Businesses can accept Milton Friedman’s view that the only justification for philanthropy is tax avoidance or not. By Crispin Wood
Companies have one primary group of stakeholders and at least two secondary groups. The first duty of care of directors is to the proprietors of the business. In a large public company this may mean thousands of individual shareholders, some with conflicting interests. The secondary stakeholders include customers and employees. But many companies and commentators now believe in, or pay lip service to, a social obligation to support the broader community, beyond simply complying with legislation and regulation.
If United States trends give a good indication of the future of Australia, then corporate philanthropy is going to attract increasing attention. US organisations have publicly ranked listed companies according to their level of charitable donations. Corporate largess may give the chairman a warm fuzzy glow and generate public relations mileage; but how can giving away money be reconciled with the primary duty of care to shareholders?
For one thing, the maxim that “nobody does something for nothing” usually applies. If a brewer sponsors a football tournament and locks in widespread media coverage as result, this can hardly be called beneficence it is simply a marketing strategy. Indeed in the bad old days when cigarette smoking was not regarded as a social disease, sports journalists were kept supplied with cartons of smokes to ensure they referred to sponsored events as “the (cigarette brand) Cup”. Even sponsorship of the arts can be used to lift a brand’s profile in a target market.
But even if the donations are colored by the desire to promote the standing of an organisation, that does not necessarily make it dirty money. Sports and the arts are important to the social fabric of a country and need sponsorship to thrive. And corporate philanthropy has genuinely supported such areas as medical research, disaster relief and assistance for the economically deprived.
Philanthropy Australia says about a quarter of the “philanthropic dollar” in this country comes from the corporate sector. The society’s corporate members include The Body Shop, Westpac, Rio Tinto and Macquarie Bank, along with formalised corporate foundations such as the AMP Foundation and RACV Foundation. Other companies most notably in the cigarette industry have a charitable component imposed on the price of consumer goods by the government, with some of the taxes directed to health foundations.
One thing is clear: companies are becoming more discerning about the amounts they give and the charities they support. O’Keefe & Partners, which prepares the annual Giving in Australia report, believes that corporate donations are on the decline. The 1998 report shows that corporate giving fell to $386 million last year from $400 million in 1996. By contrast, donations from individuals rose 10% to $1.39 billion.
In the report, O’Keefe separates corporate sponsorship from corporate giving. Sponsorship is the larger by far, valued about $1.3 billion a year. (A report by the Committee for the Economic Development of Australia indicates that $642 million of sponsorship goes to sport; the research company Brian Sweeney & Associates estimates that $38 million goes to the arts.)
O’Keefe believes that growth in sponsorships is cannibalising donations to charitable causes. “This downward spiral of corporate gifts is expected to continue in the foreseeable future, although at this stage it is unclear what amount of corporate support is being channelled through trusts. In contrast, sponsorship revenue to charities will continue to grow, as will isolated instances of cause marketing. Neither of these commercial marketing options can be thought of as philanthropic gestures.”
The report finds that 81% of not-for-profit organisations experienced a decline or minimal growth in fund-raising income last year, up from 78% last year. However, this is not solely due to reduced corporate giving; most organisations report a decline in government funding. “The welfare sector reports alarming differences between demand and government funding, while the tertiary education sector continues to suffer income decline. Both segments are seeking to make up these income deficits through fund raising.”
OKeefe and Partners director Craig Grovenstein says one of the most notable trends in corporate giving has been towards the establishment of charitable trusts, replacing direct donations. Grovenstein believes the reason for this is the desire for boards and management to put a buffer between themselves and the charitable causes. “They can be seen to be giving, but they don’t need to make the decisions themselves. They can appoint an honorary board to take responsibility.”
In the US, debate about corporate philanthropy is much more mature or at least more polemical. Anthony Lupi, head of community development at Westpac, says: “The notion of corporate philanthropy is in its infancy in this country. In the US it is much stronger.”
One of the more idiosyncratic US schemes is operated by one of the more idiosyncratic businessmen, Warren Buffett. The Omaha billionaire allows shareholders in his Berkshire Hathaway investment company to nominate their own charities. The US-based Chronicle of Philanthropy says the company has donated more than $US97 million since it established the scheme. For each “class A” Berkshire Hathaway share, the company gave away $US16 last year, allowing shareholders to pick between one and three charities to receive the money. Some of the shareholders are charities themselves, having received stock in donations and bequests. According to the Chronicle of Philanthropy, the scheme means that Berkshire Hathaway often donates to conflicting causes. In 1993, for example, 130 shareholder donations went to groups supporting the right to abortion, and 30 went to non-church organisations opposed to abortion.
