Corporate charitable giving and conflicts of interest

This is, of course, the season of giving.  And so – hopefully in not too Grinchian a way – the Conflict of Interest Blog looks at possible COIs in corporate philanthropy.

One type of such COI concerns outright corruption  (i.e., third-party conflicts) and perhaps the most attention getting story of this sort in the past year is about a commitment by a subsidiary of Wynn Resorts to contribute $135 million to the University of Macau Development Foundation and an FCPA investigation into whether this was done with a corrupt intent to further the company’s business interests there.  The company has denied any wrongdoing and, as best I can tell from public accounts, the matter remains unresolved.

But then there are the more prosaic types of conflicts similar to those regarding corporate political contributions being used to promote an executive’s personal political agenda . For more on those sorts of COIs we turn to a post last year from the Harvard Corporate Governance Blog  by  Matteo Tonell, Director of Corporate Governance for The Conference Board (based on a Director Note published by that organization and authored by Baruch Lev of New York University, Christine Petrovits of George Washington University, and Suresh Radhakrishnan of the University of Texas at Dallas for that organization) which provides a thorough analysis of and some interesting data regarding COIs in the charitable contributions context.

The post notes that “[a]n executive can reap personal benefit from corporate philanthropy in several ways.  Even when a gift is fully funded with company money, the executive often receives some credit. These awards, honors, and accolades provide the executive with a psychic benefit and elevate his status in elite social circles. In addition, an executive can use corporate contributions to advance his personal preferences, for example, by supporting an organization with his ideological agenda or the pet charity of a family member. Finally, an executive can further his career by using charitable contributions to gain favor with board members.”

The post further notes that many directors may not be doing a good job in their oversight of this area: “In a survey of 721 companies, 45 percent of respondents answered ‘personal interests of CEO/board members’ to a question about which considerations had the most weight in determining the focus of the corporate philanthropy program.”  Other interesting data points in the paper are that: a) “Companies give more to charity when their top executives and board members have social network ties to the business elite in their community, such as belonging to the same country club or serving on the same board of a prestigious cultural organization”; b) “The larger the percentage of stock owned by the CEO, the less money the company contributes to charity, suggesting that when officers are owners they are more focused on the bottom line. …” and c) “[C]ompanies with larger boards of directors are more generous givers, all else equal. Larger boards are generally perceived as a source of social interaction for directors and less effective as monitors.”

While all of this is troubling and certainly warrants attention, it does not – to my mind – provide a basis for cutting back on corporate philanthropy, given the world of good that giving by businesses provides to those in need.  Rather, in light of that importance, business leaders should strive to ensure that COIs in this area are identified and mitigated, and  the authors of the paper make a number of useful recommendations for doing this, such as aligning corporate giving with business activities and, more importantly, enhancing compliance mechanisms  around corporate philanthropy (in various ways they describe).   Indeed, overcoming COIs of the type identified in the paper may be necessary to making corporate charitable giving truly sustainable.

I should note that the COI-related critique of corporate charity is associated with Milton Friedman, who more broadly also suggested that businesses should refrain from giving because business people –  who are not experts in charity or public policy – could not be expected to make charitable choices wisely.   There is some logic to this, and similar assertions have been made by others.

But as Oliver Wendell Holmes, Jr.  said, “a page of history” can be “worth a volume of logic,”  and consider for these purposes  the page of history captured in this wonderful quote by Winston Churchill (who is no one’s idea of a softie): “When history passes its final verdict on John D. Rockefeller, it may well be that his endowment of research will be recognized as a milestone in the progress of the race … Science today owes as much to the rich men of generosity and discernment as the art of the Renaissance owes to the patronage of Popes and Princes.”  While it would be hard to match the impact being described here, there are also smaller but still vitally important worlds of good being done on an everyday basis by corporate philanthropy – and, to my mind, those seeking to undo that good bear a heavy burden of proof indeed.

Finally, on a different but somewhat related issue, here is a post about COI policies for non-profits.