By Haram Seo, Jiao Luo, and Aseem Kaul.
“Jack of all trades”, the saying goes, “is a master of none”. Yet when it comes to corporate philanthropy, being a jack of all trades may in fact be the dominant strategy. At least that’s what we find in our article in the Strategic Management Journal, where we ask the question: is it more profitable for firms to focus their corporate donations, giving a lot to a few, or to spread them around, giving a little to many?
Examining the philanthropic giving of almost 600 public US corporations from 2003 to 2011, we find that not only does the average firm give to as many as 13 different cause areas every year, but that greater variety is positively associated with firm profitability, with a one-standard deviation increase in philanthropic variety being associated with a 0.63 percentage point increase in return on assets (relative to a mean of 4 percentage points in our sample), other things being equal.
At first glance, this may seem surprising. After all, prior work on corporate social responsibility has argued that firms may benefit from strongly associating their brand identity with a single cause, and there are many reasons to think that firms that focus on a single cause area may be more effective and efficient in their giving. In their seminal 1999 article, Porter and Kramer warned against firms spreading their philanthropy too thin and argued that “the starting point for strategy is to limit the social challenges the foundation addresses”. Yet here we are two decades later, with firms and their foundations not only continuing to spread their philanthropy widely but seeming to increase their profitability by doing so. What’s going on?
“[S]upporters may generally care more about whether the firm is doing something to address a cause, than how much it is doing.”
In our study, we argue that the returns to variety in corporate philanthropy are a result of the nature of the rewards to corporate giving itself. Those who support and reward firms’ philanthropic efforts—including firms’ customers, employees, suppliers, and other key stakeholders—are generally different from the needy recipients who benefit from these donations. This separation between supporters and recipients means that supporters may be relatively ill-informed about the true impact of the corporate donations they are supporting. Moreover, the primary motivation of many supporters may be the ‘warm glow’ they get from feeling that they’ve done their part to help with a problem, and this may be relatively invariant with the amount of good done. In sum, supporters may generally care more about whether the firm is doing something to address a cause, than how much it is doing. Think about it: when was the last time you saw an advertisement celebrating a firm’s philanthropic efforts and stopped to ask exactly how much they had spent on the issue and what they had achieved? But if supporters care more about whether than how much the firm gives to a cause, then giving minimal amounts to the maximum number of causes is the optimal way for firms to maximize their profitability.
“[T]he positive relation between philanthropic variety and firm profitability is stronger where firms face less scrutiny from supporters.”
To test this explanation, we compare situations in which corporate philanthropy is likely to be subject to more or less scrutiny. If our explanation is correct, we would expect that the positive relation between philanthropic variety and firm profitability is stronger where firms face less scrutiny from supporters. We find this to be the case: specifically, we find that our main results are stronger for non-local giving than for local giving, weaker for firms that have recently come under scrutiny from activist shareholders, and weaker for firms that give in inconsistent ways (and so may get more critical attention). Overall, we think the argument that supporters care more about whether firms give than how much they give to a cause provides the best explanation for these results.
Our study’s findings offer a more nuanced view of strategic philanthropy by corporations, suggesting that the returns to corporate giving depend not only on how much a firm gives but how it gives; specifically, on whether its spreads its donations widely. At the same time, it points to a fundamental disconnect between focused giving, which may be most beneficial for recipients, and diffuse giving, which may appeal to supporters and thus prove most profitable for firms. As such, it highlights the potential for a moral hazard problem with corporate philanthropy, with firms using philanthropy to maximize their own profits rather than the social good, an issue we have discussed in prior work at SMJ.
- For the original article, see Seo, H., Luo, J., & Kaul, A. (2021). Giving a little to many or a lot to a few? The returns to variety in corporate philanthropy. Strategic Management Journal, 1– 31.
Author Bios
Haram Seo is an Assistant Professor at Mays Business School, Texas A&M University. Her research examines the implications of corporate nonmarket strategies, especially corporate philanthropy, to both firms and society. She studies the heterogeneity in how firms give and its effect on firms’ strategic benefits and social impact from giving.
Jiao Luo is an Associate Professor in Strategic Management and Entrepreneurship at the Carlson School of Management, University of Minnesota. Her research focuses on nonmarket strategy, social impact, and the organization of collective governance.
Aseem Kaul is the Mosaic Company – Jim Prokopanko Professor for Corporate Responsibility and an Associate Professor at the Carlson School of Management, University of Minnesota. His research focuses on the antecedents and consequences of corporate scope choices, and more recently, on the social impact of firms’ market and nonmarket strategies.