It seems Buffett likes it this way allowing shareholders to pick their own causes. When he set up the scheme in 1981, he wrote to shareholders saying: “Just as I wouldn’t want you to implement your personal judgments by writing cheques on my bank account for charities of your choice, I feel it inappropriate to write cheques on your corporate bank account for charities of my choice. Your charitable choices are as good as mine.”
The Buffett scheme has a certain poignancy in the US because, as the chronicle reports, at least one congressman has argued that the model should be mandatory, requiring all companies to give their shareholders some form of choice. The Economist reports that Paul Gillmor, a Republican congressman from Ohio, last year introduced two bills, one requiring companies to disclose how much they give away, and the other requiring shareholders to vote on it. Corporate America is hostile to the move, not least because of the administrative nightmare it would entail. Few large public companies in the US have the relatively manageable 9000 shareholders that Berkshire Hathaway has.
Bank of good will
In Australia, disclosure, if any, is entirely voluntary, so it is hard to gauge how extensive corporate philanthropy is. Westpac is acknowledged as having one of the most developed programs. Through its Community 2000 and other community and business sponsorships, it gives away more than $8 million a year in cash and kind, making it one of the largest corporate donors. This excludes the bank’s huge Olympics project. Westpac’s expertise was recognised recently when chief executive Bob Joss was invited to join Prime Minister John Howard’s round table on corporate community involvement.
Westpac dislikes the term “philanthropy”. Lupi, a former social worker, says: “We don’t talk about philanthropy but about corporate community involvement. We make contributions because the community is where we make our money. It is where our staff and customers live.”
Under the Community 2000 program, staff are able to take paid time off for community service, with time allocated at the discretion of management. At Westpac’s Armidale branch in NSW, for instance, staff are rostered off for two hours each day to deliver Meals on Wheels. The bank also gives away more than $300,000 a year through the Managing Directors Community Service Awards, in which recipients give the money to the cause they have supported.
Lupi says the scheme has been linked to the Olympics sponsorship to provide a staff incentive. Westpac has been allocated 500 volunteer positions for the Olympics, and the primary assessment criteria for staff who apply for a position will be their record of community involvement. “We believe volunteering time is really good for staff morale, and no one abuses the program.”
Individual business units often choose to support a particular charity. Staff in the cards division raise funds for the Starlight Foundation, which Westpac matches dollar for dollar. In the financial markets division in Sydney, there is a mentoring program with an inner-city school, and students are invited to the dealing room to see how financial markets work and consider career opportunities. Lupi says: “It is beneficial for our staff to have this exposure. They work with the top end of town and do not see this end of life it rounds them out as human beings.”
Lupi may be approached a dozen times a day by individuals and organisations seeking funds, however he says the selection is largely up to staff. More than one-third of the staff are involved in community projects. “We ask how can we make a difference in the communities where we operate? We primarily want to get involved in projects where our staff are involved.”
The other side of Westpac’s community involvement is more hard-edged. It funds such programs as the Westpac Lifesaver Rescue Helicopter and Clean Up Australia. It is big money. The rescue helicopter, which Westpac has sponsored for 25 years, costs more than $1 million a year. For this the bank expects a return in the form of increased brand recognition and community goodwill. “The Clean Up Australia sponsorship is a contractual arrangement. It is subject to clear performance criteria on both sides, and the contract is reviewed every year,” Lupi says. “We gain an advantage out of it. But at the same time we choose worthy causes, and we would hope that by behaving as a responsible corporate citizen we will be seen as an important member of the community.”
Lupi says Westpac wants value for its charity dollar. He cites the Save the Children Fund, which approached the bank for a cash donation. Instead, Westpac paid for advisors so that the organisation could develop a clear fund-raising strategy. The bank also subsidises a program with Macquarie University in which the senior management of community organisations are taught financial skills. Participants are charged $200 each, but the program costs up to $2000 a head and the balance is financed by Westpac. The next series of courses will be directed towards Aboriginal organisations.
