It was only through a difficult change process that Tata Steel’s top management was able to get the company back on track. Given the philanthropic heritage of the company, B. Muthuraman, managing director since 2001, did not want to jeopardize Tata Steel’s reputation as an employer of choice and outstanding corporate citizen. There was consensus in top management that change was inevitable, but it should not involve an abandonment of the company’s engagement in corporate philanthropy.
Today, Tata Steel is a highly profitable company with plans for substantial growth. However, even in early 2005, after substantial workforce reductions, about 1,400 of Tata Steel’s 40,000 employees were still working in city services or medical services. The company was spending about $21 million each year to carry out those tasks, and the company’s refocusing and downsizing processes were slated to continue. As this example illustrates, peripheral philanthropy may be appropriate under certain circumstances. It can help companies attain benefits that are vital both for themselves and for key stakeholders. In such cases, it may be both ethically and economically crucial for the company to jump in and meet stakeholder needs. However, such initiatives usually cannot be sustained in the long run.
Constricted Philanthropy
Other companies emphasize a pronounced competence orientation in their philanthropic initiatives. Adopting an approach that we call constricted philanthropy, executives at these companies hope to use synergies between their main activities and their charitable activities. These executives harness their companies’ core competencies for social purposes, but do so while largely neglecting an external stakeholder perspective.
The strategic impacts of constricted philanthropy are mixed. Using existing expertise, resources and facilities enhances the efficiency of the company’s philanthropic initiatives. In some cases, executives may even see opportunities to transform their companies’ cultures and their employees’ mindsets by linking philanthropic and business activities. These managers strive to imbue a sense of responsibility throughout the corporation and to cultivate a sense of innovation by engaging corporate competencies in new areas.
However, constricted philanthropy is often accompanied by several problems. Due to its internal focus and corresponding tendency to neglect concrete stakeholder needs and expectations, this type of philanthropy may address areas with little relevance to the company’s stakeholders. Executives often restrict their charitable engagement to a tight field defined by the company’s core operations, using their own products and services or the special skills of their employees. Such activities may fail to address urgent needs and thus may miss the opportunity to substantially enhance the company’s reputation or contribute to the company’s strategy.
The Hilti Corp., a multinational construction-tool manufacturer based in Liechtenstein, offers a positive example of constricted philanthropy. In the wake of the September 11, 2001, terrorist attacks on the World Trade Center in New York, the company donated several containers of construction tools to support the cleanup activities at Ground Zero. By doing so, Hilti made an important contribution and communicated a notable message of solidarity. In addition, the company was able to use its core business competency to provide a societal benefit. However, Hilti’s contribution was hardly noticed by its global customer base, as they were neither systematically informed of the initiative nor directly benefited from it. The donation did not generate any substantial impacts in the marketplace for the corporation.
Generally, constricted philanthropy may be appropriate if urgent and severe circumstances require the use of a company’s unique capabilities because, otherwise, the problem at hand could not be efficiently solved. This may be particularly the case in emergency situations, as the Hilti Corp. example illustrates. In such instances, it may be possible and necessary to use corporate core competencies to meet pressing needs in a uniquely efficient way. However, since this type of philanthropy does not systematically address a company’s key stakeholders, it lacks a strategic orientation, and its impact on the company’s competitive situation tends to be limited at best.
Dispersed Philanthropy
Corporate philanthropy in many companies is characterized by a general lack of strategic direction. Such initiatives are largely uncoordinated. Neither top executives nor typical employees have a comprehensive overview of the company’s activities, and there are no clear-cut decision criteria that explain why specific charitable projects are chosen. As a result, these companies may engage in a multitude of small projects without a guiding theme. Funding is spread more or less arbitrarily across various institutions in differing areas.
