corporate donation
DONATION V2.0.
REFRAMING THE COMPANY DONATION BASED ON
BEHAVIOURAL ECONOMICS
INTRODUCTION
Traditionally, the corporate donation has been driven by a combination of altruism and an
acknowledgement that the Company should “give back”. To receive donations, charities
needed to prove that “doing good” would benefit the Company not only in terms of the
outcomes of the donation but that the Company should acknowledge its place in society
as a responsible “person” and to some extent, has complied with these wider societal
expectations and obligations as a result.
However, there are two hurdles with this approach:
(i) trying to quantify the “benefit” – as the fundamental driver remains largely altruistic
and
(ii) the legal structure of the Corporation itself which creates many hurdles and potential
conflicts in fulfilling these obligations.
The Company although a distinct legal entity with limited liability is now an entity with the
same rights as an individual. However, given ownership is separated from the entity, the
Board and management only act as agents, the variety of regulatory controls and
obligations, competing preferences and interconnectedness of disparate interests, the
Company, if a real individual, would likely be embodied, as a slightly confused “person”
with a broader family group shouting to it about “what’s best”.
We still attribute individual traits to the Company in terms of “behaviour” and expectations
despite this structure.
Conversely, the underlying driver of the Company is economic and so not to be “good “in
the virtuous sense but rather “good” in a quantitative sense say, versus peers or outright
financial performance…and more recently with elements of ESG/CSR added in.
Increasingly however, we are seeing evidence that whilst doing “good” (virtuous) may not
be the key or sole driver of “good” (financial) metrics, there is meaningful correlation to
show this is actually the case.
We want to examine this in more detail.
The key to successfully have Companies adopt this premise is to:
(i) demonstrate the proposition is correct in a robust and quantified manner
(ii) convey it in “corporate speak” to Boards and senior management removing many of
the usual qualitative elements and rely more on verifiable data
Our discussion will revolve around considerations of:
(i) the shareholder primacy vs broader stakeholder engagement debate
(ii) the reframing of the traditional donation (V1.0) to the “new” V2.0 Donation which we
believe can be considered the equivalent of other financial incentives
(iii) the subsequent opportunity associated with this reframing to improve financial metrics
and deliver meaningful change to the charitable sector by simply diverting existing
budgets and cost allocations.
SHAREHOLDERS AND STAKEHOLDERS…SOME PARAMETERS TO SET
THE SCENE
The proposition that demonstrated and tangible CSR and broader stakeholder
engagement are integral to a Company’s raison d’être is now without doubt…it’s just how
that it is done and to what extent it is implemented.
The four basic summaries below regarding a Company’s “responsibilities” to various
interests such as shareholders, customers, employees, suppliers and broader
stakeholders are necessarily short and over-simplified, definitely non exhaustive and
require further examination…(just not here)…
View 1 – the win/win = the Company will do well (in terms of real metrics) when it is
“doing good”.
View 2 – the societal demand response – growing focus by society of a Company’s
actions towards external issues and stakeholders. The expectation of the community for
the Company to actively deal with various distributive, restitution and compensation type
failures that are purely market driven.
View 3 – CSR is an agency problem and can raise governance issues in attempting to
balance or prefer outcomes between shareholders and stakeholders (…or “it ain’t our
job”)
View 4 – the Company is not set up to, nor has expertise in, “solving” external demands
of society, it merely optimises what it does (making widgets) within the defined
boundaries of the rules (legislation)….similar to 3 but governed by clear guidelines which
are simply followed (…or “it ain’t our fault”)
I am clearly a supporter of View 1 but thus far, it has been difficult to robustly demonstrate
this to be the case in a consistent and defensible set of measurable metrics and data
that the Company itself can, in an economically, reduced risk fashion test and act
upon.
Some literature (i) supports View 1 but is has been “top down” research looking at certain
performance indicators versus direct and pure philanthropic activities of Companies.
Other research has looked at cohort analysis (the returns of those Companies with “high
ESG/CSR ratings” are better than vs those with low ratings). The issue here is we have
yet to agree on what is an acceptable/universal adoption of “ratings” as many different
versions are currently used.
Our approach to the experiment and survey was also driven knowing that we needed to
take a Company “lens” to the issue as a necessary pre-requisite. Thus, when we seek to
reframe the concept to Donation V2.0, its success or otherwise will ultimately be be
examined and judged under this lens. If not, we are left with the traditional approach and
the same outcomes associated with donation V1.0.
