When companies give Featured

7:00pm EDT February 24, 2008

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 Sradhakr@utdallas.edu or (972) 883-2111 x443.