The consequences of this piecemeal approach, which we call dispersed philanthropy, are usually not particularly favorable for either the company or the beneficiaries of its philanthropy. The negative aspects of peripheral and constricted philanthropy multiply here. For instance, dispersed philanthropy increases the problem of strategic ambiguity. Neither external stakeholder needs nor internal business considerations guide the company’s philanthropic engagement. Both managers and employees may find it hard to understand why the company is doing what it is doing. Also, the impacts of dispersed philanthropy tend to be minimal. Operating in areas far from its core competencies, the company is not able to realize internal synergies. At the same time, the multitude of different projects prevents the company from focusing its efforts on certain stakeholder groups and providing them with substantial benefits.
Dispersed philanthropy most often occurs in the realm of corporate donations. Some executives admit that the main motive behind such contributions can be found in “the board members’ personal interests.”6 Without exhibiting much creativity or evaluating the actual impacts of their gifts, executives often lend their companies’ financial support unsystematically. Consider the example of the Rheingau Musik Festival, one of Germany’s major classical music festivals. In 2004, it was sponsored by as many as 165 companies from various industries, including competitors from banking (such as Deutsche Bank, Commerzbank, Credit Suisse and UBS), information technology (such as IBM and SAP) and consulting (such as Accenture and Arthur D. Little). Donating between about $6,000 and $600,000 each, the sponsoring companies made overall contributions to the festival that totaled about $3.6 million. However, their involvement has to be evaluated very differently from a strategic perspective. For the main sponsors such as LOTTO, Germany’s biggest lottery, there were clear-cut marketing advantages, as their logos appeared prominently on all festival publications and at concert locations. Also, several donors were able to go beyond mere financial contributions and employ their core competencies in support of the festival in a way that may also benefit them in the marketplace. For instance, various hotels offered hundreds of rooms for musicians, free of charge. By doing so, the hotels not only contributed in an effective way but also gained an opportunity to showcase their services.
For other companies, however, the strategic impacts of their purely monetary contributions were limited at best. As but one in a large group of sponsors, these companies were hardly visible. Thus, the reputation and marketing impacts of their engagement were marginal. Also, there was no apparent connection between the respective companies’ contributions and their core businesses. In sum, these donations suffered from the limited strategic effects typical of dispersed philanthropy.
In specific cases, dispersed philanthropy may be appropriate and useful, particularly in situations of severe crisis when immediate action is required. For example, when the Houston area was hit by tropical storm Allison in June 2001, energy giant Conoco Inc. (today known as ConocoPhillips) quickly decided to give a day off to virtually all of the almost 3,000 employees in its Houston headquarters to allow them to provide voluntary aid to neighborhoods most affected by the flooding. With the company actively supporting these activities and organizing supplies, communications and logistics, about one-third of its employees volunteered to help in Houston’s hardest hit areas. This initiative not only brought much-needed relief to owners of devastated houses but also boosted Conoco’s employees’ pride in being able to help.
Although dispersed philanthropy may be highly valuable in such special situations, it is not appropriate as a general approach to corporate philanthropy. Under normal circumstances, companies could both produce far more significant societal impacts and benefit far more themselves if executives adopted a truly systematic strategic approach to corporate philanthropy.
Strategic Philanthropy
The most effective approach to corporate philanthropy, which we call strategic philanthropy, integrates an internal and an external perspective. It applies the same professional management principles to corporate philanthropy as to any other field of business operations. Executives align philanthropic efforts with the core competencies of their companies, thus using the company’s unique abilities to benefit society. However, they also take into account stakeholder and market expectations so that the company may benefit from the effect of its philanthropic activities in the marketplace. Companies with this approach to corporate philanthropy achieve sustainable results with regard to both their stakeholders’ needs and their own competitive advantage. While providing substantial benefits for society, they can gain opportunities to learn how to apply their core competencies in new business areas, boost their employees’ intrinsic motivation, stimulate customer demand and enhance their attractiveness in the labor market. They maintain and even strengthen their identity by aligning their social engagement with the overall company mission and vision.
