The Hindu Business Line : Does philanthropy lead to profits?

The Stichting INGKA Foundation and the Bill and Melinda Gates Foundation are running neck-to-neck for the slot of the world's largest charitable organisation, with a corpus close to $40 billion each. Many Indian firms too have set up similar charitable Trusts to fund various activities, principally in the social infrastructure area.

However, the scale of operation of India's corporate charities, such as the ones set up by the Tata Group, comes nowhere near that of their counterparts in the US and other industrial countries. For instance, since its inception in 1919, the Sir Ratan Tata Trust has disbursed about $61 million to various institutions and individuals, and the Sir Dorabji Tata Trust's grants in 2003-2004 amounted to barely $1 million.

Multiple aims

There is not one single causative factor that could be said to be the motivation behind such philanthropic activities on the part of businesses. In general, they wish to be regarded as worthy corporate citizens, intent on living up to the demands of social responsibility.

This is confirmed by a survey conducted by The Economist in 2006 in which, for 85 per cent of the 135 executives and 65 investors who responded, corporate social responsibility was a "central" or "important" consideration in investment decisions; it is to be noted that only 44 per cent had responded similarly five years earlier.

Corporate philanthropy, in fact, can have multiple aims: Securing tax concessions; refurbishing the brand image; inspiring trust in the stakeholders; desire to stand out among companies whose products and services are similar; commitment to goals promoting human and societal well-being; participation in efforts towards economic and social progress at the national and global levels; and so on.

Behind it all there is always an unstated assumption that doing good leads to doing well by bolstering the bottom line. Customers, it is said, are drawn to companies which give away a noteworthy part of their earnings for social causes and human welfare in the belief that they cannot but be equally caring with regard to those with whom they have business dealings. This, it is believed, impinges lucratively on the volume of business pushing up the profits. But does it?

No correlation

Well, yes and no, according to a paper, `A Model for Corporate Philanthropy', brought out by Wharton School Finance Professor, Dr Vinay B.Nair, in collaboration with two Columbia Business School Professors, Dr Raymond Fisman and Dr Geoffrey Heal.

Their study of financial data pertaining to 3,000 companies covering the years 1991 to 2003 shows that the connection between philanthropy and profitability was not cast-iron and obtained only in certain circumstances, and that too in certain categories of companies.

Here are some of their interesting findings: "Corporate philanthropy and profits are positively related only in industries with high advertising intensity and high competition," (such as the beverage and retail industries) "In an industry with very low advertising expenditures" (such as computer chips or business-to-business services), "there is actually a negative association between philanthropy and profits.... If you're in the top 10 percentile for advertising-intensive industries, then corporate charity does not appear to be harmful to profits."

Not all shareholders favour the idea of corporates running charities, deeming it a waste of their money, especially if it is spent on projects that are not to their liking or of low priority. They would instead like the entire profits to be distributed as dividends, leaving it to them to decide on the social causes to which they would like to contribute.

B.S.RAGHAVAN

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