view of government, many of the activities which had been considered the responsibility of the federal government since the “great society administrations” of the 1960’s rightly belonged in the private sector. Philanthropy, in particular, was one such activity. A study conducted by the Urban Institute estimated that the non-profit sector would lose thirty-three billion dollars in federal support during the period 1982-1985.9 As government funding for education, the arts, and other social programs was reduced, increased giving from the private sector, private individuals, and corporations was expected to offset the decline in government support. The second major event was the passage of the Tax Reform Act of 1986 (TRA86) which reduced the maximum marginal tax rate for both individuals and corporations. The maximum rate for individuals was decreased from 50% to 33%, while the maximum corporate rate was reduced from 46% to 34%. TRA-86 also ended the provision which allowed individuals who did not itemize their deductions to deduct their charitable contributions. Both of these provisions of the new law provided less of an economic incentive for individuals and corporations to contribute to charitable organizations. The disincentive for individuals who did not itemize was obvious; they could no longer deduct their contribution, and their aftertax cost was, therefore, 100% of their contribution. The disincentive for corporations and individuals who did itemize was less obvious. Charitable giving by both of these groups is tax deductible within prescribed limits which are infrequently reached. Both the individual who itemizes and the corporation bear a higher after-tax cost for their philanthropic giving since the value associated with the deduction is less due to lower marginal tax rates. The third event was the election of George Bush in 1988. Due to his own conservative ideology, he is unlikely to try to reverse the Reagan-era trend toward a smaller role for the federal government in social programs. Also, even if he were
THE SOCIAL SCIENCEJOURNAL
24
Table
Giving Bill. $
Private
Philanthropy
1970-I
989
individual
Foundation
Corporate
Giving
Giving
Giving
TOtal
Year
1.
Vol.29/No. l/1992
Bequests
Bill.
% of
Bill.
76 of
Bill.
% of
Bill.
% of
$
Total
$
Total
$
Total
$
Total
1970
21.0
16.2
77.1
1.9
9.0
0.8
3.8
2.1
10.0
1971
2 3.4
17.6
75.2
2.0
8.5
0.9
4.8
3.0
12.8
1972
24.5
19.4
79.2
2.0
8.2
1.0
4.1
2.1
8.6
1973
25.7
20.5
79.8
2.0
7.8
1.2
4.7
2.0
7.8
1974
27.0
21.6
80.0
2.1
7.8
1.2
4.4
2.1
7.8
1975
L8.h
23.5
82.2
1.7
5.9
1.2
4.2
2.2
7.7
1976
32.1
26.3
81.9
1.9
5.9
1.5
4.7
2.4
7.5
1977
36.3
29.6
81.5
2.0
i.i
1.8
5.0
3.0
8.3
1978
39.0
32.1
82.3
2.2
5.6
2.1
5.4
2.6
6.7
1979
43.7
16.6
83.8
2.4
5.5
2.3
5.3
2.2
5.0
1980
48.7
40.7
83.6
2.8
5.7
2.4
4.9
2.9
6.0
1981
55.5
46.4
83.6
3.1
5.b
2.5
4.5
3.5
6.3
1982
60.4
48.5
80.3
3.2
5.3
2.9
4.8
5.5
9.1
1983
65.0
53.5
82.3
3.6
5.5
3.3
5.1
4.5
6.9
1984
73.3
60.7
82.8
4.0
5.5
3.8
5.2
4.9
6.7
198.5
79.8
65.7
82.3
4.5
i.6
4.4
5,s
5.2
6.5
1986
87.2
71.7
82.2
5.2
6.0
4.5
5.2
5.8
6.7
1987
93.7
76.8
82.0
6.4
6.8
4.5
4.8
6.0
6.4
1988
104.4
86.7
83.0
6.1
5.8
4.8
4.6
6.8
6.5
1989
114.7
96.4
84.0
6.7
5.8
5.0
4.4
6.6
5.8
Sourcr~ C~wng UsA 1990-The AnnualReportcm Philanthropy
inclined to try to increase the role of the federal government in social areas, he would be constrained by the continuing problem of the federal budget deficit and his own campaign promises on new taxes. Consequently, there will be an increased reliance on the private sector, and not the federal government, to fund new and, in some cases, ongoing social initiatives. The result of these three events has been a call for an increased level of philanthropy in general including increased corporate philanthropy. The major contributions to philanthropic activity are individuals, corporations, and foundations. A study conducted by the American Association of Fund-Raising Council estimates that individuals contribute 83.0% corporations 4.6%, foundations 5%,, and bequests 6.5% of total philanthropic giving (see Table 1). Willard Butcher, Chairman of Chase Manhattan Bank, has referred to the level of corporate giving as “frankly appalling.” On the other hand, shareholders are filing lawsuits to block the philanthropic activities of the firms in which they invest. The call for increased corporate philanthropic giving has caused the debate over the legitimacy of corporate philanthropic activity to resurface and intensify.
