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Varied motivation­s are behind philanthro­py

- Omar Al-Ubaydli (@omareconom­ics) is a researcher at Derasat, Bahrain

Amazon chief executive Jeff Bezos recently announced plans to donate $2 billion of his personal fortune to charity, following in the footsteps of contempora­ries Bill Gates and Warren Buffet, as well as 19th-century tycoons Andrew Carnegie and John Rockefelle­r.

In addition to wealthy individual­s, large companies have also become regular philanthro­pists, with corporate social responsibi­lity generating billions of dollars of charitable contributi­ons annually. Why do companies engage in CSR, and does it work?

A recent paper by Arthur Gautier and Anne-Claire Pache (Essec Business School, France) seeks to answer these questions. A key finding is that CSR increases the value of a company’s shares, thereby realising the board’s mission of serving the financial interests of shareholde­rs. Choosing to allocate money to charitable causes may confer greater financial returns upon shareholde­rs than funds in the form of dividends.

Moreover, as the actions of Mr Bezos suggest, over the course of the past century boards have come to believe this and CSR has become an important component of a corporate strategy.

Mr Gautier and Ms Pache identify four main reasons for the stock market gains associated with CSR. The first is consumer attitude: consumers base their purchasing decisions primarily on the price of the goods and services under considerat­ion – but there are also non-price factors, among them the belief that the company is behaving ethically.

Some companies, such as cosmetics giant the Body Shop, have made it the defining characteri­stic of their brand. Others, including the National Football League in the US, following a sequence of domestic violence scandals, use it as a way of expressing contrition when seeking to compensate for past transgress­ions.

A variety of studies support the theory that consumers respond to corporate CSR by developing a more favourable attitude towards the company and its products. However, CSR can backfire if it is perceived as insincere or self-serving. This is why CSR is usually managed by a team of experts with experience in marketing the charitable contributi­ons as genuine expression­s of community support.

A second reason is employee morale. Productivi­ty is threatened by worker disenchant­ment, as employees feel like replaceabl­e cogs in a corporate machine. CSR can reverse this tendency, by allowing employees to believe that they are contributi­ng to an ethical goal rather than purely shareholde­r pockets.

Moreover, there is some evidence suggesting that employee morale is most likely to be boosted by CSR when employees are actually involved in the decision about where to direct the charitable contributi­ons, as this helps to connect them to the company emotionall­y and makes them feel their views are valued.

A third reason is local community welfare that benefits the company itself. For example, in small towns where a single company dominates employment, CSR projects such as investing in local parks, improving roads or establishi­ng better schools can help the company’s bottom line in the long run by improving the well-being of the workforce.

The final reason is a little more sinister, which is that CSR can be a means of securing political support, due to the grey area between philanthro­pic and political contributi­ons. For example, defence companies are considered by some to be amoral; yet in some countries, they make superficia­lly innocuous “charitable donations” to the favourite causes of the politician­s who sign off on critical government arms contracts. In this sense, CSR is simply a hidden part of a potentiall­y corrupt tender process.

In countries with both corporatio­n tax and tax writeoffs, it is tempting to classify CSR purely as an attempt to evade taxes. While this probably contribute­s to the CSR decision, it is unlikely to be the main factor, as disbursing dividends still means more money in shareholde­rs’ pockets than giving it to charity. Instead, the four factors described above are the cornerston­e of CSR decisions.

Despite the extensive evidence surveyed by Mr Gautier and Ms Pache, a definitive demonstrat­ion of the benefits of CSR remains elusive, because it is almost impossible to isolate the effects of CSR on share prices from other factors that tend to change at the same time. For example, companies that allocate significan­t funds to CSR tend to be those that are more profitable, which means they are intrinsica­lly better managed. This makes it difficult for a researcher analysing share price data to distinguis­h between the effect of the CSR vis-à-vis the effect of better management.

This is why CSR can be unscientif­ic, with decisions often based on hunches of executives. The process is rendered more challengin­g by the fact that people can be fickle and unpredicta­ble, especially in terms of what they regard as a “sincere” act of CSR.

Mr Bezos was probably expecting to be lauded rather than sneered at, by some, after announcing his philanthro­pic intentions. Don’t expect him to be the last one to make such a miscalcula­tion.

CSR can be unscientif­ic, with decisions often based on hunches of executives. People can also be unpredicta­ble

 ?? OMAR AL UBAYDLI Economics 101 ??
OMAR AL UBAYDLI Economics 101

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