paper on management question 6

Question 6: Community advisory councils can play an important role in the search for social legitimacy.  What are a few observations of what needs to be done to get the most out of a community advisory council and what can and cannot be accomplished or expected from such a council?

Please use the below lecture note to guide your response. Minimum of 2 academic references and 1 data for appendix, it could be a graph or table or piechart (2 and half pages NOT double spaced).

The Community _and the Corporation

A strong relationship benefits both business and its community. Communities look to businesses for civic leadership and for help in coping with local problems, while businesses expect to be treated in fair and supportive ways by the community. As companies expand their operations, they develop a wider set of community relationships. Community relations programs, including corporate giving, are an important way for a business to express its commitment to corporate citizenship.

This chapter focuses on these key learning objectives:

• Defining a community, and understanding the interdependencies between companies and the communities in which they operate.

• Analyzing why it is in the interest of business to respond to community problems and needs.

• Knowing the major responsibilities of community relations managers.

• Examining how different forms of corporate giving contribute to building strong relationships between businesses and communities.

• Evaluating how companies can direct their giving strategically, to further their own business objectives.

• Analyzing how collaborative partnerships between businesses and communities can address today’s pressing social problems. Whole Foods Market is a natural foods retailer with stores in many communities in North America and the United Kingdom. Founded in 1980 in Austin, Texas, the company believes that its business “is intimately tied to the neighborhood and larger community that we serve and in which we live.” Whole Foods donates 5 percent of its net profit to charitable causes and operates two foundations focused on animal welfare and rural poverty. Each of the company’s 184 stores hosts a community day three times a year, with 5 percent of the day’s total sales revenue contributed to a worthy local nonprofit organization. Whole Foods also gives its employees 20 paid community service hours for each 2,000 hours of work (about half a week per year). Employees have been involved in a wide range of service projects, including organizing blood donation drives, raising money for breast cancer research, developing community gardens, renovating housing, and delivering “meals on wheels.”1

One of the leading financial institutions in the world, ING has operations in more than 50 countries. Based in the Netherlands, the company provides insurance, banking, and asset management services throughout Europe, with a growing presence in the Americas and Asia. Recognizing that the needs of the many communities where it does business differ, the company has delegated responsibility for corporate citizenship programs to business unit managers, provided their decisions are consistent with the firm’s core values. The result has been a remarkable diversity of community initiatives. In the Philippines, ING built houses with Habitat for Humanity; in Australia, it sponsored cricket teams, and in Brazil, the conservation of rain forests. After Hurricane Katrina struck the Gulf Coast, ING donated $1 million

to the American Red Cross and an additional $275,000 to hard-hit school districts.2

Hindustan Lever, the Indian subsidiary of the transnational corporation Unilever, faced a problem when a dairy it owned in a rural area in northern India incurred substantial losses. Rather than closing the operation, the company decided to address the underlying cause—inadequate care of dairy cattle by impoverished local villagers. The company gave interest-free loans to farmers and offered classes in animal care. Within a few years, the dairy was making a profit. The program was so successful that the company expanded it to 400 villages and committed to investing 10 percent of its pretax profits in rural development projects, including children’s immunizations, water system improvements, and classes in sewing, nutrition, and agriculture. Every year, the company sends 50 of its most promising young managers to live with a rural family and work on development projects, to learn firsthand the value of community involvement.3

Why do businesses as diverse as Whole Foods Market, ING, and Hindustan Lever invest in community organizations, projects, and charities? Why do they contribute their money, resources, and time to help others? What benefits do they gain from such activities? This chapter explains why many companies believe that being an involved citizen is part of their basic business mission. The chapter also looks at how companies participate in community life and how they build partnerships with other businesses, government, and community organizations. The core questions that we consider in this chapter are: What does it mean to be a good corporate neighbor? What is the business case for doing so?