Competition by charities for the corporate dollar has led to formal benchmarking programs in the US. According to the US study Measuring Corporate Community Involvement, almost 70% of companies have some evaluation or benchmarking program in place. Of these, 56% measure the programs of their beneficiaries against those of other organisations. The GE Fund, for example, requires all university grantees to produce an annual report on program results. Home Depot takes its evaluation to the micro level, looking at the community needs of each area in which it trades and developing a program specific to each store.
Corporate charity in the US has become more blatantly politicised than in Australia. Take the Capital Research Centre, a conservative Washington think-tank specialising in philanthropy. Rather than urging greater generosity, as might be expected, it wants corporations to tighten the purse strings. A study issued last year, Patterns of Corporate Philanthropy: Funding Enemies, Forsaking Friends, celebrated a cut in donations to public policy advocacy groups and a slight increase for “pro-free enterprise” organisations. Its president, Terrence Scanlon, said: “This is a very positive sign for American business and the nation’s economy, one I hope turns into a solid trend.”
Examples of “misguided philanthropy” cited by the group include: financial institutions donating to an organisation lobbying for penalties for lenders that make high-risk consumer loans; and Ford’s donation of $US1000 to the American Lung Association, which lobbies for tighter emission controls.
Capital Research Centre says corporations are “shooting themselves in the foot” because the grant makers are unaware of the agendas of non-profit organisations, or they offer them small tributes to avoid harassment. Alternatively, it believes that some corporations donate to causes that could bring them political favors, pointing to a flood of donations in 1993 to the Children’s Defence Fund, run by Hillary Clinton.
The narrow view
Economist Milton Friedman, in the preface to the report, says: “The only justification for philanthropy is tax avoidance. The social function of a business corporation is to produce goods and services that customers wish to buy, and to do so at the lowest possible cost.” Such a narrow view of the world ignores such notions as “social responsibility”, as well as a basic tenet of marketing and public relations. However, Friedman’s argument might be gaining favor. According to the New York research group Conference Board, corporate donations as a percentage of earnings have declined over the past few years. A survey of 289 companies, 60% of them from the Fortune 1000, showed that corporate donations fell from 1.3% of pre-tax earnings in 1991, to 0.7% in 1996. In dollar terms, however, there has been less change, given the economic growth over the period and the increase in profit.
There are plenty of reasons for keeping charity alive. According to a report in The Economist, not-for-profit organisations account for 8% of gross domestic product in the US, double the level in 1960. They also employ almost 10% of the workforce. The surge is partly explained by a reduction in government services.
It is not just large public companies that are in the charity game. In the US, the 121 largest private foundations have assets of more than $US126 billion. Individuals like Ted Turner, George Soros and Bill Gates have collectively given away billions of dollars. Australia provides few similar examples. Cultural differences may explain this. In the US, organised religion is far more influential, while in Australia the government provides a much higher level of social service. Given the higher rates of personal taxation, Australians may feel that they already pay enough in tax to ensure an adequate social safety net.
Yet there are exceptions. Property developer Harry Triguboff says his private company Meriton Apartments donates about $1.5 million a year, most to educational and Jewish causes. Other longer-established private empires maintain a family tradition of supporting charitable causes. The Kirby brothers, owners of the engineering group James N. Kirby Holdings, continue to operate the Kirby Foundation established by their father. Business Review Weekly reported last year that Australia’s largest charitable trusts disburse about $43 million a year.
Among the wealthy individuals who give, most bequests come from women. O’Keefe & Co believes this is because most women outlive their spouses. Men tend to make donations during their lifetime rather than through a will.
Culturally, the pattern of corporate giving is analogous to the feudal concept of the benevolent aristocratic landowner. It is not a concept unique to the West. The Centre for the Study of Philanthropy quotes Andres Soriano, chairman of the Philippine Business for Social Progress Organisation, as saying: “For an Asian company … corporate philanthropy and citizenship are seen as part of the social contract with the community. The company observes this unwritten contract not out of fear of being picketed or penalised, but because it is the only truly acceptable way to do business … A company’s profits are a reward of the community, but a reward held only in trust. Part of that reward must ultimately be ploughed back into the community.”
Australian companies are likely in the near future to find their philanthropic endeavors coming under greater scrutiny. Many shareholders subscribe to Friedman’s philosophy. Others will want directors to show that the company is getting tangible benefits for its corporate largesse. Management should begin preparing for the debate.