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If your firm's reputation has earned you a tumultuous relationship with stakeholders, random acts of kindness in times of need may not always put you back in the good books.

Corporations often make charitable donations towards humanitarian disasters, even when they may be hurting financially themselves. In 2005, Hurricane Katrina created negative ripple effects throughout the U.S. economy, yet many major corporations responded charitably. Is this a rational response?

Managers often believe they mitigate financial losses from disasters by offering monetary disaster relief. They hope that stakeholders will see their goodwill and reward them with loyalty. But research by Alan Muller of the University of Amsterdam and Roman Kraussl of VU University of Amsterdam found that this doesn't happen in practice.

The researchers investigated Fortune 500 firms listed in 2004. They examined whether corporate donations towards aid and relief made a difference in the recovery of the stock prices of the firms impacted by Hurricane Katrina.

“... while many of the firms lost stock value after the hurricane, the extent to which stock prices fell was related to a history of social irresponsibility – not on the recent donations.”

Corporate Giving Does Not Undo Bad Behaviour

The researchers found that while many of the firms lost stock value after the hurricane, the extent to which stock prices fell was related to a history of social irresponsibility – not on the recent donations. In other words, philanthropic disaster response builds reputational capital that yields long-term financial rewards. It does little to create immediate gains. The study also found that reputational capital is more likely to yield financial rewards if the reputation is not marred by bad deeds.

Firms can apply these findings to their strategies for corporate social responsibility and philanthropy in the following ways:

  • Appreciate the impact of your negative activities: Social irresponsibility has a greater impact on reputation and financial performance than responsibility. Thus, it is in a firm’s best interest to curb its social irresponsibility over the long term, rather than engage in overt displays of philanthropy during disasters in the hope that a donation will counter past bad deeds.
  • Focus on recovery: When disaster strikes, a company will see greater returns if it invests resources in its own post-disaster recovery rather than make charitable donations to others.
  • Build a responsible track record: The firms with a history of social responsibility — that was not tarnished by irresponsibility — were found to fare better after the hurricane, with smaller financial losses. A history of social responsibility instills greater confidence in shareholders, resulting in lower losses during times of disaster and instability.

Build a Culture of Good Corporate Citizenship

Your firm is better off doing good for its community and stakeholders on a daily basis than to behave irresponsibly and do your part only in times of crisis. Retrospective philanthropy doesn't always go so far in terms of shareholder support and stock recovery, especially if your firm has a history of irresponsibility. At that point, monetary efforts may be better channeled towards the company's own post-disaster recovery.

Questions remain about the long-term social and financial benefits resulting from charitable donations during disasters and other socially responsible activities. Researchers could conduct further studies to better understand the interplay between a corporation’s charitable giving, social responsibility, reputation, and financial value.

Source

Muller, A., and Kraussl, R. 2011. "Doing Good Deeds in Times of Need: A Strategic Perspective on Corporate Disaster Donations.Strategic Management Journal. 32: 911-929.