Philanthropic Proposal Draft

A Brief Guide to Corporate Philanthropy

Part I: “Making the Business Case for Corporate Philanthropy” by Matteo Tonello

Is corporate philanthropy a good business strategy? Corporate giving programs can provide a competitive

advantage when they are well designed and carefully executed. For example, charitable contributions can

increase the name recognition and reputation of a brand or company among consumers. In addition, corporate

support of local causes improves the quality of life in communities where the company does business. These

contributions help managers build relationships with government officials and community leaders and can

reduce regulatory and special interest group obstacles. Moreover, firms can use philanthropy to improve the

economic conditions in developing regions with the long-term goal of enhancing the size and quality of their

customer base. A commitment to philanthropy also facilitates efforts to recruit and retain talented employees.

Finally, contributions can stimulate innovation as grants to universities and other organizations provide

companies with new ideas, access to technical expertise, and opportunities for research and development

collaboration.

Corporate Giving—Successes and Failures

Crate and Barrel Since 2006, the company has given its customers “thank you” gift cards to

DonorsChoose.org, an online charity that connects donors to classrooms in need. The gift cards allow

customers to allocate Crate and Barrel’s charitable contributions across various educational projects

submitted by teachers across the United States. This partnership has funded 14,500 projects, benefitting

347,000 students. As a result of this initiative, over 36,500 new donors came toDonorsChoose.org from

Crate and Barrel, and, on average, customers contributed $0.40 for every dollar redeemed by gift card. In

addition, Crate and Barrel benefitted from its improved reputation with customers. For example,

following the fall 2007/spring 2008 gift card distribution, sales increased 16 percent for redeemers and 5

percent for non-redeemers. [a]

Tyco Former CEO Dennis Kozlowski created an image as a generous philanthropist. However, the gifts

often came from Tyco rather than from Mr. Kozlowski. He played a decisive role in determining which

nonprofit organizations received funding from Tyco and was accused of giving $43 million of Tyco’s

money in his own name. For example, Tyco contributed $1.7 million to construct the Kozlowski

Athletic Center at the private school where his daughter attended and where he served as a trustee. An

additional $5 million was given to build a hall named after him at his alma mater. He also used Tyco

funds to burnish his image in the Boca Raton community, where Tyco gave $3 million to a hospital and

$500,000 to an arts center. [b]

RJR Nabisco Former CEO Ross Johnson prided himself on his ability to influence board decisions. One

technique he used to curry favor with directors involved endowing academic chairs in their names or

supporting their philanthropic causes using RJR Nabisco funds. For example, when Mr. Johnson wanted

to move corporate headquarters out of Winston-Salem, and he needed the vote of a particular director,

RJR Nabisco gave $6 million to that director’s pet charity. This use of philanthropy helped Mr. Johnson

ensure board loyalty and operate with limited oversight until he eventually became the poster child for

corporate greed during his failed takeover attempt. [c]

Microsoft The company encourages employee community involvement in a number of ways, including

organized group activities, paid time off for employees to volunteer, and nonprofit board service

training. Since 2005, employees in the United States have given over one million hours of their time,

and Microsoft has matched each of those hours with a $17 contribution to the nonprofit chosen by the

volunteering employee. Microsoft runs its program worldwide, allowing employees from across the

globe to use their expertise to meet the specific needs of each geographic location and culture. In

addition to assisting the communities in which the company operates, volunteer opportunities may raise

morale and hone employees’ leadership skills. For example, after Microsoft announced its volunteer

program in Egypt, employee satisfaction increased from 61 percent to 91 percent. [d]

[a] Crate and Barrel, “2006-2010 DonorsChoose.org GivingCard Campaigns,” accessed July 15,

2011,http://a248.e.akamai.net/f/248/48906/2d/w.donorschoose.org/docs/donorschoose-org-crate-and-barrel-032210.pdf [b] Marianne Jennings, The Seven Signs of Ethical Collapse, St. Martin’s Press, 2006. [c] Bryan Burrough and John Helyar, Barbarians at the Gate: The Fall of RJR Nabisco, Harper Collins, 1990. [d] Noelle Barton and Caroline Preston, “America’s Biggest Businesses Set Flat Giving Budgets,” The Chronicle of Philanthropy, August 7, 2010, http://philanthropy.com/article/Big-Companies-Hold-Steady-in/123792/ (accessed July 15, 2011); Microsoft, “Microsoft 2010 Corporate Citizenship Report.” http://www.microsoft.com/about/corporatecitizenship/en-us/reporting/ (accessed July 15, 2011).

