UNIT 17

Objectives

PHILANTHROPY AS A STRATEGIC CHOICE

After reading this unit you should be able to:

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know what the concept of corporate philanthropy is all about describe the nature of corporate philanthropy understand the strategic philanthropy and economic motivations

Structure 17.1 17.2 17.3 17.4 17.5 17.6 17.7 Introduction Nature of Corporate Philanthropy Strategic Philanthropy and Economic Motivations Summary Key Words Self Assessment Questions Further Readings

17.1 INTRODUCTION
The first generation of Corporate Social Responsibility (CSR) showed how companies can be socially responsible in ways that do not detract from commercial success rather contribute to it. It was the most traditional and widespread form of CSR and often manifested itself as corporate philanthropy. It rose to heights in 1990s when huge amount of money was being donated by individuals. It was not a part of the main business of the company but may have added commercial value through reputation enhancement. However as the concept evolved, corporate philanthropy is considered as a practice by companies of all sizes and sectors making charitable contributions to address a variety of social, economic and other issues as part of their overall corporate citizenship strategy. Historically many businesses played a significant role in their local communities by providing financial support to a variety of non profit organizations and charitable causes. In recent years several events and trends have contributed to companies changing the way they approach their philanthropy. The most prominent changes include :
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Adoption of a strategic approach to philanthropy in which companies align charitable giving with the companys core business interests; Expansion of the geographic focuses of corporate giving to reflect the needs and expectations of a global workforce and customer base. Development of measurement tools for evaluating the impact of charitable contributions. Innovation in the ways companies incorporate greater stakeholder participation in philanthropic activities, create long-term relationships with nonprofit organizations and organize their philanthropic programmes.
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Corporate Social Responsibility

Activity 1 Mention the prominent changes which have occurred with philanthropy.

17.2

NATURE OF CORPORATE PHILANTHROPY

The term philanthropy is generally understood as giving in the interest of the recipient. A definition of corporate philanthropy is that it is a voluntary transfer of resources from the firm to the recipient at below market prices (Fry, Keim, and Meiners, 1982) (Wokutch and Spencer, 1987). Carroll (1979) speaks of business philanthropic responsibilities. He uses the term philanthropic in this context as voluntary or discretionary social activities which are undertaken in response to societys expectation that businesses be good corporate citizens (Carroll, 1991 p. 42). Burlingame and Frishkoff characterize the ways in which corporate philanthropy is undertaken as
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Altruism giving in the interest of others without self- interest Shared-benefit giving, giving to the common good with general but not specific benefit Enlightened self- interest the chance to enhance a product or service promotion, where the donor looks for specific benefit over the long term Charitable investment where there is an expectation of short term gain, greater than that invested Stewardship where there is a direct focus on maximizing shareholder wealth and such activities as tax strategies would be appropriate.

In the past decade or two we increasingly have seen such activities as charitable contributions, community service programmes, employee voluntarism, environmental friendly policies , executive loans programmes and various quality-of-life efforts. Regarding charitable giving, companies increasingly strive to align charitable giving with hearts of workers and customers. Quality of life issue includes rebuilding inner cities, providing job training for the hard core unemployed, helping renovate parks, sponsoring cleanup programmes, providing primary education and primary health care facilities. Some management scientists have defined the concept of philanthropic and charitable dispositions and activities of business enterprises to such cases as promotion of education and health, removal of poverty, acceleration of rural development and so on. Andrew Carnegie, founder of the conglomerate U S Steel Corporations, put forth philanthropic concept of social responsibility in his book, The Gospel of Wealth published in 1899. Carnegies view was based on two principles: the charity principle and the stewardship principle. Both were basically paternistic; they saw business as parents to child like employers and customers who lacked the capacity to act in their own best interest.
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According to the Charity Principle, societys more fortunate members have obligation to help the less fortunate members, including the unemployed, the handicapped etc.

Carnegie himself practiced what he preached by giving away millions of dollars for charitable and civil purposes. The Stewardship principle required business and wealthy individuals to view themselves as the stewards or caretakers of their property. Cornegies idea was that the rich hold their money in trust for the rest of society and can use it for any purpose that society deems legitimate. However it is also a function of business to multiply societys wealth by increasing its own through prudent investments of the resources under its stewardship. Activity 2 List the ways in which corporate philanthropy are undertaken. .. .. .. .. ..

