Why Giving Too Much May Be Too Much to Ask

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The relationship between corporate giving and financial performance is not always linear and positive. Your firm may be paying excessively into philanthropy - and the payoff may not be what you expected.

A 2008 study by Heli Wang, Jaepil Choi, and Jiatao Li of the Hong Kong University of Science and Technology find that corporate philanthropy and financial performance are not linearly correlated, but rather exhibit an inverse U-shaped relationship.

The Philanthropy-Performance Relationship

Some researchers argue there is a positively-correlated relationship between corporate philanthropy and financial performance, while others refute that idea, claiming a negative relationship. The relationship may not be definitive because companies might engage in corporate philanthropy for non-financial reasons.

Authors Wang, Choi, and Li wanted to examine this trajectory to better visualize the philanthropy-CFP relationship. They built models with collected secondary data from 817 U.S. companies in the period 1987-1999 by using Taft Corporate Giving Directories and Standard & Poor's COMPUSTAT.

Philanthropy's Limits

Up to a certain level, corporate philanthropy helps firms secure and protect access to critical resources controlled by stakeholders. Past that level, the financial benefits will be gradually offset by the increase in direct costs (the actual resources used as donations) and agency costs (the potential for managers to channel resources to personal "pet" projects).

In other words, the authors' model shows that the relationship is positive before corporate philanthropy reaches a certain level, but is neutral and eventually negative past that level. 

What's more, firms in a changing competitive environment may see more financial benefits from philanthropy than those in stable industries. Corporate philanthropy can financially benefit firms in these dynamic environments because they depend on stakeholders for critical resources and are influenced by positive image and reputation.

Finally, firms with higher levels of slack resources, R&D, and advertising tend to donate at higher levels. Yet at higher levels of philanthropy, the marginal financial returns are less than those from R&D and advertising.

Determining Your Tipping Point

As a manager operating in an unstable or turbulent industry, you might want to increase your firm's philanthropy and level of corporate giving. However, philanthropy will not always benefit a firm's financial performance, especially when it exceeds a certain amount. Very high levels of philanthropy may not "pay off" compared to investments in other key activities like R&D or advertising.

Future research can (1) examine other dimensions of corporate social performance; (2) examine moderators other than environmental dynamism; (3) examine possible boundary conditions to understand why the results conflict with the findings of some previous studies; and (4) integrate several underlying variables (e.g. corporate reputation and stakeholder co-operation) directly into the models.

Source

Wang, H., Choi, J., and Li, J. 2008. "Too Little or Too Much? Untangling the Relationship between Corporate Philanthropy and Firm Financial Performance." Organization Science. 19.1: 143-159.