Corporate Philanthropy
25
THE SHIFT FROM CORPORATE PHILANTHROPY TO SOCIAL INVESTING It is ironic to note that at exactly the time corporate America is being asked to increase the level of corporate philanthropy, they are having difficulty maintaining their existing level of support. There are several reasons for this increased difficulty. The first is the fact that American corporations presently face a much more competitive global environment than they did in 1954 when the Smith Manufacturing Case gave them more discretion in supporting philanthropic activity. Today American corporations face much more intense global competition. The results of this increased competition has been decreased market share and decreased profit margins, both of which make the funding of corporate philanthropy more difficult for American corporations. Today, these same firms are finding their profit margins squeezed due to increasing costs of production coupled with the inability to raise prices due to global competitiveness. This profit squeeze makes it more difficult to fund corporate philanthropic activities. A second reason was mentioned earlier in the article. As marginal corporate tax rates were decreased in the 1980’s, this resulted in an increased after-tax cost of contributing to corporate philanthropy. The third reason for the increased difficulty of funding philanthropic activity is the fact that Wall Street has taken an increasingly short term view since the 1980’s. Philanthropic contributions are an expense (albeit a deductible one) which reduces earnings in the period in which the contribution was made. Wall Street has demonstrated a willingness to punish firms that deliver disappointing earnings, and corporate executives are reluctant during times of reduced profit margins to take actions which will further decrease earnings without a tangible, quantifiable economic benefit. Consequently, firms are under constant pressure to produce the short-term earnings necessary to satisfy the managers of large investment portfolios (mutual funds, pension funds, and insurance companies). lo The fourth reason is related to the third one. The era of hostile takeovers which began in the 1970’s was accelerated by the financing opportunities provided by the junk bond market in the 1980’s. In an environment where hostile takeovers of “undervalued firms” (firms who trade at a price below their break-up value) are more likely, corporate executives are increasingly reluctant to take steps that will decrease earnings (even in the short-term) and perhaps result in a decrease in share price because this would increase the chance of attracting the attention of a corporate raider. Consequently, the primary characteristic of modern corporate philanthropy is that it is intended to produce a more specifi:c, more measurable benefit in a relatively short time period. Contemporary CEO’s are compelled to use all of the firm’s assets at their command to maximize their firm’s earnings and Boards of Directors are demanding a more market driven, bottom line approach to philanthropy.” Philanthropy is viewed as another method to achieve business objectives, and these social investments must have a discernible payback for the firm. The president of the John Deere Foundation maintains that there is more of an expectation of a quidpro quo in corporate giving programs, when a firm gives, it expects to get
26
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1il992
something in return.” In fact, Charles T. Hogan, manager of corporate contributions for United Technologies Corporation, referred to the term “corporate philanthropy” as an oxymoron insofar as, by definition, the corporation is not motivated as much by need or altruism as it is by serving corporate interests and objectives.‘3 While the shift from general philanthropic giving to social investing has become widespread in the 1980’s, the movement does have historical roots. In the 1870’s, American railroad companies were large contributors to the early YMCAs in large part because they needed dormitories for their workers who were constructing the railroads.14 Also, Joseph Pulitzer used a form of social investing in trying to raise money to construct the pedestal for the Statue of Liberty by offering to print the name of each contributor in his newspaper. While this tactic was successful at raising money for the pedestal, it also increased circulation for his paper.” Perhaps the firm that has most fully developed and refined the process of social investing is American Express. They began what came to be known as “cause-related marketing” because they realized that the demographic profile of the customers that they wanted to reach for their cards was the same as people who were interested in the arts. This realization motivated them to sponsor the San Francisco Arts Festival in 198 1. The company tied its contribution to card use; it would contribute two cents every time an American Express card was used. The company exceeded its marketing goal and contributed $100,000 to the Arts Festival. American Express again gambled that it could do well by doing good in 1983 when the company decided to tie its contribution to the Statue of Liberty restoration fund to card use (one cent per charge) and new applications (one dollar per application). The program was a phenomenal success; card use increased 28% (they had estimated 19%), applications increased 45%, and 1.7 million dollars were donated to the restoration project.” This marriage of corporate philanthropy and corporate marketing is clearly demonstrated by the process that American Express utilizes to select the projects that it will sponsor. Fred Williamson, Jr., Vice President at American Express, states that the purpose of the process is “to build our business while helping a worthy cause in the communities in which we do business.