The Business–Community Relationship

The term community, as used in this chapter, refers to a company’s area of local -business influence. Traditionally, the term applied to the city, town, or rural area in which a business’s operations, offices, or assets were located. With the rise of large, complex business organizations, the meaning of the term has expanded to include multiple localities. A local merchant’s community relationships may involve just the people who live within driving distance of its store. A bank in a large metropolitan area, by contrast, may define its community as the both the central city and the suburbs where it does business. And at the far extreme, a large transnational firm such as ING, ExxonMobil, or Nokia has relationships with numerous communities in many countries around the world.

Today the term community may also refer not only to a geographical area or areas but to a range of groups that are affected by an organization’s actions, whether or not they are in the immediate vicinity. In this broader view, as shown in Figure 17.1, the geographical (sometimes called the site) community is just one of several different kinds of communities.

Whether a business is small or large, local or global, its relationship with the community or communities with which it interacts is one of mutual interdependence. As shown in Figure 17.2, business and the community each need something from the other. Business depends on the community for education, public services such as police and fire protection, recreational facilities, and transportation systems, among other things. The community depends on business for support of the arts, schools, health care, and the disadvantaged, and other urgent civic needs, both through taxes and donations of money, goods, and time.

Ideally, community support of business and business support of the community are roughly in balance, so that both parties feel that they have benefited in the relationship. Sometimes, however, a business will invest more in the community than the community seems to provide in return. Conversely, a community sometimes provides more support to a business than the firm contributes to the community. See Exhibit 17.A for a discussion of subsidies by communities to professional sports franchises, an instance in which the relationship between business and the community is sometimes perceived as out of balance.

Exhibit 17.A

The Business Case for Community Involvement

The term civic engagement describes the active involvement of businesses and individuals in changing and improving communities. Civic means pertaining to cities or communities, and engagement means being committed to or involved with something. Why should businesses be involved with the community? What is the business case for civic engagement?

The idea of corporate citizenship, introduced in Chapter 4, refers broadly to businesses acting as citizens of society by behaving responsibly toward all their stakeholders. Civic engagement is a major way in which companies carry out their corporate citizenship mission. As explained in Chapters 3 and 4, business organizations that act in a socially responsible way reap many benefits. These include an enhanced reputation and ability to respond quickly to changing stakeholder demands. By acting responsibly, companies can also avoid or correct problems caused by their operations—a basic duty that comes with their significant power and influence. They can win the loyalty of employees, customers, and neighbors. And by doing the right thing, businesses can often avoid, or at least correctly anticipate, government regulations. All these reasons for social responsibility operate at the level of the community as well, via civic engagement.

Another specific reason for community involvement is to win local support for business activity. Communities do not have to accept a business. They sometimes object to the presence of companies that will create too much traffic, pollute the air or water, or engage in activities that are viewed as offensive or inappropriate. A company must earn its informal license to operate—or right to do business—from society. In communities where democratic principles apply, citizens have the right to exercise their voice in determining whether a company will or will not be welcome, and the result is not always positive for business.

As illustrated by the discussion case at the end of Chapter 2, Wal-Mart has encountered serious local objection to its plans to build superstores and distribution centers in a number of local communities. Wal-Mart’s founder, Sam Walton, now deceased, was fond of saying he would never try to force a community to accept a Wal-Mart store. “Better to go where we are wanted,” he is reported to have said. In recent years, however, Wal-Mart management less often endorses that view. In a series of high-profile local conflicts, Wal-Mart sparked intense local opposition from several communities that were worried about traffic patterns, safety, and negative effects on local small businesses from the opening of giant Wal-Mart facilities. The problem seems likely to grow more complex for Wal-Mart as it continues its expansion into international markets.4

Through positive interactions with the communities in which its stores are located, Wal-Mart is more likely to avoid this kind of local opposition.

