When public companies donate to
charities, one irksome — but legitimate — question that often surfaces is this: Should CEOs/managers be
allowed to give the investors’ profits away
to charity? Or, should the profits be distributed back to investors? Should there be
oversight by the board of directors?
“This question has become a very hot
topic,” noted Dr. Suresh Radhakrishnan,
The University of Texas at Dallas’ director
of research for the Institute for Excellence
in Corporate Governance and a professor
of accounting and information management.
Smart Business asked Radhakrishnan
about his research on the benefits of corporate giving as part of corporate social
responsibility.
Should a company’s social responsibility be
part of corporate governance?
Public companies must have in place corporate governance policies that encompass corporate social responsibility.
However, in most companies, the board
may not be consulted when it comes to
charitable giving, but it should be part of
that decision-making — not only because
the money belongs to the investors but
because the board can provide valuable
input about the charities that the company
wants to be, or should be, allied with.
What ways do companies derive benefits
from being socially responsible?
While companies may not have viewed
charitable giving for their own monetary
benefits, based on my recent research conducted with scholars at New York
University, corporate giving has been
linked with future sales growth of companies. This is one of the first studies that
links corporate giving with future sales
growth and not vice versa. This is true
especially for those companies that deal
directly with consumers — such as banking and consumer goods.
We find that for every dollar a company
gives to a charity, future profits go up by
roughly $2, which is a 200 percent return
on investment. This seems too good to be true. However, one should note that the
cost is fairly small; thus even a not-so-great
increase in sales can lead to a substantial
return. On average, charitable giving
amounts to 0.1 percent of sales revenue.
Companies spend 50 times more than that
on advertising. Thus, for the rate of return
on charitable giving to be so large, it needs
to return only one-fiftieth as much. Overall,
charity can only have a minor role in the
quest for profits. What our research shows
is that the role of charitable giving may be
underappreciated.
Going back to the concern that using
investors’ money for a company’s preferred
charities could be a wasteful expenditure,
does this study prove that it is not?
Yes, it shows that corporate giving is not
burning investors’ money and that there is
an impact on future sales. But exactly how
it happens has not yet been revealed. What
we can say is that charitable giving appears
to work similar to PR and advertising.
Publicizing a company’s good deeds is beneficial in boosting the company’s reputation and brand image.
How can this be done?
Basically, a company needs to consider
what value it shares with the customers. It
needs to think of its customer base and the
implication that giving will have in demonstrating that the company stands for
moral/ethical/social values that are similar
to the customers’ values — such that the
customers become long-term customers.
Companies appear to be doing this, with
McGraw Hill supporting literacy programs,
Avon supporting the breast cancer crusade
and Coca-Cola supporting the Olympics. It
suggests that companies associate themselves with programs that demonstrate
shared values with customers.
There needs to be a shift in the investors’,
board of directors’ and the managers’
thinking: Corporate giving needs to be
treated as a long-term strategic business
decision. This can happen when corporate
governance mechanisms are included in
the decision-making and companies think
of how giving to specific charities can
demonstrate commitment to values that
the company shares with its customers.
Has your study found other benefits to companies becoming socially responsible
through corporate giving?
This is the first layer that we have peeled
back, but there are other possible links.
For example, is giving to charities overseas
as beneficial as giving locally? Is there a
link between employee retention and charitable giving?
The conclusions from our research suggest that companies are not wasting the
investors’ money. An implication is that
companies need to think strategically
about charitable giving and may be able to
enhance their returns by involving corporate governance in the process.
DR. SURESH RADHAKRISHNAN is a professor of accounting and information management at The University of Texas at Dallas and
the director of research for the Institute for Excellence in Corporate Governance. Reach him at [email protected] or (972) 883-2111
x443.