Philanthropy as a Strategic Choice

17.3

STRATEGIC PHILANTHROPY AND ECONOMIC MOTIVATIONS

When it comes to philanthropy, executives increasingly see themselves as caught between critics demanding ever higher levels of corporate social responsibility and investors applying pressure to maximize short-term profits. Increasingly, philanthropy is used as a form of public relations or advertising, promoting a companys image through high-profile sponsorships. But there is a more truly strategic way to think about philanthropy. Corporations can use their charitable efforts to improve their competitive context, the quality of the business environment in the locations where they operate. Using philanthropy to enhance competitive context means aligning social and economic goals and improving companys long-term business prospects. Addressing context enables a company not only to give money but also leverage its capabilities and relationships in support of charitable causes. Taking this new direction requires fundamental changes in the way companies approach their contribution programmes. Adopting a context-focused approach requires a far more disciplined approach than is prevalent today. But it can make a companys philanthropic activities far more effective. Scholars indicate a movement in corporate philanthropy towards strategic giving, for example, giving that improves the firms strategic position (ultimately the bottom line) while it benefits the recipient of the philanthropic act. Although the existence of this trend is widely accepted, findings of a survey of corporate giving managers of U.S. firms that have had an established giving programmes of at least 5 years, with annual giving totaling at least $200,000 each year, suggest that corporate giving managers believe their firms are becoming increasingly strategic in their philanthropic activities. The findings also indicate that institutional- firm and individual-level influences combine to precipitate strategic philanthropy. These findings lend support to the belief that the nature of corporate philanthropy is evolving to fit a more competitive market place. The new corporate philanthropy encourages companies to play a leadership role in social problem solving by funding initiatives that incorporate the best thinking of
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Corporate Social Responsibility

governments and nonprofit institutions. The new approach to philanthropy is best illustrated by the AT&T Foundation, which has set up a dynamic relationship with the companys business units to support social causes while advancing AT&Ts business goals. In 1935, George Merck II wrote that Merck was inspired by the ideals of advancement of medical science and of service to humanity. Years later, the company developed and gave away a drug to cure river blindness; when asked why, Mercks response was that a failure to go forward would have demoralized the companys scientists. After World War II, Merck brought streptomycin to Japan to eliminate tuberculosis. Although the venture made no money, today Merck is the largest American pharmaceutical company in Japan. When asked to explain such policies, Merck and similar corporations cite both self-identity and pragmatic long-term business reasons. But it seems the ideology of giving would prevail regardless because the companies assume acts of goodwill somehow pay off. Corporate values do affect decision-making. A notable Harvard Business School case points to the importance of Johnson & Johnsons credo, notable in its decision to pull all Tylenol around the nation when bottles laced with cyanide caused deaths in one city. Johnson & Johnson also spent money to communicate its warning and policy. Another company, facing similar dangers, took more limited actions. To take an example closer to this audience, It was noticed that Roger Beach, the CEO of Unocal, stresses the corporations commitment to corporate citizenship in its vision statement, which observes that Unocal strives to improve the lives of people wherever we work. He points towards the concrete steps the company has taken in East Asia during the current crisis, including assistance for Asian students in the United States. The connection of corporate citizenship to the elements of business strategy is obvious, and there are many examples. In 1987, the Minnesota legislature passed a law to block a hostile takeover of Dayton-Hudson, citing the companys outstanding record of corporate citizenship. The Clean Corporate Citizenship programme in Michigan rewards companies for good environmental records with greater flexibility in meeting environmental guidelines and reduced regulatory oversight. In less stable locations, the rewards for good corporate citizenship can be even greater. In Vietnam, Motorolas work with rural health clinics helped it to become one of the few U.S. companies to do well there. In South Africa, Consolidated Goldfields arranged and paid for secret meetings between the ANC and top Afrikaners during the last few years of apartheid. The sessions are credited with building trust and helping lay the groundwork for the negotiations to end apartheid. In so doing, the company helped avoid a descent into anarchy and conflict in a country in which it had long-term business interests. In Panama, Min-America, Panamas largest mining group, has invested in a host of social projects to benefit rural and isolated communities affected by its mining activities in order to build support for a long-term investment presence. In Hungary in 1989, American Express helped bring together competing Hungarian ministries to create a conducive environment for tourism and underwrote an education programme for the industry, in the process establishing American Express leadership position in tourism in Hungary. Clearly, good corporate citizenship is not sufficient to guarantee a friendly public policy environment on its own. But it certainly is a vital element in trying to do so. Todays business strategist must think globally, but act locally. Global competition requires companies to benchmark themselves with others around the world; if a company doesnt, it can get run out of business. At the same time, companies need to be close to all their customers. This means knowing the tastes and interests of local