Community involvement by business also helps build social capital. Social capital. a relatively new theoretical concept, has been defined as the norms and networks that enable collective action. Scholars have also described it as “the goodwill that is engendered by the fabric of social relations.”5 When companies such as Whole Foods Market, described at the beginning of this chapter, work to address community problems such as blood shortages, hunger, and dilapidated housing, their actions help build social capital. The company and groups in the community develop closer relationships, and their people become more

committed to each other’s welfare. Many experts believe that high levels of social capital enhance a community’s quality of life. Dense social networks increase productivity by reducing the costs of doing business, because firms and people are more likely to trust one another. The development of social capital produces a win-win outcome because it enables everyone to be better off.6

Community Relations

The organized involvement of business with the community is called community -relations. The importance of community relations has increased markedly in recent years. According to one expert, “Over the years, community involvement has moved from the margins of the corporation to a position of growing importance. More companies regard their involvement in the community as a key business strategy and a linchpin in their overall corporate citizenship efforts.”7 The importance of community relations is shown by the following statistics, drawn from a study conducted by the Center for Corporate Citizenship:8

• 81 percent of companies now include a statement in their annual report on their commitment to community relations.

• 74 percent of companies have a written mission statement for their community relations program.

• 68 percent of companies factor community involvement into their overall strategic plan.

In support of this commitment, some corporations have established specialized -community relations departments; others house this function in a department of public affairs or corporate citizenship. Their managers’ job is to interact with local citizens, develop community programs, manage donations of goods and services, work with local governments, and encourage employee volunteerism. These actions are, in effect, business investments intended to produce more social capital—to build relationships and networks with important groups in the community. Community relations departments typically work closely with other departments that link the company to the outside world, such as external affairs, corporate relations, government relations, and public affairs (discussed in Chapters 2 and 8). All these roles form important bridges between the corporation and the community.

Community relations departments are typically involved with a range of diverse issues. According to a 2005 survey of community involvement managers, education (kindergarten through high school) was viewed as the most important issue, as it was for the tenth year in a row in which the survey had been conducted. Other critical issues included health care, economic development, higher education, and housing. Further down the list of issues, although still important, were literacy, environmental issues, crime, transportation, and job training.9 Although not exhaustive, this list suggests the range of needs that a corporation’s community relations professionals are asked to address. These community concerns challenge managers to apply talent, imagination, and resources to develop creative ways to strengthen the community while still managing their businesses as profitable enterprises.

Several specific ways in which businesses and their community relations departments have addressed some critical concerns facing communities are discussed below. The all-important issue of business involvement in education reform is addressed in the final section of the chapter, which discusses collaborative partnerships.

Economic Development

Business leaders and their companies are frequently involved in local or regional economic development that is intended to bring new businesses into an area. Financial institutions, because of their special expertise in lending, have been at the forefront of many recent initiatives to bring development money into needy communities. In the United States, the federal Community Reinvestment Act requires banks to demonstrate their commitment to local communities through low-income lending programs and to provide annual reports to the public. This law has led many banks to begin viewing the inner city as an opportunity for business development. Some have even created special subsidiaries that have as their mission the development of new lending and development in needy urban neighborhoods. Chicago’s ShoreBank, for example, has been deeply involved in meeting the housing needs of low-income residents. Financial institutions have been active in this area in many other nations, as well. An innovative initiative by a small bank in Bangladesh to provide micro-credit for economic development in rural areas is described in Exhibit 17.B.

Exhibit 17.B

Crime Abatement

Many urban areas around the world are forbidding and inhospitable places, fraught with drugs, violence, and high crime rates. Business has an interest in reducing crime, because it hurts the ability to attract workers and customers and threatens property security. Some firms have become actively involved in efforts to reduce crime in their neighborhoods, as the following example illustrates.

