Hidden Conflict: How Companies Benefit from Charitable Giving

ESG (Environmental, Social, and Governance) and Corporate Social Responsibility (CSR) are both vital frameworks guiding businesses towards sustainability and ethical operations. With growing attention to corporate social responsibility examples, companies around the world are scrambling to project themselves in positive light. A recent report estimated corporations in the U.S. increased their philanthropic donations to charities by 23.8% in 2021, to US$21.08 billion.

The thinking goes that companies may be ruthless in their respective industries, but their tireless efforts to do some good in return helps, to a certain degree, to balance the social and ethical ledger. However, a new study has sought to peer deeper in to the motives that companies have in supporting charitable organisations. Specifically, it sought to examine whether companies would have an ulterior motive when appointing a representative to sit on the supervising board of a charity it supports.

“While corporate investments can give public charities financial support, companies can also benefit from their charity partners. That’s why it’s natural that people may be concerned that a firm’s charitable activities is not aimed at producing a public good but for its own political benefits,” says Ahn Changhyun, Research Assistant Professor at the Department of Finance at The Chinese University of Hong Kong (CUHK) Business School, and one of the co-authors of the new study.

He notes, for example, that U.S. opioid-manufacturing pharmaceutical company Purdue Pharma was criticised for lobbying against federal agencies’ efforts to curb opioid prescriptions through a non-profit medical organisation, while at the same time having its chairman serving as a director on the non-profit’s board.

Influencing Public Policy

The study, titled Hidden in Plain Sight: The Role of Corporate Board of Directors in Public Charity Lobbying was conducted in in collaboration with Prof. Joel Houston and Prof. Kim Sehoon, both from University of Florida. “Its findings suggest that firms and charities share interests in ways not readily apparent to policymakers or the general public,” Prof. Ahn says, adding that this can influence public policy in ways that are not well understood and it is important to bring more transparency to the political process.

“While corporate investments can give public charities financial support, companies can also benefit from their charity partners.”

Prof. Ahn Changhyun

To construct the dataset for their study, Prof. Ahn and his collaborators collected publicly disclosed financial and hiring information of public charities, as well as biographic information on directors of publicly traded firms in the U.S., for the years between 1999 and 2017. They used this information, which included 385 charities and 1,248 firms, to first identify whether specific corporate directors sat on the boards of different charities. They then examined government reports on federal lobbyist activities, including their lobbying topics and related costs.

Political lobbying, a process where an organisation seeks to make itself heard during the law-making process, is one of the most important ways of political engagement for companies, and can bring benefits such as preferential access to finance and lower levels of regulatory oversight. The researchers used this data to quantitatively summarize whether a charity’s lobbying activity overlaps with the lobbying interests of the connected firm.

After analysing the data, Prof. Ahn and his co-authors found that public charities with corporate directors on their boards spent 17 percent to 18 percent more on lobbying on issues that are important to their connected corporate firm.

Corporate Political Engagement

The study also found that if a connected firm itself lobbies more, then this further magnifies the increase in lobbying actions that charities will spend on as result of the presence of a corporate director on its board. On the flip side, the effects are almost non-existent if the firm spends little directly on lobbying. In addition, the study also found that firms with greater political networks are more likely to seek to influence a charity’s lobbying activities.

But why do firms need help from charities when they can lobby on behalf of themselves? The research team reasoned that this was because lobbying actions conducted through a charitable organisation were more cost effective. They found that a 1 percent increase in lobbying expenditure by a charity directed at a government agency resulted in the connected firm receiving a 5 percent increase in the value of contracts awarded from that same agency.

“It is in this way that the lobbying efforts of charities can be viewed as valuable and complementary to a company’s own efforts, and one that comes at a low direct cost, even though the supported charity may actually be spending a lot less than what the firm is spending to lobby for the same cause,” says Prof. Ahn, adding that firms may be complementing their political engagement through the actions of the charities they support.

Reciprocal Benefits

“The fact that companies stand to benefit hugely from the lobbying activities of the charities they support goes a long way to explaining why charities with corporate directors on their boards are more likely to lobby on behalf of their connected corporate interests,” the professor adds. “But at the same time, these same charities are willing to extend political favours for firms through lobbying. It suggests that the charities themselves also stand to benefit in return.” Indeed, Prof. Ahn and his co-authors found that charities engaging in lobbying on behalf of corporations are more likely to receive donations and grants.

As non-profit organisations, public charities raise funds through contributions from corporations, government agencies and the general public. The researchers noted that this need for charitable donations can help to explain why charities often bring corporate directors onto their boards. The study found that when charities lobby for connected firms, those with corporate board connections see their receipts of grants and donations rise by between 10 percent and 16 percent, compared to those without.

In the U.S., public charities are prohibited from involving themselves in political campaigns, meaning they are not allowed to engage in activities that supports or opposes any candidate seeking public office. Falling afoul of this, they risk losing their charitable status which exempts them from federal income taxes. However, they are allowed to participate in political lobbying activities to influence the law-making process. “Charities are allowed to lobby the legislative process because it encourages policymakers to hear about the needs of the society through the lens of advocacy groups like firms and charities,” he says.

Tightening Governance of Charities

Because of this, it has become not unusual for large corporations in the U.S. to mask their political engagement from the public domain by directing it through charitable organisations with which they have sway over, Prof. Ahn says. “Because the details of these investments and the amount of capital deployed through this channel are unobservable, it is often dubbed ‘dark money’,” he says, emphasisng the importance of making the process more transparent.

To address this loophole, Prof. Ahn and his co-authors note that policymakers may consider enhancing the governance of charities. “They can do so specifically by strengthening the requirements for maintaining their tax-exempt status,” says Prof. Ahn, adding that losing tax-exempt status will lead to the loss of donations. He suggests that authorities can mandate charities to disclose donor information and to whom they have reached out for political objectives, so that the public can scrutinise the charities’ activities.

Finally, Prof. Ahn notes that this latest study has sought to shed light on a potential channel of corporate political influence, where charities provide firms with a less-recognised source of political capital. “We sought to highlight how the relationship between charities and their corporate patrons can influence the political process,” he says. Regarding future research direction, he says the team may next look to examine how industry-wide collective organisations interact with non-profit charities. “It will be interesting to look at how business leagues and associations are formed, and how competition within the industry may harm or benefit charities,” he says.

Know more about CSR:

Corporate Social Responsibility Definition

Corporate Social Responsibility (CSR) refers to the ethical and social commitment made by businesses to contribute positively to society and the environment beyond their primary motive of profit-making. It encompasses a company’s initiatives to assess and take responsibility for its effects on environmental and social well-being, often going beyond what is required by regulators or environmental protection groups. CSR can encompass a range of activities such as donating to charities, implementing greener business operations, supporting community programs, and ensuring ethical labor practices.

Why CSR is important?

In today’s business world, Corporate Social Responsibility (CSR) is crucial as it reflects a company’s dedication to ethical operations and its intent to positively impact society. By adopting CSR activities, businesses look beyond mere profit, underscoring their commitment to the environment, stakeholders, and the communities they touch. By promoting sustainable methods, championing social causes, and fostering community growth, they not only address societal concerns but also bolster their reputation, nurture customer trust, and draw in elite professionals. As the awareness of environmental and social matters grows among consumers and investors, CSR provides businesses with a competitive edge, harmonizing their objectives with society’s larger aspirations.