Corporate philanthropy has gained substantial relevance to daily business operations. In the United Kingdom alone, leading publicly traded companies made donations to nonprofit organizations in 2003 and 2004 that were valued at more than $1.6 billion and that equaled close to 1% of the companies’ pre-tax profits.1 However, for leading companies, corporate philanthropy goes well beyond mere donations. Fannie Mae, a private mortgage company that works with the U.S. government to facilitate home loans, and the Procter & Gamble Co., were ranked first and second inBusiness Ethics’ 100 Best Corporate Citizens list in 2004. They engage in a variety of philanthropic activities, such as volunteer initiatives, community service and educational or cultural projects. Often, such engagement is part of a larger framework of corporate social responsibility that also covers issues such as ethical business conduct, diversity and protection of the environment.2

Academics and practitioners alike have been emphasizing the strategic relevance of corporate philanthropy. They argue that companies can and should strategically use their charitable activities to create win-win opportunities for themselves and for the beneficiaries of their philanthropy.3 A similar idea is reflected in a joint statement that CEOs from renowned companies such as Accenture, McDonald’s Corp., Deutsche Bank AG, Siemens AG and Renault S.A. signed in January 2003 at the World Economic Forum. These corporate leaders acknowledged that social issues are crucial elements of their businesses and that taking active responsibility for such issues in a sound way is both economically and ethically crucial.4

Although the strategic relevance of corporate philanthropy is widely accepted, its effectiveness varies substantially. Few companies achieve significant lasting societal impacts with their philanthropy, and even fewer manage to accomplish both sustainable social effects and significant economic returns. Most companies’ philanthropic activities lack a cohesive strategy and are conducted in a piecemeal fashion, causing investments in corporate philanthropy to often simply dissipate.

In most cases, executives dismiss this ineffectiveness as an inevitable part of philanthropic engagement. By doing so, they misjudge the situation. There is no reason to treat a company’s charitable activities less professionally than the core business.

But to what extent should corporate philanthropy be related to a company’s core business? From an ethical perspective, is it legitimate to require corporate charitable activities to contribute to the company’s bottom line by providing market benefits or advancing internal business operations? We think that this is clearly the case. Only philanthropic activities that both create true value for the beneficiaries and enhance the company’s business performance are sustainable in the long run. Initiatives that don’t fulfill these two objectives are easily threatened in difficult economic situations. Also, charitable activities that are not win-win solutions may not reach their potential and are often regarded within the company as negligible side activities. To achieve a sustainable and robust approach to corporate philanthropy, companies must direct their charitable engagement from both an ethical and an economic point of view.

Types of Corporate Philanthropy

Although many executives have started to pay more attention to corporate philanthropy, the strategic direction of their companies’ philanthropic activities often remains superficial and poorly controlled. One reason is a poor understanding of managerial options in this area. Our research suggests that companies’ philanthropic activities rely on two overarching perspectives, which we callmarket orientation andcompetence orientation. (See “About the Research.”)

Market Orientation

Some executives put a strong emphasis on the expectations of stakeholders such as customers, employees, regulating agencies or neighboring communities. These executives strive to enhance their companies’ competitive situation by designing their corporate philanthropy according to external demands. Trying to live up to the expectations of important stakeholders, these companies hope to achieve competitive advantages such as improved marketing and selling capabilities, higher attractiveness as an employer or better relationships with governmental and nongovernmental organizations. For example, Deutsche Lufthansa AG runs a community-involvement program that is designed with a clear external strategic goal: to enhance the company’s relations with communities neighboring the airline’s hub in Frankfurt. Since the program’s launch in 1999, Lufthansa has supported more than 130 community projects and contributed more than $100,000 annually to the initiative.

Executives who adopt a market-oriented approach to corporate philanthropy tend to put stakeholder expectations at the center of their considerations. Such companies may be more interested in influencing stakeholder attitudes than in actual social outcomes. However, market-oriented corporate philanthropy can achieve remarkable societal benefits too. Because such initiatives are usually directed toward meeting stakeholder demands in order to affect stakeholders’ attitudes, the activities often serve to satisfy crucial needs.

Competence Orientation

There are some executives, on the other hand who, when deciding on the nature of their charitable engagement, focus on internal issues. In particular, they align corporate philanthropic initiatives with their companies’ abilities and core competencies. In so doing, they avoid distractions from the core business, enhance the efficiency of their charitable activities and assure unique value creation for the beneficiaries.

