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The Confused State of
Corporate Philanthropy

Each year, companies spend billions on something called external relations, and they frequently do so without enforcing the same kind of tough management standards that they usually apply to other aspects of their businesses. Stakeholders are often left scratching their heads about the true value of a hodgepodge of “soft” functions that encompass community and public affairs, corporate social responsibility, and—most of all—corporate philanthropy.

Mixed Impressions

Of all the activities that have been stuck into this curious corporate corner, perhaps nothing is more mystifying than the way businesses relate (or don’t relate) to nonprofit organizations and government institutions. If the public is left with a schizophrenic impression about what’s going on between the private sector and these outside audiences, it’s understandable. Consider the following two prevalent if contradictory impressions.

IMPRESSION A: BUSINESSES ARE CHEAP

The evidence is indisputable that when it comes to supporting nonprofit organizations, corporations are getting parsimonious with both their fiscal and their human resources. Companies are donating less of their pretax earnings to nonprofits than they did only a few years ago. What’s more, it’s getting harder to squeeze employee volunteers out of significantly downsized corporations.

It seems that many American companies are not connecting to the world outside the workplace the way they could or should. They are pulling back into themselves, consumed with a passion for reorganization and restructuring as they chase the dream of becoming the leanest profit-making machines on the face of the globe. One consequence of this inward focus among corporations is that nonprofit organizations that rely (at least in part) on business donations and volunteers are being turned away at the company gate.

The amount of tax-deductible corporate contributions made each year has been and still is a good indicator of how businesses relate to social issues and needs. These cash, product, equipment, and land donations are the mercury in the social responsibility thermometer. The latest temperature reading inside many companies is unsettling as it becomes apparent that philanthropy isn’t keeping pace with the rapid rise in annual profits. To put it another way, many businesses are more closefisted than in the past when deciding what size slice of their earnings they should carve out for grants and contributions to the nonprofit world. And this new attitude about philanthropy is causing aftershocks being felt in college quadrangles, museum galleries, soup kitchens, and community health centers all over the country.

Something else is perceived to be wrong, too. Some shareholders of publicly held companies have a growing concern that corporate contributions are being misused by senior management. The complaints center on gifts and grants going to nonprofits that are of personal interest to CEOs and other high-level executives, organizations that have little or no affinity to the corporation’s business concerns.

This kind of business and executive self-centeredness may be disrupting an unusual and remarkable alliance in America. Corporations, government, and hundreds of thousands of nonprofit organizations have long been intertwined in a way that defines our quality of life in the United States. According to Impression A, this delicate coalition may be unraveling. Company leaders appear to be turning a blind eye toward nonprofit organizations at a time when government is trying to off-load more of its human service responsibilities onto these same institutions.

These days, the sounds coming from nonprofit organizations and agencies caught in the middle of this commotion are hardly screams of joy.

IMPRESSION B: BUSINESSES ARE SOCIALLY RESPONSIBLE

But something else is also happening between nonprofits and businesses. This action is largely offscreen—not usually captured on camera because it falls outside what has come to be defined as “traditional” philanthropy. Some businesses are putting up sizable amounts of cash to lure nonprofits into the private-sector circle where the main aim of the game is to make money.

Suddenly, nonprofits are in the business of profit sharing. They are splitting the take from cause-related marketing campaigns, endorsements, and sponsorships. New kinds of deals are being cut that rewrite the rules for corporate-nonprofit relationships. Here are some recent examples:

PRIMESTAR paid the American Red Cross $10 for each new subscriber to its satellite television service and referenced the nonprofit organization as part of its $5 million ad campaign to entice potential customers to subscribe.

HBO designed commercials featuring primate researcher Jane Goodall and a cast of chimpanzees—a deal that brought a year’s worth of funding to the Jane Goodall Institute in Connecticut.

The Walt Disney Company and the American Society for the Prevention of Cruelty to Animals worked out more than a hundred merchandising agreements that the ASPCA’s management says “will be worth many millions.”

Denny’s, Flagstar’s restaurant chain, has become Save the Children’s largest corporate supporter, raising $2.5 million over three years by selling special meals, scarves, and neckties—an arrangement that has proven financially beneficial to both partners.

For each of five hundred thousand Rosie O’Dolls (sixteen-inch dolls modeled after television talk-show host Rosie O’Donnell) that Tyco sold in 1997, $10 went to the For All Kids Foundation.

Corporations usually consider these kinds of transactions as marketing expenses, not as charitable grants or gifts. The money handed over to outside organizations in this way rarely gets mentioned in any public statement the company makes about philanthropy or social responsibility.