Whilst this “lens” necessarily reduces the analysis to numbers and thus, largely eliminates
the altruistic and philanthropic aspects of a donation…that’s the point…we are trying to
re-frame to Donation V2.0 and enter into a discussion using a less traditional basis.
We therefore need to outline our contentions to Companies around areas such as risk,
relative value, return on investment, opportunity costs, IRRs, NPVs, demand curves and
price elasticity. The subsequent propositions are drawn from data and an experimental
approach that is robust, used regularly, widely, seen as standard and replicable (Discrete
choice modelling).
The BIG point established from the experiment, and our key starting point, is not so much
the quantum of the change in outputs (deltas) with respect to price, demand and
switching providers but rather that the delta clearly exists.
We understand and acknowledge that the value of the changes to price/demand/
switching outputs using Donation V2.0 in our experiment will vary across sectors and
goods/services – as it does with the use of other incentives – but the change in
behaviour/consumer response will happen.
The way in which each Company utilises this information will be up the to Company itself
but our point is that Donation V2.0 cannot be ignored as a valid input with respect to
understanding and incentivising consumer behaviours.
It also allows the Company to align or embed purpose with strategy in a tangible
demonstration to all stakeholders.
BROADER STAKEHOLDER INTERESTS MUST BE NOTED BUT
SHAREHOLDERS STILL “WIN”.
Before going on to examine Donation V2.0, we need to take a quick look at the
shareholder vs stakeholder discussion and look at some practical issues around the
implementation of achieving a fair balance between these groups.
The move to Company “stakeholder” acknowledgement has been driven by and grown
out of V1.0 ESG/CSR considerations and expectations into a broader theme which seeks
to show that those Companies actively pursuing a robust ESG/CSR agenda will be
“better off” in the long run.
Whilst I agree with the theme, there are a many issues in terms of balancing or prioritising,
in a relative sense, these competing demands or expectations. Importantly unless these
competing interests vs outputs can be somewhat quantified (relative and outright) the
whole debate becomes a mess and is entirely subjective. By way of example:
– How, and by what criteria, are the needs/wants of all relevant external stakeholders,
assuming they can be identified, (and completely ignoring shareholders) balanced and
prioritised amongst each other? (note s.172 CA UK indeed formally identifies the need
of Directors to take into account broader stakeholders yet its practical implementation
is fraught with difficulty- if not impossible.)
– Did the Company pay “too much” in dividend and “not enough” on ensuring, say, an
ethical supply chain?
– Did the Firm “waste” money on subsidising employee health via gym membership to
ensure better employee engagement and productivity, reducing days off or was that
money “well spent”?
– The Chair of a XYZ Widgets tells shareholders at the AGM that, through perfectly
legitimate and acceptable accounting, the Company could have paid tax of between
$80 and $100 but chose to pay $100 to do “the right thing”. The next Agenda item at
the AGM is a vote on the re-election of the Chair which subsequently fails…
So why does it seem shareholders must win?
Quite simply, that despite the contention that stakeholders should be taken into account
when making strategic and economic decisions of the Company, it is shareholder money
that is funding these Company decisions. Thus, the issue is not one of shareholder
primacy but simply, ultimate accountability for use of their (shareholder) money.
There are shareholders who will absolutely agree that stakeholder engagement needs to
be addressed but at what “cost” to them? How does the Board or senior management
justify certain types of spending/investments to shareholders that whilst serving a broader
societal benefit, are unable to be measured and quantified or have outcomes that cannot
show a degree of correlation (or causation) to the Company’s performance? Without
being able to measure, limits will be placed on the Company by its shareholders.
The solution lies in demonstrating (quantitatively) that Board and management decisions
to pro-actively take into account stakeholders, at the very least, firstly do not destroy or
significantly diminish shareholder wealth whilst also fulfilling a Company’s broader
obligations or, alternatively, it is a “fair price” to pay by the Company and the results of
the spend have a degree of correlation to performance.
WHY THE SHAREHOLDERS ARE USUALLY HAPPY SO LONG AS YOU
HIT YOUR TOP LINE GROWTH AND DIVIDENDS ARE PAID…or IT’S AS
MUCH ABOUT WHAT IS NOT SAID…
Now that we’ve established the completely unsurprising connection between Boards,
senior management and the priority their shareholders, let’s take a look at how
shareholders may think about things.
