Why do companies give?

In the immediate aftermath of the Asian tsunami, corporate giving reached huge figures. But was this a one-off or was it the start of a new trend in corporate giving? Richard Willsher considers the question

On 19 January 2005, the New York based Committee to Encourage Corporate Philanthropy quoted a number of pieces of research that put the scale of corporate giving in aid of the Asian tsunami victims to over $300m. It predicted that this would eventually reach $500m. It went to on illustrate this with reference to a variety of American multi-nationals including Johnson & Johnson, Pfizer, General Electric, Chevron and Time Warner, who had all made donations running into several millions of US dollars.

The corporate response to the disaster was as unique as the catastrophe itself. The view of charitable organisations seems to be that this was a fitting response to an exceptional set of circumstances, which will be unlikely to start a new wave of corporate beneficence but it does serve to illustrate how corporates give.

Big pharma - deep pockets

For example, large pharmaceutical companies were among the biggest donors to the tsunami relief effort but cash accounted for a relatively small proportion on their total contribution. Pfizer announced on 2 February that it had provided $11m in cash but $45m in medicines and healthcare products. Novartis, AstraZeneca and GlaxoSmithKline all made large donations with an emphasis on product donations.

The scale of corporate giving and community support across all causes is now strongly characterised by the recognition that cash may not be the best way of doing things. Microsoft provides a good example. Last year it says it contributed '$40m in cash but $224m in software to 5,000 non-profit organisations.' Kraft Foods is another case in point. It says it ''...provided more than $34m in food and financial support to hundreds of non-profit organisations around the world...''

The trend to a variety of forms of giving is confirmed in other research. The UK's Charities Aid Foundation annual survey over the last couple of years has shown that cash donations are falling among the top 500 corporate donors. Business In the Community, the corporate responsibility organisation, carried out a 2004 survey among 152 companies which found that cash donations had risen by 200% but that gifts in kind had risen by 460% and management time by 230%.

Instead, businesses like GlaxoSmithKline are more than making up for the difference with other forms of donation. In 2004, GSK donated a total £328m - equivalent to 5.4% of its group pre-tax profit. Of this product, donation accounted for £260m, cash for £48m, in kind donations for £2m and a figure £18m was given to manage and deliver community programmes in more than 100 countries.

Why give?

But why is it that businesses give charitably at all, in whatever form? They are after all businesses where, you would think, the corporate goal would be to make as much money as possible for the business, the management and its shareholders.

One answer was provided by Sandy Weill, chairman of global banking and financial services giant Citigroup, and also chairman of the Committee to Encourage Corporate Philanthropy, speaking in late February. 'With the problems [companies] have suffered with corporate governance, it has become more important that they be seen as human and institutions that really care.'

It is clearly important to companies to be seen to be doing good. In the foreword to a December 2003 report, The Business Case for Corporate Responsibility, from consultants Arthur D Little, David Varney, chairman of Business in the Community, wrote: 'Corporate scandals, stock market downturn, uncertain economy, threat of terrorism - all have diminished trust in the corporate sector and its leaders. Companies have to address this, individually by demonstrating their positive impact on society and collectively by developing comparative meaningful measures against which to report their progress. Corporate responsibility is not a fad, but an imperative. Yet, even as it becomes more mainstream, stakeholders are becoming more critical, and the standards for meaningful social interaction are rising.'

The report goes on to say that '58% of the general public across Europe feel that industry and commerce do not currently pay enough attention to their social and environmental responsibilities'. Which, in turn, is a risk to their reputations as organisations.

With the rapid dissemination and availability of information, reputational risk is a major issue. Corporations can be leaders in the field one minute and out of business the next. Perhaps the best illustration of this is Enron and its erstwhile accountants Arthur Andersen. To foster a socially responsible public image through corporate giving and involvement in the community is, to some extent, an insurance policy against reputational risk.

It is also a useful staff recruitment and retention tool. A spokesperson for Business in the Community notes that people are more likely to want to work for a company with a strong public image of doing good in the community. They may forge stronger bonds to their employers if, for example, they are working on community projects in tandem. In a tight employment market where skilled, loyal staff are at a premium, a business has much to gain.

This applies to high fliers in the organisation. A survey among 800 MBAs from 11 leading business schools found that 97% said they were 'willing to forgo 14% on average of their expected income to work for an organisation with a better reputation for corporate social responsibility and ethics'.

Cheap at the price... and tax efficient

If there is a cost to corporate giving then it is worth considering what that cost actually is. For example, how much does the contribution of medicines by a pharmaceutical company actually cost it? Once into its production and distribution phase, the unit cost of medicines becomes negligible if you discount the cost of research and development. Likewise for a software company, where the cost of software becomes a very small proportion of the retail price.

The cost of staff or management time again can be low. After all, the business is paying their salaries anyway, 365 days a year. A day or two spent doing good is unlikely to have much effect on the well-being of a large corporate with tens of thousands of employees. Yet the benefits to the business of having a good name in the local, national or international community can be great, not to mention the intangible benefit of spreading brand recognition, perhaps into the burgeoning populations of tomorrow's emerging markets of Asia, Africa or Latin America.

In addition, many countries now provide fiscal incentives to enable the costs of charitable giving to be set against the revenues of the business. The cynic might argue that there is an element of tax efficient, below the line image building going on here.

A more generous assessment is that corporate and social responsibility, including corporate giving, is now fully on the corporate agenda and really is perceived as worthwhile and morally right. When good is being done a human tendency is to give the benefit of the doubt. There is no doubt about the scale of corporate generosity towards the Asian tsunami and many, many other causes across the globe.

Richard Willsher is a financial and business writer with a background in investment banking.