In the mid-1990s, the crime rate in the metropolitan area of St. Paul-Minneapolis, Minnesota, had become so bad that out-of-town newspapers disparagingly called the city “Murderopolis.” To combat this situation, a collaborative alliance formed called Minnesota HEALS (Hope, Education, and Law and Safety). Sixty companies and other organizations, including Honeywell, General Mills, 3M, and Allina Health Systems, worked closely with police and civic groups to address public safety issues in the community. Among their many initiatives were development of an integrated information system for law enforcement agencies, better housing, job training, and afterschool programs. Crime rates dropped sharply, and the overall climate for business in the city improved.10

Housing

Another community issue in which many firms have become involved is housing. Life and health insurance companies, among others, have taken the lead in programs to revitalize neighborhood housing through organizations such as Neighborhood Housing Services (NHS) of America. NHS, which is locally controlled, locally funded, nonprofit, and tax-exempt, offers housing rehabilitation

and financial services to neighborhood residents. Similar efforts are being made to house the homeless. New York City’s Coalition for the Homeless includes corporate, nonprofit, and community members. Corporations also often work with nongovernmental organizations (NGOs) such as Habitat for Humanity to build or repair housing.

Welfare-to-Work Job Training

The need for improvement in worker skills draws businesses into the world of worker training and retraining, especially efforts to train the disadvantaged. In the United States, government leaders have called on American businesses to help address one of the most vexing and costly social problems—welfare reform. Welfare is a form of public assistance to those who are unable to work and live an independent and self-sufficient life. Most societies have some basic form of public assistance to the needy, and some countries (Germany, France, and the United States) are known for their relatively generous assistance programs. As the costs of such programs have risen, however, many citizens have pressured their governments to curb the cost of welfare-assistance programs.

Bank of America (BofA) has been deeply involved in welfare-to-work initiatives. In many communities, BofA has partnered with Women in Community Service (WICS), a nonprofit organization that provides job and life skills training to women who are on public assistance, in prison, or homeless or living in public housing. The bank has contributed staff, products and services, internship opportunities, and money to WICS, and has hired thousands of new employees out of welfare-to-work programs. BofA has experienced many benefits: an improved reputation, tax credits, and recruitment of motivated workers. “We see an incredible amount of corporate loyalty to the organization that invested so much in recruiting them, helping to get them trained and giving them a chance,” said the bank vice president who manages the program.11

Aid to Minority Enterprises

In addition to programs to train people for jobs in industry, private enterprise has extended assistance to minority-owned small businesses. These businesses often operate at a great economic disadvantage: They do business in economic locations where high crime rates, poor transportation, low-quality public services, and a low-income clientele combine to produce a high rate of business failure. Large corporations, sometimes in cooperation with universities, have provided financial and technical advice and training to minority entrepreneurs. They also have financed the building of minority-managed inner-city plants and sponsored special programs to purchase services and supplies from minority firms.

Microsoft spends $10 billion annually on procuring supplies and services. About 5 percent of this is directed to minority-owned businesses. “The general rule here,” said the company’s director of supplier diversity, “is, if all other things are equal, pick the minority company.” Microsoft works closely with its minority suppliers to refine their business processes to make them more competitive. An example is Group O Direct, an Illinois-based firm that provides fulfillment services for customer promotions. Group O Direct, which is owned by Mexican-Americans, now has several other high-profile clients in addition to Microsoft, including SBC Communications, and annual revenues of more than $50 million.12

Disaster, Terrorism, and War Relief

One common form of corporate involvement in the community is disaster relief. Throughout the world, companies, like individuals, provide assistance to local citizens and communities when disaster strikes. When floods, fires, earthquakes, ice storms, hurricanes or terrorist attacks devastate communities, funds pour into affected communities from companies.

Businesses from all over the world responded with extraordinary generosity to the communities impacted by the massive tsunami that struck the Indian Ocean in December 2004. Their donations, estimated to be around $2 billion, collectively exceeded those of most governments. In addition, many companies drew on their own special expertise to lend a hand. United Parcel Service mobilized its planes to airlift disaster relief supplies to the region free of charge. Pfizer donated millions of dollars worth of medicines. GE sent power generators and mobile water treatment plants. British Airways, Intel, and Cisco collaborated to set up a high-speed wireless Internet network in Banda Aceh, Indonesia, to enable communications in and to one of the hardest-hit areas.13

International relief efforts are becoming more important, as communications improve and people around the world are able to witness the horrors of natural disasters, terrorism, and war. Corporate involvement in such efforts is an extension of the natural tendency of people to help one another when tragedy strikes.