“‘7 This process clearly demonstrates the primary nature of the business motive. The company first identifies the local area in which it wants to increase business. They then look for a worthy cause that they wish to support. Finally, they develop an appropriate advertising and promotional campaign. American Express has utilized this formula successfully dozens of times since the 1980’s. And, while the promotions have generated welcomed funds for the local charities, American Express executives freely admit that their main objective is to increase sales and improve bottom-line performance.‘” Once American Express successfully developed this shift from philanthropic giving to social investing, many firms began to utilize this concept in their giving programs. Although the details of these programs differ, the common denominator is the tangible benefit that the firm expects to receive as a result of its philanthropy. Examples of this type of activity include:
Corporate Philanthropy
27
Chesebrough-Ponds bases the amount of money that it donates to charitable causes to the number of coupons redeemed during a special promotion period. While the objective of these programs is increased sales, the non-profits receive the funds that they need.” Fleishman’s Margarine sponsored the U.S. Cross-Country Ski Team. In return for this sponsorship, team members wore blazers with the Fleishman’s logo during television interviews. Fleishman’s benefited economically from this sponsorship by being able to focus on the healthy aspects of their products.20 Carter Hawley Hale Stores, Inc., which operates Neiman Marcus, changed its contribution strategy from supporting a variety of charities to the funding of the arts to better reach the upscale consumer-their prime customer market.*l SCM Corporation, a diversified conglomerate, openly acknowledges that it sponsors museum exhibits for the publicity value. “SCM executives estimate that they would have to spend 51 million dollars a year for five years on advertising to reach SCM customers compared to the $200,000 a year the company now spends on museum sponsorship.“** “Champion International is in the paper business and, for that reason, much of the art it supports-photography, for instance, or new ways of using paper itself as art-is focused on paper, patronage that not so incidentally markets the product.“23 Hallmark, the greeting card company, sponsors fine art and design programs in order to promote the creative art talent that the company needs.24 Burger King in 1983 was contributing about $200,000 a year to the United Way, arts organizations, and other worthy causes. Burger King, at the time, was also experiencing major turnover problems; there were 2.5 changes per year in each job. In an attempt to deal with this problem, the company revised their giving programs and began investing $4 million a year in educational programs. Much of the funds went to support scholarships. These scholarships were tied to length of service; workers accrued $250 in scholarship credit for each three months of continued service, up to a maximum of $1,000 per year. This program was piloted in Atlanta and New York in 1984, and was implemented nationally the following year. The program was very successful; in its first year, it reduced the turnover rate by more than 50%.25 .
Both IBM and Apple donate computer equipment to colleges and universities in order to establish a user base. John Akers, President and CEO of IBM stated, “IBM is not a philanthropy, we are a business.... Only individuals can be philanthropic and give money because it feels good. Corporations must justify giving away money to stockholders, employees and customers.“26
28
THE
SOCIAL
SCIENCE JOURNAL
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CONCLUSION This recent trend toward social investing has been criticized on many grounds. First, some felt that the purity and nobility of the non-profit sector could be tarnished by commercialism. Second, it was feared that these investments would decrease traditional philanthropic giving. It should be noted that the budget for the American Express cause-related marketing efforts comes from their marketing budget and not from funds allocated for traditional giving. Finally, there was concern that social investing would undermine the financial basis of philanthropy, that the public would perceive a charity as “being taken care of” by a corporate sponsor and as a result individual giving, which accounts for over 75% of all giving, would dry up or that the Boards of the non-profits would bend to the wishes of their corporate sponsors.” While this phenomenon is too new to fully ascertain its overall impact on philanthropic giving, its proponents maintain that it represents a unique joining of business and charity for the greater benefit of each. They depict this relationship as a true “win/ win”situation. Business enhances its public image by being associated with a worthy cause and increases their sales in the process. The non-profit organizations receive the benefit of the donations along with increased public awareness made possible by the marketing expertise of the business.2R It is instructive to note the irony in this situation; in effect, philanthropy has come full circle. In the first half of the century, prior to the Smith Manufacturing Case, corporations were constrained by government from making philanthropic donations that were not in the “direct relation to their economic interest,” and now in the closing years of this century a “direct relation to economic interest” rule has been reimposed on them by the competitive global environment in which they exist.
NOTES 1.
2. 3. 4. 5. 6. 7. 8. 9. IO. 1I.
