Good deeds act as ‘insurance policy’ against misfortune, scandal and negative headlines
Google’s announcement last week that it has earmarked $265 million of the money raised in its public stock offering for charity resurrects a long-standing debate over whether or not companies should be involved in philanthropic efforts.
And although detractors contend that money spent on charity should go back into shareholders’ pockets, a new study in the “Academy of Management Review” by a Brigham Young University business professor argues that a track record of corporate giving protects a company much like an insurance policy, adding to overall value and shielding shareholders’ investment in the event of misfortune.
“Bad things happen to every company, even the best companies,” says Paul Godfrey, an associate professor of strategy in BYU’s Marriott School of Management. “And just like a business with fire insurance is more valuable than one without it, businesses that have earned a reputation for being generous through acts of philanthropy are given the benefit of the doubt when negative events occur.”
When accidents happen, lawsuits are filed or harmful news coverage creeps out, shareholders, customers and industry regulators often question if managers are looking out for anyone but themselves, says Godfrey. If a company has demonstrated its character through philanthropic giving and community outreach efforts, such criticism may be tempered.
“The stock price will rebound more quickly, management won’t be viewed as harshly, fines will be less, boycotts may be shorter,” says Godfrey. “And to a shareholder, that’s valuable.”
Intangible relationship-based assets, which can be worth millions to a company and its shareholders, are often the very assets that receive the most benefit from philanthropic efforts in the event of misfortune, he says.
“Part of the reason that people have had such a hard time seeing the justification for corporate giving is that they don’t see any extra revenue being generated from the expense,” says Godfrey. “What I argue in my paper is that they should look at it more like reputation insurance.”
Jeffrey S. Harrison, the W. David Robbins chair in strategic management at the University of Richmond, said Godfrey's article provides compelling economic justification for corporate giving.
“In this regard, it is truly groundbreaking research,” said Harrison. “For many years scholars have debated whether there is any sound economic justification for corporate philanthropy. Godfrey's well-grounded explanation that ‘doing good’ provides insurance-like protection for companies because of the goodwill it creates is very significant. I am sure it will promote a lot of additional inquiry.”
Along with the economic incentive his model gives to managers to allocate a firm’s resources toward philanthropy, Godfrey suggests that companies can still think of ways giving can be directed to further business interests.
“For example, it would make sense for an outdoor outfitter like REI to make donations to organizations that promote nature or trail conservation,” says Godfrey. “Or, in the case of Qwest, a telecommunications company with a broad range of customers, the strategy might be to give to promote education or literacy, interests that are somewhat related to communication and that would appeal to the company’s diverse customer base.”
That way, consumers see that the companies they frequent are concerned with the same issues that are important to them, says Godfrey, adding that consistency in giving is important to building the reputation that help companies weather storms.
“Just like an insurance policy has premiums that must be paid to keep them current, a company can’t expect to give one time and receive any coverage. This is something a company has to work at, but it works because philanthropic activity is morally discretionary rather than obligatory.”