The Harvard Corporate Governance Forum has an interesting and detailed post on corporate philanthropy that examines the various incentives that operate in this space. The post first seeks to identify the concept of corporate philanthropy:
This report focuses on corporate philanthropy, which includes direct cash giving, foundation grants, stock donations, employee time, product donations, and other gifts in kind. Corporate philanthropy is one component of corporate social responsibility, albeit an important, highly visible component. The issues surrounding corporate philanthropy apply to a wide cross-section of companies in every industry, from small, family firms to large, multinational ones. …
The post then goes on to discuss the various incentives that operate with reference to managers as well as the company that may determine their interest in corporate philanthropy. Based on the study, the authors conclude that there must always be a strong business case for corporate philanthropy:
Managers are most likely to make self-serving business decisions in companies with excess cash and little monitoring. Corporate philanthropy is one area in which managers often have discretion to use a company’s slack resources independent of business objectives. In particular, because charitable causes benefit from corporate giving, many stakeholders perceive it as a benevolent and unconditionally laudable activity. This perception results in a “halo effect” over corporate philanthropy. The “halo effect” may cause directors to fear being labeled misanthropes if they question giving decisions and may result in less oversight of charitable contributions than other business activities.
An executive can reap personal benefit from corporate philanthropy in several ways. Even when a gift is fully funded with company money, the executive often receives some credit. These awards, honors, and accolades provide the executive with a psychic benefit and elevate his status in elite social circles. In addition, an executive can use corporate contributions to advance his personal preferences, for example, by supporting an organization with his ideological agenda or the pet charity of a family member. Finally, an executive can further his career by using charitable contributions to gain favor with board members. Although the board should be supervising the executive, they may be swayed by corporate gifts in their name to their favorite cause.
The empirical evidence reveals that executives make giving decisions with a mix of intentions. In actuality, some corporate philanthropy is opportunistic behavior and some is good business strategy. The different motives are not necessarily mutually exclusive. For example, a contribution can help a member of top management attain higher social status while simultaneously enhancing the firm’s reputation. Nevertheless, an executive imposes costs on shareholders when he uses the corporate giving program purely for self-interest. Likewise, it is not enough for corporate philanthropy to simply provide a “warm glow” or “good feeling.” Some return is essential for corporate giving to be able to continue in the long run. Thus, making a sound business case is extremely important.
After considering various other governance issues including the role of institutional investors, independent directors and the extent of disclosures, the post concludes: “Executives can justify charitable contributions by applying the same prudence to giving decisions that they do to other business activities.” It then provides various recommendations for making corporate philanthropy more effective.
Although corporate philanthropy is not synonymous with corporate social responsibility (CSR), the discussion regarding incentives and business strategy must have an important role to play in shaping the CSR regime in countries such as India. This will particularly assist in addressing the debate as to whether CSR should be mandatory or voluntary, on which there continues to be some amount of ambivalence and it is not clear how the company law reform will finally take shape on the issue.