Corporate Philanthropy and Higher Profits?
25 January 2007 at 11:01 am
Research into corporate philanthropy and whether being charitable — such as donating money to medical research or to organisations that promote economic self-sufficiency – helps a company’s financial picture concludes that it all depends on the type of industry.
The research is published by the Wharton School at the University of Pennsylvania and is produced by Finance Professor Vinay B. Nair and two other researchers.
The researchers say corporate philanthropy and profits are positively related only in industries with high advertising intensity and high competition citing as examples the beverage and retail industries.
In low-advertising industries, such as computer chips and business-to-business services — the found that there is actually a negative association between philanthropy and profits.
The Wharton School says the mixed-bag findings come at a time when more and more companies are putting on a generous, good-citizen face.
Professor Nair says in the business community, corporate social responsibility (CSR) has emerged as a significant theme.
His research paper is called "A Model for Corporate Philanthropy," co-authored with Columbia Business School Professors Raymond Fisman and Geoffrey Heal.
Nair and his colleagues theorise in the paper that charitable giving may be good for the bottom line because it helps to convince consumers that a company and its products are trustworthy. Trust factors into many purchases, particularly when it is not obvious why one product is better than another.
The researchers say visible corporate philanthropy provides a source of product differentiation in an otherwise uniform market space.
To gauge the relationship between corporate giving and profits, the researchers collected financial data from 1991 to 2003 on 3,000 companies.
Companies were assigned a philanthropy rating score based on certain levels and patterns of giving, such as support for housing or education initiatives. The researchers excluded from consideration good deeds that could also have the effect of boosting a company’s productivity and, in turn, its profits.
For instance, a company’s decision to operate an environmentally friendly plant could increase efficiency. Likewise, a company that offers flexi time and good maternity leave benefits may reap the benefits of a more loyal and productive workforce.
The researchers found, as they suspected, that there was much more philanthropy going on in advertising-intensive industries.
But when it came to profitability, being generous paid off — or at least didn’t cause a financial drag — only under certain circumstances.
The researchers concluded that in advertising-intensive industries, there is a more positive relationship between philanthropy and profit.
However they say that in an industry with very low advertising expenditures such as the steel industry, there is actually a negative association between philanthropy and profits.
From the perspective of competition, they found that for competitive industries, the direct cost of giving is offset by the benefits of differentiation that flow from corporate philanthropy.
They conclude that corporate philanthropy isn’t necessarily making those companies rich, but it isn’t hurting their bottom line, either.
Corporate philanthropy may act as a signalling device, indicating that a firm’s products are reliable and that it can be trusted to provide high quality in those dimensions where the consumer cannot readily check quality before buying," the paper concludes.
Read the full report at Knowledge@ Wharton http://knowledge.wharton.upenn.edu/papers/1331.pdf?CFID=3686946&CFTOKEN=1010