The following evidence indicates that corporate philanthropy is a legitimate and valuable business activity:

 Growth in the amount of charitable giving is positively associated with future revenue growth for consumer

product companies. However, revenue growth is not associated with future charitable giving for these same

companies. This time-series analysis suggests that corporate giving enhances financial performance and is

not simply a distribution of profits. Further examination of this relationship reveals that corporate

philanthropy increases customer satisfaction, which, in turn, boosts revenue.

 Potential employees perceive companies with strong community involvement as more attractive. As a result

of corporate-sponsored volunteer experiences, current employees report higher job satisfaction and a greater

commitment to their company. Additionally, current employees believe that volunteer programs help them

enhance leadership and professional skills.

 Corporate giving increases following negative media exposure, suggesting companies use philanthropy to repair damaged relationships with community leaders and other stakeholders.

 Compared to other industries, technology companies are the largest funders of educational initiatives and

focus the greatest part of their budget for philanthropy on higher education. This focus is consistent with

their need for a well-trained workforce as well as their desire to access university research programs.

Additionally, technology companies generally have a high proportion of college-educated employees who

take advantage of programs that match gifts. Other industries make similarly strategic decisions about the

type of recipient to fund (e.g., health care companies provide the most support to health and human service

organizations).

Recommendations

Executives can justify charitable contributions by applying the same prudence to giving decisions that they do

to other business activities. This section offers recommendations for increasing the effectiveness of corporate

giving and minimizing opportunistic behavior or the appearance of such behavior.

1. Align corporate giving with business activities

This is the most common recommendation regarding corporate giving, but it bears repeating: a company

should establish a flagship charitable initiative that uses the company’s unique resources to address a

social problem affecting the company’s competitive context. A well-designed corporate giving program

clearly articulates a congruence between the company’s philanthropic activities and its other business

activities.

For example, a publishing company decides to focus on combating illiteracy. The company provides

cash grants, product donations, and, most importantly, a distinct expertise in developing reading and

writing curriculums. Moreover, the publishing company can leverage certain business relationships it

already has in place (e.g., suppliers and authors) to enhance the effectiveness of the initiative. The

company’s efforts are not only likely to appeal to their current customers and employees but may also

increase their target market in the long run.

As discussed in “Corporate Giving—Successes and Failures” (on p. 3), Crate and Barrel successfully

partnered with DonorsChoose.org. This success was due in part to the fact that Crate and Barrel was an

early mover in allowing customers to allocate corporate philanthropy. A similar program may not be as

fruitful for another company because customer-designated giving may not exploit a company’s core

strengths or build brand identity.

Establishing a strong link between a company’s identity and its corporate giving normally requires a

long-term commitment but should pay off in terms of both financial and social performance. When a

charitable cause is aligned with the company’s business, the company likely has the appropriate

resources and abilities to make a meaningful social impact. This reduces skepticism about the

company’s motives and increases its credibility with stakeholders.

2. Measure financial and social performance

Companies must demonstrate that their corporate giving programs increase shareholder value and social

welfare. To do so, they must implement procedures to systematically measure and evaluate progress

toward economic and social goals. The absence of any performance measurement signals the absence of

accountability. Knowledge gleaned from the measurement process is helpful in determining whether to

continue, revise, or terminate a particular giving activity and should improve the overall effectiveness of

corporate philanthropy.

The financial benefits of philanthropy are often intangible and long-term in nature, making measurement difficult. However, this is also true of other business activities, such as R&D and marketing expenditures. Nevertheless, companies have devised methods to assess the value of these activities and can do the same for charitable giving. Two issues arise in the process of measuring the net financial benefits of corporate philanthropy. First, evidence suggests that, even without opportunistic executives, more philanthropy isn’t necessarily better. There appears to be an optimal level of charitable giving beyond which the company receives no further benefit. Regular measurement will assist companies in converging to this optimal level. Second, the total cost of a corporate philanthropy includes the contributions themselves plus administrative costs, such as the salaries of giving professionals and overhead. Assessing administrative costs over time and comparing costs to external benchmarks will help companies determine whether their level of staffing and organizational structure are reasonable and the giving program is operating efficiently. For example, a recent survey reported that administrative costs are 8.8 percent of total giving on average.

Measuring social performance is challenging, but significant progress has been made in developing tools

that companies can use to estimate the societal impact of their philanthropic activities. For example, the

Committee Encouraging Corporate Philanthropy has developed a framework that includes procedures

for assessing whether individual grantees are achieving the intended outcome as well as procedures for

estimating an overall social return on investment.

Given the diversity of corporate giving programs, there is no “one size fits all” approach to evaluating

the effects on social welfare, and companies must individually determine which metrics best suit their

needs. But overall, companies should consider the following steps for effective oversight:

 Approve an annual philanthropy plan that is consistent with the company’s business strategy.

