How to get shareholders on board with corporate philanthropy

There are a number of important considerations corporate Australia need to factor in when it comes to getting shareholders to support donations to charitable causes

In the wake of the devastating bushfires Australia experienced last summer, there was an outpouring of support from across the country with almost $500 million in donations. The business community was also a major supporter, with at least $100 million donated from Australian and international corporations.

More broadly, corporations donated more than $4 billion to charities last year. Rio Tinto, BHP, Coles, CSL and the Commonwealth Bank topped the list of Australia’s biggest corporate givers as the business sector is increasingly driven by the desire to demonstrate it is about more than the bottom line. Out of the $4 billion donated, $1.25 billion came from the top 50 donors.

But how do shareholders feel about this? And importantly for corporates – how can they get them onside?

Traditional economic theory states that firms should not engage in corporate giving or corporate philanthropy, according to ​UNSW Business School finance lecturer Cara Vansteenkiste, whose research area is corporate finance and corporate social responsibility.

“This is because firms should be focused on generating value for their shareholders, and they should not bother with engaging in socially responsible activities on behalf of their shareholders and their employees: if shareholders value altruism and philanthropy, they can donate on their own behalf,” says Vansteenkiste, who recently presented a BusinessThink webinar which explores whether corporate giving following natural disasters increases firm value and how to communicate the benefit of strategic philanthropy.

To incentivise corporate giving, many governments have therefore created tax incentives by making donations tax-deductible. “However, the cash flows firms can gain through a donation tax shield are typically much lower than the donated amount, and we see in practice that firms are donating much larger amounts than can be explained by tax incentives,” says Vansteenkiste.

Motivations for donations

This triggers an important question: why do firms donate? Vansteenkiste says the literature has found that most corporate giving is motivated by insiders seeking to extract private benefits.

“These are what we call agency incentives,” she explains. “Managers and executives tend to donate to charities in which they or other board members are active, effectively moving cash or other assets away from the firm into their own pockets.”

Vansteenkiste’s research paper challenges this view, and she contends that not all corporate giving is agency-motivated and value-destroying. Corporate giving also has a value-increasing component, as it can increase firms’ reputation and social image, she explains.

“This is what we refer to as strategic philanthropy. Our study shows that the strategic benefits of donating increase if firms donate in the context of large, attention-grabbing events and if they rely more on marketing and reputation in their day-to-day operations,” she says.

This is particularly the case in times of a high-profile crisis or event – such as bushfires, for example. “We typically see very large increases in corporate giving following natural disasters: this holds in Australia, but also in many other countries across the globe,” says Vansteenkiste.

Key elements of strategic philanthropy

Corporate giving is not necessarily bad for shareholder value, according to Vansteenkiste’s research. In fact, she asserts corporate philanthropy can provide benefits beyond a reduction in taxation costs. For example, corporate giving can be used as a marketing and reputation-building tool that increases sales, attracts new clients and capital, builds the firm’s image in the community, and increases support from employees and other stakeholders. “If the strategic benefits are sufficiently large, firms can use corporate giving to increase their financial performance,” she says.

Specifically, her research found the strategic benefits of donating are larger if firms donate in the context of large, salient events such as natural disasters. “As we have seen during the bushfires and also in today’s pandemic, these types of events attract a lot of media coverage and grab investors’ attention: the strategic, reputation-increasing effects of corporate giving are amplified because any corporate action in the context of a disaster attracts much more attention than it would have in a non-disaster setting,” she says.

Market reactions to corporate disaster-relief giving also increase with the size and severity of the disaster, the relevance of the disaster (proxied by how frequently people search for disaster-related news on the internet) – and also with the relative importance of reputation and social image to the firm’s operations and value, Vansteenkiste explains.

In addition, the size and type of the donation also plays an important role: in-kind donations in which firms donate products or equipment tend to be perceived more positively by the market, whereas cash donations trigger more negative market reactions.

In terms of how much to donate, Vansteenkiste says firms face a trade-off in appealing to public versus shareholder sentiment. For example, Rio Tinto got slammed by the public for “only” providing $1 million in disaster relief to the bushfires, which amounts to less than 0.025 per cent of its annual revenue. “However, shareholders may oppose larger donations if they feel a larger donation is not optimal for firm value,” she says.

“This trade-off is very apparent in the data: both very small donations and excessively large donations trigger negative market reactions. Firms should therefore seek to balance the positive reputational effects from appealing to public sentiment while also avoiding opposition by shareholders who do not like to see large amounts of resources leaving the firm.”

Strategic philanthropy advice for corporates

Vansteenkiste’s research suggests that whether to donate or not is highly dependent on the context in which corporate giving occurs.

She observes that Australia’s top corporate donators – the likes of Rio Tinto, BHP, Coles, CSL and the Commonwealth Bank – are firms that typically rely more on their employee and consumer sentiment, and try to build stakeholder support by improving their social image in the community.

“If the strategic benefits of donating are sufficiently large (such as providing disaster-relief following large natural disasters) she affirms corporate giving can benefit society while also increasing value for shareholders,” she says.

“That being said, if the strategic benefits of donating are relatively small, markets are likely to react negatively to firms giving away cash and other resources, as this may signal deeper agency issues in the firm.”

The BusinessThink Rising Stars webinar series provides a unique opportunity for attendees to learn from the next generation of academic thought leaders, who will share evidence-based analysis, insights and solutions to emerging challenges for business and the big issues for society. Upcoming webinars in the series include: Facebook Assessments for Hiring: Opening Pandora’s Box, and When do children have a say in child labor decisions? Evidence from a refugee camp in northern Kenya.