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Making the Business Case for Corporate Philanthropy
added: 2011-08-06

Given the evolving expectations for corporate philanthropy, corporate giving programs must go beyond simply “doing good.” In order to ensure the effectiveness of corporate philanthropy programs, executives should apply the same prudence to giving decisions that they do to other business activities, according to the Director Notes report released by The Conference Board, the global business research and membership organization.

The report - entitled Making the Business Case for Corporate Philanthropy - provides practical recommendations to companies and boards for ensuring the legitimacy of their corporate giving programs. It also discusses the role of institutional investors and questions surrounding disclosure, and highlights examples of corporate giving successes and failures.

“The evidence shows that, done the right way, corporate contributions can indeed be good for both the company performance and society,” says Baruch Lev, director of the Vincent C. Ross Institute of Accounting Research and the Philip Bardes Professor of Accounting and Finance at the NYU Stern School of Business, and co-author of the report for The Conference Board with Christine Petrovits of George Washington University and Suresh Radhakrishnan of the University of Texas at Dallas School of Management.

Notes Petrovits, “With the decline in government funding of the nonprofit sector, companies face increasing expectations to step up their support. Corporate philanthropy programs can improve social welfare, but some financial return from these programs is essential for corporate giving to continue in the long run. Officers and directors should not treat charitable giving as a peripheral activity or an after-the-fact distribution of profits.”

“A coherent corporate contribution program is a formidable way for a corporation to enhance its business strategy and reward loyal stakeholders,” adds Matteo Tonello, research director of corporate leadership at The Conference Board. “In some cases, the link between corporate philanthropy and shareholder value is undisputed. In others, however, charitable giving mostly furthers the goals or aspirations of those managers who get to decide on its recipients. For this reason, it is essential for the corporate board to scrutinize the motives of charitable contributions, demand a strategic rationale, and establish adequate transparency safeguards.”

Despite the fact that almost all companies contribute some money to charity, corporate philanthropy remains a controversial component of corporate social responsibility. Proponents of corporate giving programs believe that companies have a moral obligation to assist the communities in which they do business. However, critics contend that the programs consume company resources and often further the goals of management, rather than shareholders. Since contributions tend to vary over time, programs may also be criticized as a waste of shareholder money. Moreover, shareholders may ascribe selfish intent to corporate giving decisions by officers and directors. Companies must demonstrate that their corporate giving programs improve shareholder value and social welfare.

In order to increase the effectiveness of corporate giving programs and minimize the existence or appearance of opportunistic behavior, the report recommends that executives:

- Align corporate giving with business activities. A well-designed program clearly articulates congruence between the company’s philanthropic activities and its other business activities.

- Clarify the role of officers and directors. Effective oversight includes ensuring that giving professionals have the necessary resources to implement the program and to establish internal controls, including written policies, over those resources.

- Establish standards of independence for board members. Standards should take stock exchange rules on the effect of corporate giving on director independence into account, including consideration of how independence rules might affect oversight of a corporate–sponsored charitable foundation.

- Measure financial and social performance. Procedures to systemically measure and evaluate progress toward economic and social goals can help determine whether to continue a giving activity and improve overall program effectiveness.

Source: The Conference Board

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