Giving back to society can be good for business too

Companies that donate to charitable causes enjoy greater success in corporate acquisitions, especially if they face negative publicity or controversy, a new study finds

By Lisa Kennedy

From the M+ museum in West Kowloon to the statue of the Goddess of Mercy on the quiet hill of Tai Po District, striking monuments to corporate philanthropy span Hong Kong. The 76-metre statue in particular was financed by the city’s richest tycoon, Li Ka Shing, who has founded a charitable organisation that has reportedly provided billions of dollars to top universities around the world.

Hong Kong’s public universities also provide abundant evidence of corporate giving by its business leaders, of which education has been a major beneficiary. Campus building names provide a roll-call of Hong Kong magnates, with major donors including Li Ka Shing, KK Leung, Lee Shau Kee and Run Run Shaw, to name but a few.

Funding major projects that advance cultural heritage, education or other causes rewards business leaders with prestige and recognition of their achievements, as well as the simple knowledge that by giving back to society they are helping to relieve social and environmental issues or improving life for future generations.

From an economic standpoint, some might ask: Does corporate philanthropy also help corporations to prosper and grow through the acquisition of other companies that may boost a firm’s wealth, size, market reach or diversification? A new study investigated this question in the context of corporate giving by manufacturing firms in mainland China.

The study entitled Looking good in the eyes of stakeholders: Corporate giving and corporate acquisitions was conducted by Yang Haibin, a Professor in the Department of Management at the Chinese University of Hong Kong (CUHK) Business School, in collaboration with Professor Gao Yongqiang and Zhang Miaohan of Huazhong University of Science and Technology in Wuhan.

The research builds on the growing interest in corporate social responsibility (CSR) and its relationship to companies’ wider strategic goals, such as acquisitions. As companies need to consider various stakeholders in their decision-making processes, philanthropy helps firms cultivate goodwill and trust among regulators, target firms, and communities.

Winning over stakeholders

In the study, Professor Yang and his collaborators examined the effect of a specific activity of CSR, corporate giving or donations, on corporate acquisitions. Since corporate giving helps firms obtain support from various stakeholders, firms may deliberately use it to facilitate major strategic behaviours such as acquisitions.

“Acquisitions would not be successful without support from key stakeholders such as regulators, target firms and communities, and benevolent gestures towards charitable causes enhance a firm’s reputation in the acquisition market,” says Professor Yang. “Therefore, firms planning to undertake acquisitions have more incentive to engage in philanthropy.”

“Business executives could recognise the strategic or instrumental value of corporate giving and integrate their firms’ non-market strategy with market strategies such as acquisitions, which are highly risky and can lead to losses, if they are not planned well.”

Professor Yang Haibin

The researchers argue that winning over stakeholders is critical to success in corporate acquisitions, because they are a risky investment and stakeholder resistance often leads to failure. Three types of stakeholders are important in China. Firstly, those in the target firm: its owners, directors, employees and suppliers; secondly, institutional stakeholders, especially the government, and thirdly, investors and stock analysts.

The researchers also theorise that there will be a stronger positive relationship between corporate giving and subsequent acquisitions for firms that face negative media coverage or those that operate in controversial industries, such as tobacco, gambling or oil and gas.

A wide evidence base

The theory was tested on a sample of 995 manufacturing companies across nine industrial sectors that were listed on the Shanghai and Shenzhen stock exchanges between 2004 and 2015. The sample includes six controversial industries.

The researchers examined the impact of the companies’ corporate giving on both the number and value of the acquisitions that they made per year; and measured the extent to which this varied for firms facing negative media coverage and those in controversial industries.

Data on the number of negative media reports about the firms per year was taken from the Financial News Database of Chinese Listed Companies. The study was subject to an elaborate set of controls and statistical analyses.

The results showed that corporate giving is positively associated with both the number and value of subsequent acquisitions; and that this positive relationship is stronger both for firms that have faced negative media coverage and for those in controversial industrial sectors. All the researchers’ hypotheses were thus confirmed.

“China provides an ideal context for this research because the Chinese often use a firm’s philanthropic giving to judge its social consciousness,” says Professor Yang.

Further analysis of the figures showed that corporate giving also increased the proportion of acquisitions that were completed successfully and the return on sales by subsidiary firms after the acquisition. Moreover, firms that faced negative media coverage before making a philanthropic donation were subject to fewer negative media reports afterwards.

Implications for managers

“This study has rich implications for managers,” says Professor Yang. “Business executives could recognise the strategic or instrumental value of corporate giving and integrate their firms’ non-market strategy with market strategies such as acquisitions, which are highly risky and can lead to losses, if they are not planned well.”

Furthermore, Professor Yang highlights that the study shows that both society and companies could benefit from corporate giving. This win-win situation not only offers confidence to executives to engage in philanthropy, but also provides an ethical basis for such behaviour, at least from a utilitarian perspective.

“Firms are not all set to benefit equally from philanthropy in their market strategies,” he explains. “Companies that have had more negative media coverage and firms belonging to controversial industries are in greater need of corporate giving. So, this study provides a solution for stigmatised firms to advance their acquisition behaviours through philanthropic donations.”

However, the researchers also warn that there is a risk that companies could “unethically manipulate” stakeholders’ expectations by engaging in corporate giving to whitewash their reputations and alleviate wrongdoing in controversial industries.

“For this reason, we maintain that it is critical to develop evaluative analyses of corporate giving and reflect on these donations and companies’ wider behaviour to arrive at a normative assessment of corporate philanthropy,” Professor Yang adds.