Philanthropy: Why do Companies Give?

Philanthropy: Why do Companies Give?

With Arthur Gautier

While companies aren’t required to give, an ever-increasing number of them do. Even the global financial crisis failed to put a dent in the remarkable momentum currently enjoyed by corporate philanthropy. But why do companies give? Does corporate philanthropy derive from a sincere desire to contribute to the common good and invest in the community, or can the phenomenon be better understood from a marketing perspective?

For more than 30 years, researchers have been asking themselves this very question. Arthur Gautier and Anne-Claire Pache, Professor of Public and Private Policy and head of the ESSEC Chair in Philanthropy, have looked back through the years and taken stock of research in the field. Their paper, “Research in Corporate Philanthropy: A Review and Assessment”, published in The Journal of Business Ethics, looks at the findings of 162 academic papers to distill the theories of so many experts.

Do Companies Really Care or Is it Just Marketing? 

At first sight, corporate philanthropy seems like an oxymoron: giving money away very clearly contradicts the commercial, profit-making purpose of a company. While some scholars argue that a person can be altruistic while companies cannot, still others recognize that there are at least some elements of selflessness in corporate philanthropy.

Does non-reciprocity therefore help distinguish between corporate philanthropy and sponsorship? Not surprisingly, non-reciprocity is relative. By and large, researchers tend to agree that corporate philanthropy almost always serves the company’s interests, albeit indirectly. A firm that invests in its community stands to benefit from the investment: increased social cohesion, an educated workforce and improved infrastructure all indirectly help beef up the bottom line.

Many researchers agree that while firms invest in the common good, they generally expect returns on their good deeds. That may seem fair enough, but a darker side of this coin has been gaining momentum over the past decade, in both practice and in theory. Philanthropy is used by some firms as a marketing tool, used for everything from increasing CEO popularity to manipulating local public opinion.

How Much Depends on the Goodwill of the Few?

Indeed, retail and consumer oriented firms tend to spend more on philanthropic endeavors since they tend to have the biggest impact on business-to-consumer industries, where the demand for products and services is essentially driven by individuals’ aspiration. That said, many studies have also hypothesized that a lot hinges on the firm’s ability to give, in other words, on their net assets.

But beyond economic reasons, pro-social behavior theorists argue that a lot a lot also depends on the goodwill of individual actors within the company: more so than the companies themselves,  managers can be impelled by moral norms, benevolence and integrity values. Interestingly, some theorists argue that boards including women and minorities are more likely to give because these groups are seen as less profit-driven and more empathetic.

However, contrary to the idea that philanthropy depends on the goodwill of managers, agency theorists argue that giving can more ominously relate to ‘managerial shirking’: disenfranchised managers look to use resources for preferred expenditures - including corporate philanthropy.

The Happy Coincidence: Do Philanthropic Firms Enjoy Better Financial Performance?

With 31% of the reviewed literature, the outcomes of corporate philanthropy are an important area of inquiry. Whether one frames corporate philanthropy as a commitment to the common good, a community investment, or as a marketing ploy, many researchers ultimately expect that contributions will benefit the company. Indeed, today there is a widespread belief that firms with a sound corporate philanthropy program perform better than those companies that don’t give. That said, the indirect impact of philanthropy doesn’t necessarily translate into sales or increased shareholder value.

Nevertheless, a critical shift began sometime in the 1980s towards what many have called ‘Strategic Philanthropy’. This is when companies dedicate resources to philanthropy not only to impact the receiving communities, but also to impact the firm’s bottom line. This notion hasemerged as “a common meeting ground for the opponents and proponents of corporate philanthropy.”

Over the past 30 years, academic research has drawn a rich and complex picture of firms as philanthropic actors. That said, A. Gautier and Prof. A.-C. Pache have identified through their investigation some surprising research gaps. Strikingly, they found little debate regarding the definition of the subject itself: what is it that truly sets philanthropy apart for other activities of the firm? In addition, some causal links remain unclear, including the link between corporate philanthropy and firm profitability. Beyond this, little effort has been made to document the outcomes of corporate philanthropy on beneficiaries. The hopes of both authors are that this review spur future scholarly interest and provide a roadmap for future researchers.

From the paper:

Research in Corporate Philanthropy: A Review and Assessment”, The Journal of Business Ethics,  Nov 2013, p. 1‑27.

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