As for the receiving team, the organizations that get cash from these corporate spigots aren’t complaining. The dollars are just as green whether they are paid as part of a marketing arrangement or handed out as a donation.

A DUAL REALITY

So which impression is correct, A or B? The answer is, both.

On the one hand, corporations have become more miserly in recent years when carving out a percentage of their profits for traditional philanthropy. But at the same time, businesses are negotiating new, interesting, creative, and sometimes controversial relationships with nonprofit organizations.

The reality is that business connections to the “outside” world are not what they used to be. Some marketing and promotion executives are circumventing corporate contributions or community relations personnel in order to build their own bridges to nonprofit organizations. In at least a few companies, manufacturing departments are producing goods for charities without any coordination or oversight by managers in other parts of the firm. In this very unsettled atmosphere, many philanthropy, public affairs, and community relations staffers are struggling to figure out their roles and responsibilities. Because of all of this, the public gets a jumbled picture of where companies stand when it comes to these external activities.

Relations between the private sector and the nonprofit world started changing back in the early to mid-1980s. It was a time when corporations in the United States were getting very serious about losing weight—shedding excess baggage that was standing in the way of efficiency and improved profits. Wall Street hovered over businesses like Richard Simmons with an attitude, screaming at top management to sweat off every bump and lump in their organizations. The weigh-ins came every quarter, and if companies didn’t look better than they had the day before, the Street tolerated no excuses.

Over the years, businesses impulsively grabbed any weight-loss plan that was put in front of them. These plans came with different names—reengineering, downsizing, rightsizing. In many instances, the crash diets actually worked. So much so that the corporate bottom line took on a very appealing shape, which investors greeted with wolf whistles. Slimmer, trimmer companies basked in the glow of their financial success. (See Figure 1.)

Fig. 1. Corporate Profits (Before Taxes), 1986–1996

Reprinted with permission by The Conference Board. Sources: The Conference Board, Council for Aid to Education (RAND)

As businesses became increasingly absorbed in their own appearance, their attitudes changed about what was going on outside the corporate walls. After a period when companies had been pumping up their philanthropy spending until it reached more than 2 percent of their pretax earnings, the private sector did an about-face. Businesses began assigning less importance to philanthropy. Year by year, corporate gifts and grants eroded until the percentage of profits set aside for philanthropy fell to nearly half of the spending levels in the mid-eighties. (See Figure 2.)

Fig. 2. Declining Rate of Corporate Giving (as Percent of Profits), 1986–1996

Reprinted with permission by The Conference Board. Sources: The Conference Board, Council for Aid to Education (RAND)

During the same era of extraordinary economic success, many educational institutions, charities, and other nonprofit organizations were taking it on the chin. Government funding was drying up, private foundations were increasing their spending only modestly, and personal donations were erratic. Meanwhile, politicians threatened to negotiate a new Contract with America that would shift more tax-funded human service activities to the nonprofit field—and a goodly number of corporate executives cheered the idea. Shell-shocked charities mulled over the prospect of doing more while at the same time coming to the harsh realization that their share of the corporate profit pie was steadily eroding.

Corporate Frugality

What has made the private sector turn so frugal? Here are a few reasons why many American corporations seem to have partially zipped up their wallets.

CEO DISINTEREST

Fifteen or twenty years ago, a few chief executives had a reputation for nudging social responsibility (mainly a do-it-for-the-country-or-community and don’t-expect-anything-back-in-return way of thinking) to the front of the stove. People like John Filer (Aetna), Kenneth Dayton (Dayton Hudson), Fletcher Byrom (Koppers), Thomas Watson (IBM), and David Rockefeller (Chase Manhattan) weren’t shy about getting on the stump to talk about why businesses needed to go beyond paying taxes to help solve critical social problems. Today’s CEOs, with a handful of exceptions, aren’t known for that kind of talk. Visionaries are hard to find when it comes to corporate social responsibility.

A SHIFT IN PHILOSOPHY

There have always been those within the business world who have held that corporations should not spend their resources or time worrying about matters that don’t directly affect their ability to make money. The business of business is—business! Make a profit and provide jobs. That’s a corporation’s ultimate responsibility. Ever since the 1930s, when the IRS declared that corporations could consider charitable contributions as legitimate business expenses, executives and shareholders have debated how much of a company’s profits or energies should be directed toward supporting nonprofit institutions. Although there are those who argue corporations have a moral obligation to assist outside causes and issues, the let’s-keep-business-focused-on-business approach has gained ground in recent years.

