Behind the Veil of Corporate Philanthropy

Philanthropic activities are increasingly used to promote a company’s image to the public. New research on Chinese firms shows they can also serve as a signal for a company’s commitment to financial transparency

By Fang Ying, Senior Writer, China Business Knowledge @ CUHK

Companies that actively engage in corporate philanthropic giving tend to demonstrate greater concerns for investors’ interests by providing more transparent financial information and avoiding corporate misconduct. However, the relationships between corporate giving, financial information transparency, and corporate misconduct differ among companies with different ownership types. This is the finding of a research conducted by Prof. Albert Tsang, School of Accountancy at the Chinese University of Hong Kong (CUHK) Business School, and his collaborators from City University of Hong Kong and Sun Yat-Sen University in Guangzhou.

Beyond Philanthropy

The research investigates how corporate philanthropic activities are associated with financial transparency and misconduct, and how a company’s ownership type affects the relationship between these three elements. Examining more than 3,000 Chinese firms listed on either the Shenzhen or Shanghai Stock Exchange during 2003-2009, the study looked into the corporate giving data from these firms’ annual reports and their data on financial transparency and corporate misconduct.

The researchers found that there is a positive relationship between corporate giving and financial information transparency, and that the relationship is stronger among Chinese non-state-owned enterprises (non-SOEs). At the same time, among these non-SOEs, there is a negative association between corporate philanthropy and corporate misconduct. In other words, the more a company engages in philanthropic activities, the more it exhibits financial transparency and the less it engages in corporate misconduct. However, the researchers did not find such a pattern among China’s SOEs.

Why is that the case? According to Prof. Tsang, corporate philanthropic activities reflect a company’s positive response to stakeholder demands. Usually, a company engaged in corporate philanthropy also demonstrates equal concern for its shareholders by providing them with more transparent financial information and are less likely to engage in corporate misconduct.

“There is a concept called behavior consistency,” explains Prof. Tsang. “In the business setting, if a firm truly cares about its stakeholders’ interests, it will also care about its shareholders’ interests since the companies should treat them equally. In other words, if a company does well in the CSR dimension, it also tends to do well in other dimensions. If it cannot treat all stakeholders and shareholders equally, its business cannot sustain in the long run. For such an inconsistency to occur, there must be some reasons behind it.”

Prof. Tsang points out that due to the unavoidable political pressures in China, SOEs have to fulfill the government’s objectives and have heavier burdens to bear when it comes to fulfilling their corporate social responsibility. “The government may force the SOEs to be its representatives to do good. In that case, many Chinese SOEs are not into voluntary corporate giving. Or they might do so without being concerned about the positive financial returns that usually come as a result of creating good will in society through philanthropy. Even if they do make charity contributions, you don’t see other aspects of the company improve, which means that they actually do not treat shareholders equally well as they treat stakeholders,” he puts it straight.

For SOEs, even though they engage in corporate philanthropy, it doesn’t necessarily mean that they behave in a more responsible manner by providing high-quality accounting information and avoiding corporate misconduct, according to the research.

However, things look differently for China’s non-SOEs.

The study suggests that non-SOEs’ engagement in corporate giving may be driven by considerations such as the need to behave ethically to win stakeholders’ trust and to create a good public image. Therefore, these companies are more likely to behave in a consistently responsible manner toward shareholders by providing transparent financial information and refraining from corporate misconduct.

“For non-SOEs, when they engage in corporate philanthropy, it truly reflects their willingness to deal with all stakeholders in an ethical way and their effort in building a trustworthy image,” Prof. Tsang comments.

A Problem in Emerging Markets

Can this finding be applied only to companies in China? Prof. Tsang opines: “Not only in China. Actually, the situation is the same in all emerging markets. Companies with associations with the government may exhibit similar problems. Some researches have shown that government ownership can negatively impact the performance of a company, as SOEs are influenced by a variety of interests beyond the maximization shareholders’ interests.”

Prof. Tsang says that there is limited analysis of the relationship between corporate social behavior (particularly corporate philanthropy), corporate financial transparency and misconduct. Moreover, existing research on corporate philanthropy has primarily been carried out in the context of Western countries. As such, it was about time to explore the relationship between corporate philanthropy and financial transparency in the context of emerging markets, particularly in China.The study offers important practical implications for company policymakers and investors.

As for investors, they should evaluate the credibility of a company’s engagement in corporate philanthropy to determine whether these practices reflect their genuine intention to do good or are just an act of window-dressing.