Louis W. Fry, Gerald D. Kim and Roger E. Meiners, “Corporate Contributors: Altruistic or for Profit?” Academy of Management Journal, 25: 95. Milton Friedman, “The Social Responsibility of Business is to Increase Profits,” NewI York Times Magazine. (September 13, 1970): 122-126. Ibid., pp. 125-126. Keith Davis, “Corporate Philanthropy is Inevitable,” Cal$ornia Management Review, 19: 14-20. John H. Filer, “The Social Goals of a Corporation,” Corporations and Their Critics (New York: McGraw-Hi11 Book Company, 1981), p. 271. “Charitable Investments: Is This Growing Practice True Jeffrey L. Koroach, Philanthropy?” Industry Week, 223, 1 (October 1, 1984): 32. Ibid., p. 32. Richard I. Morris and Daniel A. Biederman, “How to Give Away Money Intelligently,” Harvard Business Review,, (November-December 1985): 156. Martin A. Paley, “The Uses of Corporate Philanthropy,” Cornell Executive, 9, 2 (Spring 1983): 42-44. World, 4 (July-August Herbert Schmertz, “Patronage That Pays,” Communications 1987): 60. Patricia Caesar, “Cause Related Marketing: The New Face of Corporate Philanthropy,” Non- Prqfft World Report, 5, 4 (July-August 1987): 26.
Corporate
12. 13. 14. IS. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28.
29
Philanthropy
American Association of Fund-Raising Council, Giving USA-The Annual Report of Philanthropy for the Year 1989, (1990) Chicago: Lipman-Hearne, Inc. 64-65. Claudia M. Christie, “Corporate Philanthropy,” New England Business, 4, 14 (September 6, 1982): 96. Morris, et. al., op. cit., p. 152. Caesar, op. cit., p. 16. Avery Hunt, “Strategic Philanthropy,” Across the Board, 23 (July-August 1986): 23. Philip Maher, “What Corporations Get by Giving,” Business Marketing, 69, 12 (December 1984): 80. Ibid., p. 80. Donn J. Tilson and Donald Vance, “Corporate Philanthropy Comes of Age,” Public Relations Review, 11, 2 (Summer 1985): 3 I. Philanthropy: A Strategic Approach Timothy Mescon and Donn J. Tilson, “Corporate to the Bottom Line,” California Management Review, 29, 2 (Winter 1987): 54. Ibid., p. 54. Ibid., p. 54. Schmertz, op. cit., pp. 60-61. Hunt, op. cit., p. 28. Ibid., pp. 27-28. Maher, op. cit., p. 87. Caesar, op. cit., p. 17. Ibid., p. 16.
REFERENCES American Association of Fund-Raising Council (1990). Giving U.S.A.-The Annual Report on Philanthropy for the Year 1989. Chicago: Lipman-Hearne, Inc. Caesar, P. (1987, July-August). “Cause Related Marketing: The New Face of Corporate Philanthropy,” Non- Profit World Report, 5 (4): 21-26. Christie, C.M. (1982, September). “Corporate Philanthropy,” New England Business, 4 (14): 96. Davis, K. “Corporate Philanthropy is Inevitable,” Caltfornia Management Review, XIX (I): 14-20. Filer, J.H. (1981). “The Social Goals of a Corporation,” pp. 271-276. Corporations and Their Critics. New York: McGraw-Hill Book Company. Friedman, M. (1970, September 13). “The Social Responsibility of Business is to Increase Profits,” New York Times Magazine, 33: 122-126. Fry, L.W., G.D. Kim, R.E. Meiners. “Corporate Contributors: Altruistic or for Profit?” Academy of Management Journal, 25: 95. Hunt, A. (July-August 1986). “Strategic Philanthropy,” Across the Board, 23: 23-30. Koroach, J.L. (October 1, 1984). “Charitable Investments: Is This Growing Practice True Philanthropy?” Industry Week, 223 (1): 32-33. Maher, P. (December 1984). “What Corporations Get by Giving.” Business Marketing, 69 (12): 80-89. Mescon, T.S. and D.J. Tilson. (Winter 1987). “Corporate Philanthropy: A Strategic Approach to the Bottom Line,” Calijornia Management Review, XXIV (2): 49-61. Morris, R.1. and D.A. Biederman. (November-December 1985). “How to Give Away Money Intelligently,” Harvard Business Reviews, Pp. 15l- 159.
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M.A. (Spring 1983). “The Uses of Corporate Philanthropy,” Cornell Executive, 9 (2): 42-44. Schmertz, H. (July-August 1987). “Patronage That Pays,” Communications World, 4: 59Paley,
61. Tilson, D.J. and D. Vance. (Summer
1985). “Corporate
Relations Review, I I (2): 26-33.
Philanthropy
Comes of Age,” Public