In all these areas of community need—economic development, crime abatement, housing, job training, aid to minority enterprise, and disaster relief—as well as many others, businesses around the world have made and continue to make significant contributions.

Corporate Giving

An important aspect of the business–community relationship is corporate philanthropy, or corporate giving. Every year, businesses around the world give generously to their communities through various kinds of philanthropic contributions to nonprofit organizations.

America is a generous society. In 2005, individuals, bequests (individual estates), foundations, and corporations collectively gave more than $260 billion to churches, charities, and other nonprofit organizations, as shown in Figure 17.3. Businesses are a small, but important, part of this broad cultural tradition of giving. That year, corporate contributions totaled almost $14 billion, or about 5 percent of all charitable giving. This amount includes in-kind gifts claimed as tax deductions and giving by corporate foundations.14

As U.S. firms have become increasingly globalized, as shown in Chapter 7, their international charitable contributions have also grown. A study by The Conference Board found that about half of U.S. corporations surveyed said they had directed some of their donations abroad, and the amount they gave was on the increase. To cite just one example, the Coca-Cola Foundation has donated $138 million to support education around the world over the past two decades. Its contributions have, among other projects, helped build schools in China, Mexico, and the Philippines.15

In the United States, tax rules have encouraged corporate giving for educational, charitable, scientific, and religious purposes since 1936.16 Current rules permit corporations to deduct from their taxable income all such gifts that do not exceed 10 percent of the company’s before-tax income. In other words, a company with a

before-tax income of $1 million might contribute up to $100,000 to nonprofit community organizations devoted to education, charity, science, or religion. The $100,000 in contributions would then reduce the income to be taxed from $1 million to $900,000, thus saving the company money on its tax bill while providing a source of income to community agencies. Of course, nothing prevents a corporation from giving more than 10 percent of its income for philanthropic purposes, but it would not be given a tax break above the 10 percent level.

As shown in Figure 17.4, average corporate giving in the United States is far below the 10 percent deduction now permitted. Though it varies from year to year, corporate giving has generally ranged between 1 and 2 percent of pretax income since the early 1960s, with a rise that reached a peak at just above 2 percent in 1986. Corporate giving was 1.6 percent of pretax income in 2004. A few companies, including a cluster in the Minneapolis-St. Paul area that have pledged to donate 5 percent annually, give much more than this. One company, Newman’s Own, the philanthropic corporation established by film star Paul Newman, gives all of its earnings to charity.

In Europe, corporate philanthropy has lagged behind that in the United States, in part because tax breaks are less generous and differences in the law across countries make cross-border giving difficult. Greater spending on social welfare by governments also reduces incentives for private sector philanthropy.17 Europe-based multinational corporations have become more active, however, as illustrated by the following example.

The motto of Nokia, the cellular phone company based in Finland, is “connecting people.” In partnership with the International Youth Foundation, the company launched a program called “Make A Connection” to help develop life skills among young people in 25 countries. In 2005, Nokia pledged $23 million to the program over 5 years, as well as equipment and expertise. In the Philippines, for example, the program’s “text2teach” initiative used mobile technology to bring interactive, multimedia learning materials to 80 schools. Said Nokia’s vice president for corporate social responsibility, “It’s about developing the social glue within a peer group or community.”18

Although most companies give directly, some large corporations have established nonprofit corporate foundations to handle their charitable programs. This permits them to administer contribution programs more uniformly and provides a central group of professionals that handles all grant requests. More than three-fourths of large U.S.-based corporations have such foundations; together, they gave $3.4 billion in 2005.19 Foreign-owned corporations use foundations less frequently, although firms such as Matsushita (Panasonic) and Hitachi use sophisticated corporate foundations to conduct their charitable activities in the United States. As corporations expand to more foreign locations, pressures will grow to expand international corporate giving. Foundations, with their defined mission to benefit the community, can be a useful mechanism to help companies implement philanthropic programs that meet this corporate social responsibility.