If you’ve been to an AGM, you’ll notice a lot of numbers and commentary in the
presentation but not notice (by definition) a lot of things that have been left out. Usually,
this is not nefarious or an active omission but because it doesn’t really matter in the
scheme of things and given time constraints, is not that important. (go read the Annual
Report).
So, when the Chair or CEO/CFO presents high level financials, you’ll see the revenue line
and the revenue change YoY, vs same quarter last year etc…….what you won’t see is
HOW they achieved this in terms of the mix of superior product, superior sales team and
the types of incentives offered for products/services during the course of the year to
achieve sales growth. These incentives exist and are used – simple.
Let’s go back to XYZ Widgets. They have a number of widget lines and also introduced a
few new widget product derivations but in order to ramp up sales for the new lines,
needed to offer discounts or other incentives such as “2 for 1”, upgrades, packages with
existing widgets quite apart from the new widget (purportedly) being a superior product
(often the biggest competitor to a new product is inertia). The use of incentives to
increase sales, gain initial or increase current market share – even at an initial loss or cost,
for a longer term positive outcome (see IRRs and NPVs) – is an entirely standard strategy
and one which is planned and costed in to Company budgets.
So at the end of the financial year, XYZ Widgets improved the top line revenue by 10%
which was spot on expectations and budgets. Assuming they were decent cost
managers this allowed them to pay a dividend to shareholders also in line with
expectations…everyone is happy.
One question NOT asked at the AGM was “what mix and amount of financial incentives
did you utilise to hit that 10% top line revenue improvement?”…why, because so long as
it was legal and moral, it didn’t matter…
CURRENT PHILANTHROPIC PITCHES, CONSTRAINTS…AND THE
NEED FOR BUCKETS
Current pitches for Company donations or other financial support rely on a combination
of the trend towards broader stakeholder management as well as allowing the Company
to signal publicly it’s acknowledgement that society’s expectations have changed and
they are tangibly making an effort to meet these expectations (assuming no level of
greenwashing). There is also an element of simple altruism….exactly the point.
The usual pitch and successful outcome to receive a donation generally relied on
convincing the Company various advantages accrue, or expectations are met, that are
largely qualitatively based and thus hard to measure apart from some (ex post)
quantitative analysis generally based on the recipient’s subsequent use of funds.
Importantly, as it stands, donations within a Company’s budget fall into the “donations
bucket” of costs/expenses. This is usually a relatively small bucket in relative terms
compared to most every other cost or expense line item in a Company’s P&L.
What we are suggesting is that in order for a Company to support Donation V2.0;
(i) we need to reframe the concept of a “donation” particularly in terms of its “output” as
directly related to the Company itself
(ii) validly argue Donation V2.0 can therefore be allocated to another, larger category of
costs/expenses (bucket).
The key issues we are trying to demonstrate are:
(i) causality or high degree of correlation between Donation V2.0 incentive and customer
response
(ii) method of measurability and subsequent quantification of (i) and
(iii) tangible benefit – or limited/no downside to the Company for undertaking use of
Donation V2.0 (i.e. point (ii) is a positive number)
Why is this important?
It comes back to using other people’s money on an agency basis to run the Company, the
Directors and senior management liability or justification for their actions…and buckets.
Shareholders seek a return on investment for the risk of deploying their capital. By
spending money on something that is neither causal, measurable or directly “beneficial”
to the Company, shareholders rightly have the ability to at least question that spend,
the amount of that spend and seek to have it constrained (or in the extreme, completely
curtailed).
However, what if the Company can defend the outlay as one which does not
diminish shareholder wealth and quite possibly enhances it whilst achieving
positive outcomes for stakeholders and societal interests?
That’s our bingo moment. (BINGO!)
—–
gift from a company
V2.0 of DONATION.
REFRAME THE COMPANY DONATION IN TERMS OF
ECONOMICS OF BEHAVIOR
INTRODUCTION
Traditionally, corporate donations have been motivated by a combination of charity and a desire to help others.
awareness of the need for the company to “give back” Charities rely on donations to survive.
needed to show that “doing good” would help the company not only financially but also in terms of reputation.
However, the Company should acknowledge its standing in society as a result of the donation.
as a responsible “person” who has adhered with certain societal norms to some extent
As a result, there are expectations and obligations.
However, there are two drawbacks to this strategy:
I attempting to quantify the “benefit” – as the primary motivator is still mostly altruistic
and
(ii) the Corporation’s legal structure, which poses numerous challenges and risks.
conflicts