IBM’s Reinventing Education grant program is a classic example of strategic philanthropy.7 Launched in 1994, Reinventing Education aimed to improve school systems and drive education reform in the United States and other countries. To achieve this aim, IBM provided IT solutions in areas like communication between homes and schools, teacher professional development, student assessment and data management and analysis. Reinventing Education drew heavily on IBM’s employees’ specialized skills to provide solutions for technological problems. By August 2004, the program, which is still ongoing, had completed three rounds of grant awards to schools and school districts and had, in 2004, issued grants valued at more than $70 million. However, only about 25% of those contributions were given in cash, while 75% consisted of research and consulting time, software and technical equipment.
The Center for Children & Technology in New York estimates that by 2004, more than 90,000 teachers and millions of students were using educational technology tools created through Reinventing Education. The program was working in 25 sites across the U.S. and in nine countries in Asia, Latin America, Europe and Australia. Besides offering significant contributions toward the improvement of public education, Reinventing Education also provided IBM with important strategic advantages, such as enhancing its reputation. From 2000 to 2003, IBM continuously remained in the top five ofBusiness Ethics’ 100 Best Corporate Citizens list. In addition, the company received the 1999–2000 Ron Brown Award for Corporate Leadership. Reinventing Education also boosted IBM employees’ pride and loyalty. And the program enabled technological learning, skill transfer and the development of new technologies with commercial potential. For instance, as part of the Reinventing Education initiative IBM staff developed new drag-and-drop technology for the Internet that also could be used for commercial purposes. IBM also created “Watch-me!-Read,” an innovative voice-recognition software application for children. Although initially designed as part of the philanthropic initiative, these innovations also had substantial commercial potential. Because of Reinventing Education, IBM was eventually able to make its K-12 education business profitable even though that business had been losing money before the program started.
As this example illustrates, strategic philanthropy enables companies to fully realize the potential of corporate philanthropy both for its beneficiaries and for the company. However, strategic philanthropy also entails substantial commitment on the part of management. It requires sound planning and careful implementation, and executives need to clearly focus their companies’ charitable activities. For example, Reinventing Education was clearly directed toward providing technological solutions to barriers to reform in K-12 education, and projects were only initiated if they addressed that issue. Without such a clear focus, corporate social engagement is likely to drift away from strategic philanthropy.
Overcoming the Pitfalls of Corporate Philanthropy
In addition to adopting the strategic approach, there are concrete tactical factors that help make some companies’ social initiatives successful. Our research suggested four tactics that effective companies use to avoid typical mistakes in managing corporate philanthropy.
Track the Impact
Specifying concrete goals and overarching guidelines for philanthropic activities is an important first step for purposeful management of corporate philanthropy. Then it is a logical — and far-reaching — next step to integrate a company’s performance in the area of corporate philanthropy into the overall controlling and reporting system, putting it on an equal footing with other accounts of corporate performance. Besides depicting the impacts of the companies’ charitable initiatives on their intended beneficiaries, an appropriate corporate philanthropy monitoring system must be able to answer questions such as: How well do our activities meet our goals for corporate philanthropy? To what extent do we meet expectations of core stakeholders? To what degree does this philanthropic initiative advance the company’s core business operations? Some companies have found that including philanthropy-related performance measures into a balanced scorecard approach8 proves to be one effective way to help answer these questions.
Define Exit Options
Executives who strategically direct their companies’ philanthropic activities toward sustainability avoid hasty or superficial commitments. By devoting great diligence to the initial design of their charitable initiatives, these executives make sure not to fall prey to the trap of becoming overcommitted. In particular, we observed that successful approaches to corporate philanthropy often involved an active control of stakeholder expectations. From the outset, executives explicitly defined what would be included in their company’s philanthropic initiative and what would not. By doing so, they avoided raising expectations incorrectly. They also explicitly specified exit options, clearly defining when and under what conditions an initiative would end.