 Ensure that appropriate resources are available for the company’s giving professionals to carry out the plan.

 Implement internal controls to prevent executives from interfering with the plan for their personal benefit.

 Assess the outcome of the plan.

Conclusion

Expectations for corporate philanthropy are evolving. Officers and directors can no longer treat charitable

giving as a peripheral activity or an after-the-fact distribution of profits. In order to make a business case in

support of corporate philanthropy, executives should integrate giving with other business activities, institute

controls to limit managerial opportunism, and develop procedures to measure and evaluate financial and social

outcomes. It is no longer sufficient for corporate philanthropy to simply “do good.” If corporate giving is to

succeed in the long run, it must provide a financial return. Acknowledging the economic benefits of corporate

philanthropy does not negate its power to alleviate social problems and enhance communities.

Part II: “Understanding the Charitable Giving Tax Deduction – What Can Your Small

Business Write Off?” by Caron Beesley

Small businesses are known for their philanthropic gestures. In fact, surveys suggest that 75 percent of small

firms donate to charities each year, averaging a contribution of six percent of their profits. Women-owned

businesses tend to donate an average of 10 percent of profits, and those with the highest revenues are, not

surprisingly, the most generous. (Source)

Contributing to a worthwhile cause has many benefits beyond the act of goodwill itself. It gives local business

owners an opportunity to embed themselves in the community and network with other donors. And, of course,

there are tax deduction benefits.

But what exactly are these benefits? If you are thinking of making charitable donations in the near future, here

are some FAQs to consider:

What does the IRS consider to be charitable giving?

In the eyes of the IRS, charitable donations are gifts made to qualified charitable organizations. These include,

but are not limited to, churches, nonprofit organizations such as a volunteer fire company, a foundation or trust

fund or any other organization “operated exclusively for charitable, religious, educational, scientific, or literary

purposes, or for the prevention of cruelty to children or animals.”

Most operate as federally-approved 501(c)(3) organizations. This online search tool from the IRS lets you

search for charities eligible to receive tax-deductible charitable contributions. Donations can include cash,

volunteered services, sponsorship of local charity events, or donating inventory or services. All are forms of

charitable giving.

What tax benefits can charitable giving provide?

Charitable contributions can qualify as tax deductions against your business’ annual tax liability. However, the

IRS tax code is complex and it’s important to note that not all contributions can be considered legitimate

deductions.

Here’s what you need to know about what you can and cannot deduct:

 Monetary contributions – Cash or other monetary contributions may be tax deductible as long as

they are not set aside for use by a specific person. Contributions must also be made during the tax

year to be eligible for a deduction, regardless of the accounting method you use. When you file

your claim you’ll need to use Form 1040, Schedule A and itemize each deduction. Generally, you

can deduct up to 50 percent of your adjusted gross income, but 20 percent and 30 percent

limitations may apply (refer to Limits on Deductions from the IRS)

 Donations of property, including business inventory – These are also considered a valid tax deduction. Donations are evaluated and deducted based on their fair market value (basically

what a consumer would pay for these goods in an open market). Deductions are limited in most

cases to 50 percent of your adjusted gross income. For donations of over $500 in value, you’ll

need to complete Form 8283

 Volunteering – While you can’t deduct the value of your service, you can deduct certain expenses incurred and related to your volunteer work. For example, if you host a party or fundraiser for the

organization, you can deduct the costs. Other deductibles include supplies (e.g. stationery), the costs

of a uniform and telephone expenses.

 Benefits you receive as a result of your charitable contributions – If you received something in return for your donation, you can only deduct the amount of your contribution that is over and above

the value of the benefit you receive. For example, say you attended a fundraiser and placed a

winning bid on a weekend in Las Vegas where the trip is valued at $2,500, but you actually bid

$5,000. Your deductible contribution (i.e. the fair market value of the trip, in this instance), is the

value of your total contribution ($5,000, minus the benefit you receive ($2,500), for an allowable

charitable contribution deduction of $2,500. Find more information about this type of deduction and

other scenarios that might qualify in the IRS guide: Contributions for which you Benefit.

Another useful reference is the IRS’ guide to monetary and property contributions that cannot be deducted.

Sources: Beesley, C. (2012, November 5). Understanding the Charitable Giving Tax Deduction – What Can Your Small

Business Write Off? Retrieved March 20, 2015, from https://www.sba.gov/blogs/understanding-charitable-giving-tax-

deduction-what-can-your-small-business-write

Tonello, M. (2011, August 15). Making the Business Case for Corporate Philanthropy. Retrieved March 20, 2015, from

http://blogs.law.harvard.edu/corpgov/2011/08/20/making-the-business-case-for-corporate-philanthropy/