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Corporate Philanthropy is Not an Oxymoron

Corporations have had a prominent role in relief efforts after natural disasters abroad, sending money and aid to those affected by the Tsunami in Southeast Asia and the earthquake in Haiti. Similarly, corporate charitable foundations and partnerships have benefited communities at home, strengthening local relationships. Yet opponents of corporate philanthropy argue that corporations exist solely to benefit stockholders: Corporate managers owe a fiduciary duty to maximize corporate revenue and hence stockholder profit. These critics contend that while corporate philanthropy may benefit the public, it does little to advance the interest of stockholder and thus is outside the scope of a corporation’s responsibilities. 

Corporate PhilanthropyJane Muir and Jordan Alexander Dresnick argue that charity is not antithetical to the responsibilities a corporation owes to its shareholders. For example, American corporations can use disaster relief as a marketing venture, because donations may grow market share and maximize stockholder profit. There are also tax advantages of philanthropy, and the opportunity to create beneficial relationships in communities.

Many point to the obvious tax advantages of philanthropy. Corporate acts of charity can also camouflage rent-seeking behavior. These propositions further the notion that corporate charitable contributions may be utilized to maximize firm value and therefore advance the interest of shareholders. Aggregate stakeholder welfare can be maximized by paying particular attention to stockholder interests. For example, if an act of corporate philanthropy augments employee utility, improves the welfare of the community in which the firm conducts commerce, bolsters goodwill among customers, and provides a tax shield, the company can enhance employee productivity, increase market share, and decrease its tax bill. These results benefit the shareholders while providing philanthropy to the community. 

Although corporate philanthropy may appear only to address the community stakeholder, Jane and Alexander argue that it can also advance each of the aforementioned stakeholder groups. Many models of stakeholder management contend that the corporation improves its present state by addressing each of its stakeholders. In so doing, the future wellbeing of each group is improved and this therefore advances the relative financial position of the firm. This clearly behooves the interest of all affected stakeholders, including the shareholders. This theory of corporate philanthropy argues that in addressing the immediate interests of community, the firm improves the future condition of each stakeholder group.

Although numerous ethicists and philosophers have discussed the morality of corporate philanthropy, the economics literature, in contrast, contains little research on this topic. Writing in 1966, Orace Johnson noted, “In view of the importance of philanthropy in our society, it is surprising that so little attention has been given to it by economic or social theorists.”   Despite the four decades since Johnson identified this deficit, relatively little work has been done on the topic.

Here, economic analysis is used to investigate the claims of the shareholder and stakeholder theories of management. These two principles may appear contradictory, but they take on remarkable resemblance, when viewed from an economic standpoint. This paper begins with a survey of the literature, introducing the contrasting schools of thought on the shareholder and stakeholder theories of management. It then develops a series of guidelines to enable managers to identify charitable contributions that fulfill the firm’s fiduciary duty to its stockholders.

Read more about how corporations can leverage philanthropy for a mutual benefit here.

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