For example, in spite of the generous outline of IBM’s Reinventing Education program, the program from the outset incorporated a number of limits and exit options. Most importantly, Reinventing Education was divided into separate waves with budgets that were defined before each wave was launched. In 1994, Louis V. Gerstner Jr., IBM’s CEO at the time, started the first round of Reinventing Education with $25 million in grants. In 1997, the second round of the program began with $10 million in grants, followed by the same amount of international grants in 1998. And finally, in 2002, a third round of the Reinventing Education program was launched, with another $25 million in grants. Even though each of these program phases had a substantial size, establishing the budgets years in advance allowed IBM to take the overall costs into account early on and plan adequately for the program’s financing. In addition, the design deliberately made it easy for the company to withdraw from specific projects at the end of each respective phase, if appropriate, without having created the expectation of a longer-term commitment.
Professionalize Social Engagement
Executives with a strategic approach to corporate philanthropy establish clear-cut principles for their charitable activities in general and for corporate donations in particular. Some also define in advance the circle of preferred beneficiaries to guarantee goal-directed contributions and exclude the distraction that can result from personal preferences. Clear-cut principles that govern philanthropic activities can guide decision making in specific cases and, more generally, help strengthen the strategic orientation of corporate philanthropy and enhance its efficiency.
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REFERENCES
1. See M. Armstrong, “Top 100 Firms Give Less Than 1% of Profits to Charity,” The Guardian, Monday, Nov. 8, 2004.
2. See R.P. Hill, D. Stephens, and I. Smith, “Corporate Social Responsibility: An Examination of Individual Firm Behavior,” Business and Society Review 108, no. 3 (2003): 339–364. In our definition of corporate philanthropy, we follow A.B. Carroll, “The Pyramid of Corporate Social Responsibility: Toward the Moral Management of Organizational Stakeholders,” Business Horizons 34, no. 4 (July–August 1991): 39–48. Thus, corporate philanthropy is regarded as the discretionary part of a company’s social responsibilities, which “encompasses those corporate actions that are in response to society’s expectation that businesses be good corporate citizens. This includes actively engaging in acts or programs to promote human welfare or goodwill” (p. 42).
3. See, for instance, J.J. Chrisman and A.B. Carroll, “Corporate Responsibility — Reconciling Economic and Social Goals,” Sloan Management Review 25, no. 2 (winter 1984): 59–65; M.R. Porter and M.R. Kramer, “The Competitive Advantage of Corporate Philanthropy,” Harvard Business Review 80, no. 12 (December 2002): 57–68; and C. Smith, “The New Corporate Philanthropy,” Harvard Business Review 72, no. 3 (May––June 1994): 105–116. Empirical studies generally confirm a positive relationship between companies’ social performance and their financial results. For an overview, see M. Orlitzky, F.L. Schmidt and S.L. Rynes, “Corporate Social and Financial Performance: A Meta-analysis,” Organization Studies 24, no. 3 (2003): 403–441.
4. See World Economic Forum (ed.), “Global Corporate Citizenship: The Leadership Challenge for CEOs and Boards” (Geneva, Switzerland: World Economic Forum, 2003).
5. See H. Bruch and U. Frei, “Tata Steel 2005: The Vision of Harmonizing Profitable Growth and Social Responsibility,” University of St. Gallen case no. 405-023-1 (St. Gallen, Switzerland: University of St. Gallen, 2004).
6. See K. Gazdar and K.R. Kirchhoff, “Unternehmerische Wohltaten: Last oder Lust [Corporate Charity: Burden or Pleasure]” (Munich: Luchterhand, 2004), 336.
7. See R.M. Kanter, “IBM’s Reinventing Education (A),” Harvard Business School case no. 9-399-008 (Boston: Harvard Business School Publishing, 2001).
8. See R.S. Kaplan and D.P. Norton, “The Balanced Scorecard: Translating Strategy into Action” (Boston: Harvard Business School Press, 1996).
