Corporate Giving Adds to Shareholder Wealth

Google’s recent announcement that it has earmarked $US265 million of the money raised in its public stock offering for charity resurrects a long-standing debate over whether or not companies should be involved in philanthropic efforts.

And although detractors contend that money spent on charity should go back into shareholders’ pockets, a new study in the “Academy of Management Review” by a Brigham Young University business professor argues that a track record of corporate giving protects a company much like an insurance policy, adding to overall value and shielding shareholders’ investment in the event of misfortune.

Paul Godfrey, associate professor of strategy in BYU’s Marriott School of Management. Says bad things happen to every company, even the best companies.
And he says just like a business with fire insurance is more valuable than one without it, businesses that have earned a reputation for being generous through acts of philanthropy are given the benefit of the doubt when negative events occur.

Godfrey says when accidents happen, lawsuits are filed or harmful news coverage creeps out, shareholders, customers and industry regulators often question if managers are looking out for anyone but themselves . If a company has demonstrated its character through philanthropic giving and community outreach efforts, such criticism may be tempered.

He says the stock price will rebound more quickly, management won’t be viewed as harshly, fines will be less, boycotts may be shorter. And to a shareholder, that’s valuable.

He says intangible relationship-based assets, which can be worth millions to a company and its shareholders, are often the very assets that receive the most benefit from philanthropic efforts in the event of misfortune.

Godfrey says that part of the reason that people have had such a hard time seeing the justification for corporate giving is that they don’t see any extra revenue being generated from the expense.

He argues in his research that corporates should look at it more like reputation insurance.

Jeffrey S. Harrison, the W. David Robbins chair in strategic management at the University of Richmond, said Godfrey’s article provides compelling economic justification for corporate giving.

Harrison says that for many years scholars have debated whether there is any sound economic justification for corporate philanthropy. Godfrey’s well-grounded explanation that ‘doing good’ provides insurance-like protection for companies because of the goodwill it creates is very significant.

Along with the economic incentive his model gives to managers to allocate a firm’s resources toward philanthropy, Godfrey suggests that companies can still think of ways giving can be directed to further business interests.

For example, he says it would make sense for a telecommunications company with a broad range of customers, with a donation strategy to promote education or literacy, interests that are somewhat related to communication and that would appeal to the company’s diverse customer base.

That way, he says consumers see that the companies they frequent are concerned with the same issues that are important to them, adding that consistency in giving is important to building the reputation that help companies weather storms.