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markets. So corporations must operate effectively at various levels, while integrating different functions smoothly. In a world of data overload, businesses also need to know what information matters. Surveys show that a companys image and reputation matter. It is important to customers and good corporate citizenship is a key component of that image around the world. IBM studies reveal that citizens expectations of corporate responsibility are as high in Korean and Malaysian cities as they are in the United States. British Petroleum now publishes a social responsibility report along with its financial report. One can see how companies are connecting products to causes as a marketing strategy. Corporate citizenship is also important to local reputation and knowledge. Successful companies will need more ties to a greater variety of communities, so as to learn about local customs, standards, and networks. Local employees will also care about their employers role in the community. IBM made a special effort in Japan to help the handicapped through product development, contributions to organizations, employee volunteerism, and hiring practices. This has helped IBM become one of the most prestigious companies in Japan. A recent Japanese poll found that the Japanese public ranks IBM second only to Sony in respect for social responsibility. McDonalds, in turn, has employed its Ronald McDonald Houses to unify a company composed of thousands and thousands of retail outlets around the world. The success of this strategy also applies to firms outside the United States and Europe. In 1992, a Taiwanese soft drink company, King Kar, organized a huge public relief effort to help Chinese flood victims. With judicious use of its logo during the flood relief, the company subsequently moved ahead of Pepsi as the second most popular soft drink in Taiwan. Another aspect of a successful business strategy is that it must be based on developing and supporting a companys people. Because competitors can often also access the same capital and technology, the competitive challenge is how a workforce applies these factors more productively. At a time of rapid change and uncertainty, businesses need managers who can handle more variables, solve problems through flexible thinking, and are sensitive to the outside environment. Managers who recognize that their job includes good corporate citizenship are more likely to develop these skills and insights. They are likely to gain new ideas and to be aware of more resources outside the company on which they can draw. For all employees, corporate citizenship will affect their pride, loyalty, and job satisfaction. These qualities are reflected in dealing with customers and building a sense of co-ownership. For these reasons, corporate citizenship is increasingly seen by human resource personnel as a key part of employee development. These and similar employee skills derived from corporate citizenship can also turn out to be vital in a crisis. Although the foundation of a large oil company was widely admired for its many contributions, the work of the foundation had no apparent connection to the companys corporate strategy. So after an oil spill, senior corporate management had few ties to environmentalists or others that might have offered useful advice. The company instead became reactive, making it a target. In contrast, another large oil company developed a large network of ties with outsiders who helped the company to respond quickly and openly when accidents occurred. In turn, the company helped environmental groups by testifying in favour of legislation that sought to address both environmental and business concerns. This example points to the importance of a fifth component of business strategy: the development of effective alliance partners.

Philanthropy as a Strategic Choice

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Corporate Social Responsibility

In todays environment, more than ever, businesses must recognize the numerous variables and relationships outside their control. Customers are often competitors too. Connections are more horizontal than hierarchical and can only be managed through a combination of incentives, shared interests, and negotiated relations. This is a challenge of alliance management similar to the task facing countries in coalitions or alliances like NATO. These business alliances should extend beyond the corporate world. For example, NGOs can offer companies ideas, information, and support. NGOs may become partners on projects. In some countries, they assist in training and identifying potential employees. In return, companies that form strategic alliances with non-profits can offer something other than money: companies may provide management advice, technical and communication support, employee volunteers, and other resources. The alliances become two-way streets, where the partners benefit and learn from one another. By doing so, a company can go beyond simply donating and transforming corporate citizenship into strategic philanthropy as an element of a successful business strategy.

17.4

SUMMARY

Historically many businesses played a significant role in their local communities by providing financial support to a variety of non profit organizations and charitable causes. In recent years several events and trends have contributed to companies changing the way they approach their philanthropy. Corporations can use their charitable efforts to improve their competitive context, the quality of the business environment in the locations where they operate. Using philanthropy to enhance competitive context means aligning social and economic goals and improving companys long-term business prospects which is well illustrated in the examples discussed.

17.5

KEY WORDS

Altruism giving in the interest of others without self- interest. Corporate Philanthropy is considered as a practice by companies of all sizes and sectors making charitable contributions to address a variety of social, economic and other issues as part of their overall corporate citizenship strategy. Stewardship where there is a direct focus on maximizing shareholder wealth and such activities as tax strategies would be appropriate.

17.6
1) 2) 3) 4)

SELF ASSESSMENT QUESTIONS

What do you understand by corporate philanthropy? Mention few ways in which corporate philanthropy is undertaken? Discuss few cases suggesting strategic philanthropy and economic motivations? From the above answer, comment on the relevance of strategic philanthropy for business organizations.

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17.7

FURTHER READINGS

Philanthropy as a Strategic Choice

Elko, Ibuki. Innovation in Corporate Philanthropy, adopting balanced scorecard, Methodologies to build Strategy and Evaluation System , Nomura Research Institute. Johnson, Gerry & Scholes, Kevan. (2004). Exploring Corporate Strategy, Sixth edition, Prentice-Hall of India, New Delhi. Jr. Thompson A Arthur, III Strickland A J. (2003). Strategic Management, Concepts and Cases, Thirteenth edition, Tata McGraw Hill Publishing, New Delhi . Rao, V.S.P. and Hari, Krishna. V. (2003). Strategic Management, Texts and Cases, First Edition, Excel Books, New Delhi. Robert, B. Zoellick. (January 27, 1999) President and Chief Executive Officer of the Center for Strategic and International Studies (CSIS), Keynote Address before the Business- Humanitarian Forum, Geneva, Switzerland. Velasquez, G. Manuel. (2002). Business Ethics, Concepts and Cases, Fifth edition, Prentice Hall of India, New Delhi.

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