Forms of Corporate Giving

Typically, gifts by corporations and their foundations take one of three forms: charitable donations (gifts of money), in-kind contributions (gifts of products or services), and volunteer employee service (gifts of time). Many companies give in all three categories.

The share of all giving comprising in-kind contributions of products or services has been rising steadily for the past decade or so and has now surpassed cash contributions. Of U.S. corporate contributions in 2004, more than half—54

percent—were in the form of in-kind gifts.20 For example, computer companies have donated computer hardware and software to schools, universities, and public libraries. Grocery retailers have donated food, and Internet service providers have donated time online. Publishers have given books. The most generous industry, in terms of in-kind contributions, is pharmaceuticals; seven leading drug companies collectively donated $4 billion worth of medicines in 2004, an amount equal to about 10 percent of their pretax income.21

One of the most generous companies, in terms of in-kind contributions, is Pfizer. In 2004, Pfizer contributed an extraordinary $1.62 billion worth of medicines and other products and services, an amount equal to 8.3 percent of that year’s profit. Many of these donations were directed to the poorest nations and communities in the world, where the company gave away drugs to treat malaria, HIV/AIDS, trachoma, and many other illnesses.22

Under U.S. tax laws, if companies donate new goods, they may deduct their fair-market value within the relevant limits. For example, if a computer company donated $10,000 worth of new laptops to a local school, it could take a deduction for this amount on its corporate tax return, provided this amount was less than 10 percent of its pretax income.

Business leaders and employees also regularly donate their own time—another form of corporate giving. Volunteerism involves the efforts of people to assist others in the community through unpaid work. According to a report by the Department of Labor, about 29 percent of Americans ages 16 and older volunteered during the prior year, donating on average 50 hours of their time.23 Many companies encourage their employees to volunteer by publicizing opportunities, sponsoring specific projects, and offering recognition for service. Some companies partner with a specific agency to provide volunteer support over time, as illustrated by the following example.

KaBOOM! is a nonprofit organization that builds playgrounds. The group’s goal is “to help develop a country in which all children have, within their communities, access to equitable, fun, and healthy play opportunities.” Since it was founded in 1996, the organization has maintained a strong partnership with Home Depot, the building supply firm. Home Depot employees in many communities have volunteered their building skills, along with materials, to build KaBOOM! playgrounds in underserved neighborhoods. “Team Depot” volunteers, working alongside people from the community, can build a state-of-the-art playground in a single day.24

Another, less common approach is for companies to provide employees with paid time off for volunteer service in the community. One such company, Timberland, is profiled in the discussion case at the end of this chapter.

Priorities in Corporate Giving

Overall, what kinds of organizations receive the most corporate philanthropy? The distribution of contributions reflects how businesses view overall community needs, and how this perception has changed over time. As shown in Figure 17.5, the corporate giving “pie” is divided into several main segments. The largest share of corporate philanthropy goes to health and human services; the next largest share goes to education. Civic and community organizations and culture and the arts also receive large shares of business philanthropy. Of course, these percentages are not identical among different companies and industries; some companies tend to favor support for education, for example, whereas others give relatively greater amounts to cultural organizations or community groups.

Does corporate giving contribute to business success? One recent study addressed this question directly. In 2000, the Council on Foundations sponsored research to develop a Corporate Philanthropy Index (CPI) that rated companies from 1.0 to 5.0 on a five-point scale based on their stakeholders’ perceptions. Employees, customers, and influential members of the community were asked to evaluate companies’ contributions to the community and society. The study showed that companies with high CPI scores had better reputations and generated more admiration and goodwill than others did; people were also more willing to give these companies the benefit of the doubt if they received bad publicity.25 Further research may reveal more about the specific benefits of donations.

Are business gifts always welcomed? One controversy over corporate generosity is profiled in Exhibit 17.C.