The Five Levels of Corporate Charity

The Five Levels of Corporate Charity

Corporate giving amounts to more than $20 billion annually in the U.S. Although it represents a small fraction of business expenditure, it’s an important item for socially responsible investors to chew on. Corporate charity has the potential to greatly enhance the welfare of society’s most vulnerable.

All corporate charity dollars are not created equal. The who and why matter.

Who benefits from the charity’s cause? Is it the most vulnerable members of a population, or does the work support people across the welfare spectrum? The gap between the haves and have-nots is so wide that the social value of each corporate donation may be dozens, hundreds or more than 1,000 times the economic value foregone by the company’s shareholders.

Motivation matters too. Politically driven giving may ultimately harm society and undue the social good apparent on the surface.

Valuing charity by cause

Efficiency is often the marker by which charities are judged. Donors want most of their dollars going directly to the mission rather than solicitation and other overhead expenses. But socially responsible investors also need a way to compare the outcomes of charitable giving.

A relative utility approach may prove helpful. Every shareholder dollar redirected to a charitable cause is effectively reducing the consumption utility of the shareholder and lifting the consumption utility of those served by the charity. Since most stock is owned by the wealthiest 10% of households, this trade usually lifts the consumption utility of society as a whole.

The social utility boost varies with the population served by the charity. A charity providing food or shelter for the homeless creates a lot more social value than a symphony orchestra patronized by the wealthy.

I’ve come up with social value multiplier estimates for 37 different charity classifications as defined by Charity Navigator. The 37 charity types have been grouped into 5 levels based on estimated income levels for those primarily served. The highest level of charity serves the most vulnerable people on earth, such as those in war torn countries or areas suffering from environmental disaster. The lowest level of charity includes activities that benefit the general population or a wealthier crowd. To estimate the social value of corporate giving, one applies the social value multiplier to the donation amount less an estimated overhead percentage for the charity.

Refer to this post for more detail on how relative utility is used to estimate social value multipliers.

Level 1 – helping those in extreme poverty due to conflict and/or environmental disaster

Think international disaster relief efforts conducted by groups like the International Federation of Red Cross and Red Crescent Societies or the U.N.’s World Food Program. The people served include many of the nearly two billion people living on $3 per day or less. The social value created for every dollar of corporate giving to this level of charity is $1,000 to $1,800, by my estimate. Such giving is a massive leverage of shareholder wealth for global utility!

Level 2 – helping those without a home

The working homeless is not an oxymoron. For many, their wages aren’t adequate to provide for themselves and their families, especially in areas where real estate is expensive. A study by the National Low Income Housing Coalition finds the average homeless adult in New York City earns about $8,000 per year while living in a shelter. The social value created by corporate giving to these charities is estimated at $90 to $125 for every dollar donated.

Level 3 – helping those with inadequate food

Gainfully employed households may still struggle to provide adequate food for themselves and their dependents. Feeding America, the largest network of food banks in the United States, estimates its clients have an average income of over $900 per month. It serves nearly 1 out of every 7 Americans. I estimate the social value of food aid in developed countries at $60 to $80 for every dollar donated.

Level 4 – providing help with education, basic healthcare, and adequate housing

This level encompasses many of the social services normally provided by governments. But budget limits leave gaps in coverage. These charities are there to fill them. The value of this social help is pegged at $35 to $45 for every dollar donated.

Level 5 – providing universal benefits like environmental protection, medical research and treatment, civil rights protection, community building, technology research, and cultural enrichment

This level includes charities serving everyone — rich and poor alike. The social value of corporate giving is still positive, but the multiplier is considerably smaller than the first four levels. I estimate the social value of this level of giving at $4 to $7 for every dollar donated. The social value of some charities, like performing arts groups, may be even lower if they cater to a wealthier demographic. A majority of those attending classical music, opera, and theater performances have a household income of more than $75,000 per year, according to the National Endowment for the Arts.

The Motivations of Corporate Charity

Why do corporations get involved in charity? Four motivations are commonly identified (Noble et al. 2008). First, charity can enhance a company’s reputation among its customers and employees. This reputation enhancement may ultimately boost sales and profits. Second, some donations may confer political benefits to the company. Government officials the company would like to influence may sit on the charity’s board, or the charity may reside in a community that is important to the targeted official.