The pro bono projects conducted by many consulting companies represent an example of this kind of philanthropic activity. For instance, McKinsey & Co. offers free consulting services to nonprofit organizations in social, cultural and educational fields. Beneficiaries include public art galleries, colleges and charitable institutions. Each year, the company conducts about one hundred such projects worldwide, using its employees’ unique knowledge of nonprofit causes. Besides meeting its responsibilities toward society, McKinsey explicitly cites its employees’ excitement, inspiration and development as major motives to engage in these activities.

One of the dangers of the pronounced internal orientation of competence-oriented philanthropy is that the resulting philanthropic behavior may not be comprehensively aligned with external stakeholders’ interests. As a result, the beneficiaries may not receive the most value possible. On the other hand, competence-oriented corporate philanthropy sometimes creates unique benefits. Because companies are operating within their core business areas, they can utilize their unique expertise instead of merely relying on financial resources.

Some companies combine an external, or market, orientation with an internal, or competence, orientation, while others focus on just one perspective on corporate philanthropy. Still others do not adopt a strategic orientation toward their philanthropic activities at all. The desired degree of internal and external orientation indicates one of four specific approaches to corporate charitable activities: peripheral philanthropy, constricted philanthropy, dispersed philanthropy and strategic philanthropy. (See “Four Types of Corporate Philanthropy.”)

Peripheral Philanthropy

Companies that practice what we call peripheral philanthropy have charitable initiatives that are mainly driven by external demands and stakeholder expectations. Most such companies see corporate philanthropy as a means to better position themselves within their competitive environment. Their philanthropic engagement is usually unrelated to their core activities, but they are attempting to translate positive reputation effects into concrete bottom-line impacts.

The strategic consequences of peripheral philanthropy are mixed. Companies may be able to reap benefits from enhanced reputation. Their philanthropic image may help stimulate customer demand for their products and services. Also, they may improve their ability to attract and retain qualified employees or enjoy lessened public and regulatory scrutiny. However, peripheral philanthropic activities often do not tap a company’s core competencies, may lack credibility and may appear superficial. Companies may end up engaging in charitable activities in a wide array of fields with contributions that are hardly distinctive.

On the other extreme, some companies design their peripheral philanthropy very comprehensively. Such companies risk confusing and impairing their business focus. Their social initiatives can distract both monetary and managerial resources from the business’s core activities and can contribute to strategic ambiguity.

Consider the case of the Indian steel producer Tata Steel Ltd., based in Jamshedpur, India.5 Founded in 1907, Tata Steel acquired a strong philanthropic heritage from its charismatic founder, Jamsetji Nusserwan Tata, who ran his business with a strong sense of social responsibility for the Indian nation’s welfare. As a result, Tata Steel pioneered many employee welfare measures in India, introducing the general eight-hour working day in 1912, free medical treatment in 1915, maternity benefits in 1928 and a pension system in 1989. Tata Steel also virtually ran the city of Jamshedpur. The company provided a wide array of services, including water and power supply, landscaping, street sweeping and civil construction work. Tata Steel ran hospitals, schools and a college with 30,000 students. For many years, these far-reaching social welfare practices substantially enhanced Tata Steel’s reputation and provided the company with significant advantages. It was able to attract and retain the talent necessary for its continued success, even though the area around Jamshedpur provided little infrastructure. In addition, the company enjoyed excellent labor-management relations and was spared from strikes for decades. Tata Steel was also able to create an enormous level of satisfaction and loyalty among its workforce.

However, in the early 1990s, the typical problems of peripheral philanthropy started overshadowing its benefits. Tata Steel’s wide array of noncore activities impaired the company’s ability to focus on the core steel business. As one of the company’s vice presidents put it, “Tata Steel realized that it was necessary to review its approaches to the sustenance of its business and to the great social responsibility that was on its shoulders. The problem was how to grow into an efficient world-class business corporation without losing the image of a socially conscious employer.” The company’s philanthropic activities were widespread but stategically ambiguous, and this was eventually viewed as an impediment to future growth. These developments threatened to erode Tata Steel’s position in the marketplace and put its very existence at risk.

Tata Steel suffered from inefficiency, and the company’s oversized workforce boosted payroll costs. By the early 1990s, Tata Steel’s payroll peaked at 78,000 employees, almost 10% of whom worked providing services for the town or medical services. The drawbacks of Tata Steel’s approach to corporate philanthropy became obvious after the liberalization of the Indian economy in 1991 led to increased competition. Top management at Tata Steel suggested far-reaching changes, including massive workforce reductions and a substantial redesign of the company’s social welfare programs.

(Reprint #:47111)

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