COVID Highlights Shortfall of Corporate Charity

COVID Highlights Shortfall of Corporate Charity

We gave one tenth of one percent. You don’t see many corporate headlines touting that sort of statistic. The 50 largest companies in the S&P 500 by market capitalization have announced COVID-19 related cash donations of nearly $900 million in total. That is a good deal of change. In the United States, I estimate such donations create $35-$125 of social value for every corporate dollar given —  the utility of the $900 million pledged may exceed $100 billion in equivalent dividend payments made to investors. And this doesn’t include the value of products donated. Yet, these same 50 corporations generated net income of more than $650 billion in their most recent fiscal year. After-taxes, the pledged donations amount to just one tenth of one percent of net profits. 

To be fair, some corporations have done a good deal more. The COVID-related donations of PepsiCo and Salesforce each exceed 1% of net income, while promised relief from Wells Fargo and Netflix is just below this threshold. But the median company in the top 50 is offering $15 million of support against earnings of over $9 billion. 

Such a tepid charitable response to the most serious threat to humanity in generations highlights the need for a re-examination of the role of corporations in society. If corporate charity is limited to brand building and tax-deductible lobbying, can socially responsible investors be confident that it creates positive social value? Hidden lobbying alone may account for as much as 10% of corporate donations. Beyond the potential of currying favor with politicians or other influential trustees, there is the issue of silencing natural dissent. Imagine a large retailer that sells groceries nationwide. They have a lot of food that goes unsold and is donated to local food banks. The retailer receives a tax break on the food that is nearly spoiled along with some level of publicity, and the charities use the food to feed the hungry. Although this appears to be a perfectly symbiotic relationship on the surface, its potential flaws are exposed with deeper inquiry.

Andrew Fisher’s Big Hunger details how the alliance between corporate America and anti-hunger groups may perpetuate rather than solve hunger. The food charity may believe that in addition to “feeding the need” it ought to address flaws in an economic system that generates such widespread food insecurity. Potential solutions might include higher minimum wage levels, greater investment in adult education, or better access to child care. Given their knowledge of the populations they serve, food charities are often in a natural position to advocate for policy changes at a state or national level. However, if the food retailer making large donations is opposed to a higher minimum wage, the charity has a strong incentive to tread carefully on the advocacy front. The public cost of suppressed support is incalculable, but it is not difficult to imagine it might be several times greater than the damage done by more obvious corporate malfeasance. 

In order for socially responsible investors to gain confidence in the social value of corporate charity, one of two things must be true. Either 1) the amount donated annually is above levels that typically confer shareholders benefits, or 2) the company or its charitable foundation pursues federated giving. 

In the first case, if a company typically donates 1% of its income annually, we might reasonably presume that all of this charity occurs with an eye toward the interests of its shareholders. Charity may enhance the company’s brand image with customers and lead to greater market share, make it easier to attract and retain civic-minded talent, or improve the company’s reputation among socially conscious investors. A conservative approach to estimate the social value of the corporation’s charity might be limited to amounts given in excess of 1% that are free of obvious attempts at political influence. Another method is to compute average giving percentages for the company’s peers, and estimate social value on dollars in excess of the peer group average.

Federated giving involves donating to an umbrella organization that contributes funds to several charities, typically with a variety of missions. Amounts given to United Way organizations or similar charities may serve to act as a firewall between corporate donors and the individual charities supported. Federated giving may still confer reputation benefits, but the diminution of political influence and suppression of natural advocacy increases confidence that the net social outcome is positive.

How much should we encourage corporations to give? The logic of marginal utility suggests 1.25% of profit in excess of what is given for the presumed benefit of shareholders. The social value multiplier of the average dollar transferred from an American shareholder to a charity benefiting its citizens is roughly 80x. On that basis, a company giving away about 1.25% of net income without any benefit to itself creates as much value for the world as it does for its (generally far wealthier) shareholders. This principle appeals to an inherent desire for equality, at least as between stakeholder groups.

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