Bertand et al. (2018) find that a non-profit is more than 4x likelier to receive grants from a corporate charitable foundation if a member of the U.S. Congress sits on the non-profit’s board. Their study suggests the amount of politically-motivated corporate giving is between $1 and $2 billion annually — comparable to the $3 billion businesses spend on lobbying in the U.S.

Third, corporate charity may be influenced by the individual values and motivations of executives. Masulis and Reza (2015) show that CEO connections to a charity raise both the likelihood and amount of corporate giving, and that corporate giving is related to the strength of a firm’s corporate governance. A business with weak board oversight tends to have more charity dollars directed to projects favored by key executives.

Finally, corporate giving may be altruistic. Smith (2008) states “pure” charity is one of the keys to ethical behavior. His view is people have an innate need to give and corporations may balance the ethic of mercy with the need for economic efficiency.

Political Gains Can Erase the Social Value of Charity

Individual grants from corporate foundations or direct gifts may be driven by some combination of motivations. Parsing out the “true” intention behind giving is difficult. But investors and analysts mainly need to be on the lookout for potential political gain tied to specific acts of charity. If a company’s reputation and profit is enhanced at the expense of a competitor, no social harm occurs. If giving is directed to causes favored by the CEO, shareholders may suffer but society is still better off. However, if corporate philanthropy becomes a tool of political influence, the social value calculus gets complicated.

I estimate the social cost of corporate lobbying, a more overt form of political influence, at roughly 40x the level spent by the company. I would apply a similar penalty to corporate charity with clear ties to government officials. The net social value of such giving then comes down to who directly benefits from the charity and how. If it takes the form of disaster relief, then the social value is likely still positive. If gifts are directed to a local museum, the net social value may well be negative.

In-Kind Giving Deserves Extra Attention

Sometimes the form of donations affects their social value. In-kind donations need to be evaluated with care. In some industries, in-kind donations account for the bulk of a corporation’s charitable giving. For instance, many food manufacturers and retailers donate surplus food and sundries to food banks. And pharmaceutical companies may donate medicines to communities or individuals in need. In my opinion, the social value of such donations should turn on this question — were there practical alternatives?

With cash donations, the answer is clearly yes. Cash can be returned directly to shareholders, reinvested in the business, given to employees in the form of a bonus, or given away. The set of alternatives enables us to judge some actions as being more valuable than others — to shareholders and society.

This isn’t usually the case with donated goods.

If food that is soon to spoil is donated to a food bank, I would argue very little social credit should accrue to the corporate donor. Yes, a grocer could have sent surplus food to the landfill instead. But the company and its shareholders had few alternatives. In this case, the appropriate benefit to tabulate may be the reduction in greenhouse gas emissions attributable to keeping products out of the landfill.

Valuing donations of medicine are even trickier. Drugs are often sold to different populations at different prices. How is a 100% price discount any different? I argue withholding potentially life-saving medicine from those in need is unethical. Why then should a pharmaceutical manufacturer be credited for doing what is right?

From the drug company’s perspective, the prices paid reflect the design of the healthcare system in each country or regional market, the bargaining power of the buyer, and their ability and willingness to pay for drugs that are often protected by market exclusivity. What matters is that the aggregate sales revenue received provides a sufficient return on the investment in developing and marketing the medicine. Who pays which price is irrelevant. If the bargain is those with means pay more, and those with little pay nothing, it is hard to ascribe any value to donated medication.

Putting It All Together

Disclosure requirements are limited. Only giving through corporate foundations is required to be disclosed. But it provides important window into the details of giving.

Each foundation is required to file annually with the IRS through Form 990. This form includes information on who donated to the foundation (this is usually only the corporate sponsor), and more importantly, which charities received foundation grants.

Investors can push companies to share information on their direct giving and employee volunteering programs — the other two common forms of corporate charity.

An investor can categorize the charities receiving gifts into the five levels of charity to compute a gross social value for the corporation’s giving. In-kind giving can be deducted, if necessary. Finally, the recipients of larger donations can be examined for political ties to the company. This may require the study of lobbying disclosures along with recipient charity disclosures that detail their executive and board leadership. Where political influence is suspected, a penalty should be applied.

Corporate giving amounts to just 1% of total profits, but the social value multiplier of giving for the right reasons has the potential to distinguish companies as being far more valuable to society than others.

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