HERDISM

There’s something about straight-out corporate philanthropy that makes companies want to head for the middle of the pack. Corporations give (or don’t give) based on what other businesses are thought to be giving (or not giving). Few companies dream about running ahead of the pack when it comes to spending money on contributions. Without enough businesses taking the lead, corporate philanthropy tends to remain stuck in place while the rest of the economy marches on. And that is exactly what has happened over the past decade. Although pretax profits have soared since the mid-eighties, the dollars spent on corporate charitable contributions have crept ahead at a much slower rate of growth.

DOWNSIZING’S SHADOW EFFECT

Also called the it-doesn’t-look-right syndrome, the oftenunnoticeable effect of downsizing has been especially harmful to corporate philanthropy in recent years. Even when a business scores big with higher earnings and is in a position to expand its social responsibility investments, it balks at doing so. Why? Because even modest increases in so-called nonessential spending don’t look right, especially in the face of employee layoffs and other painful cuts in the operating budget.

BAD MANAGEMENT

As one bank executive put it in very unbanking-like terms, “Too many people making corporate philanthropy decisions don’t have a clue as to what their jobs are all about.” This is a bit harsh, perhaps, and certainly is a generalization that doesn’t apply to everyone involved in giving away company funds. However, the statement does raise a critical issue. Exactly what are the managers who handle corporate contributions supposed to do? If the answer is don’t spend a lot of money and don’t make waves, then many of these managers are doing an admirable job. But if a corporation is looking to leverage its corporate giving to help the business become more successful (while simultaneously doing good things for society), then this banker may not be far off the mark.

A Critical Issue

All of this may seem monumentally unimportant given other critical issues that businesses have to worry about. Even nonprofit organizations may not view the changes in corporate giving as being all that consequential. After all, businesses have historically played a notoriously small role in American philanthropy. Of the billions of dollars donated annually to religious groups, colleges, human service agencies, and a slew of other nonprofit institutions, businesses have never accounted for much more than 5 percent of the total. (See Figure 3.) If companies turn a little stingier, so what? What difference will it make?

Fig. 3. Corporate Contributions as a Percent of Total Giving, 1996 (dollars in billions)

Sourc: Giving USA 1997; reprinted with permission by the American Association of Fund-Raising Counsel (AAFRC) Trust for Philanthropy

The difference is greater than you might think.

When focusing only on nonreligious organizations (health, education, civic, cultural groups), corporate charitable donations represent one dollar out of every ten raised by these organizations. For some nonprofit institutions, corporate support is absolutely essential for survival. For others, it provides the seed money needed to raise funds from other sources (private foundations and government, for example). For still other nonsectarian groups, corporate giving comes with a bonus that might prove more important even than the company’s tax-deductible gift: time and commitment from corporate executives and employees.

There is a good chance that a nonprofit that gets major financial support from a business also has an executive from that company on its board or one of its advisory committees. This not only means free management consulting for the nonprofit but can also open doors to other services that are quietly donated on the side—for example, printing, accounting, meeting rooms, and so on. These “added value” benefits are likely to fade away along with the company executive serving on the board of the nonprofit organization if a business decides to cut back or eliminate its contributions support.

As mentioned earlier, there is a bright side to this picture that is largely overlooked in any accounting of corporate social responsibility. Although traditional philanthropy has taken a beating in recent years, there has been an upsurge in new kinds of relationships between businesses and nonprofits. Sponsorships, quid pro quo contracts, marketing deals—all are part of a growing trend. Examples:

The American Cancer Society is renting its name to SmithKline Beecham’s NicoDerm antismoking patch and to the Florida Department of Citrus. The rentals are reportedly worth a minimum of $2 million a year to the cancer organization, and this sure isn’t traditional philanthropy.

A relatively small New York–based retail company, Stonehenge, donates 4 percent of revenues from the sale of its men’s ties to Mothers Against Drunk Driving (MADD).

Are these marketing relationships sucking away money that otherwise might have been donated via “usual” contributions channels? Probably not. This is a relatively new kind of revenue stream running into charity’s pond that may eventually become a river of change.

The Ten-Step Corporate Social Investment Management Model

Businesses can take the lead in turning this hubbub into a more coherent process. Management is the key. And the ten-step plan outlined in Corporate Social Investing is the instruction manual that any company—whether a gargantuan multinational or a small service business, whether a laissez-faire Silicon Valley chip maker or a buttoned-down East Coast financial institution—can use to unlock the power that comes from effectively linking up with nonprofit and public sector organizations. Exhibit 1 summarizes the ten-step process.

The following chapters explain in-depth how companies can go about taking these steps to replace philanthropy with corporate social investing.

Exhibit 1. The Ten-Step Corporate Social Investment Management Model