Constructive Engagement of the Corporate Sector: A New Approach to Corporate Philanthropy and Social Activism

by: Dan O'Brien
President and CEO
O’Brien and Associates International, Inc
(Formerly National Director for Private Sector Programs of CARE)

INTRODUCTION

There is a fundamental change taking place in the way corporations view their roles and responsibilities to society that is being driven by the demands of their key stakeholders. Customers are demanding high quality products at low prices and investors are requiring competitive returns on their investments. These pressures are forcing companies to seek new consumer, labor, and natural resource markets often located in poor countries without the resources necessary to regulate powerful multinational corporations. In response, activist and special interest organizations are demanding that companies adhere to strict international environmental and labor standards. At the same time, host governments and development NGOs are pushing companies to contribute its resources to local socio-economic development agendas.

To address the social and environmental concerns of specific stakeholders, companies have spent significant resources on corporate social responsibility programs ranging from traditional philanthropy and cause related marketing to more strategically focused social investments linked in some way to their core businesses. Yet, it is not clear to what extent these investments have contributed to companies’ financial performances.

In an effort to respond to the range of stakeholder concerns while strengthening financial performance, many corporations are beginning to find ways to fold notions of traditional philanthropy and corporate social responsibility with their business models in order to gain competitive advantage in global markets. While this presents unprecedented opportunities for private voluntary organizations (PVOs) to engage the private sector in new and creative ways to fight global poverty, it is not clear whether PVOs understand and are willing to make the necessary changes. 


TRENDS IN CORPORATE SOCIAL RESPONSIBILITY

There are several factors that are merging and contributing to a fundamental change in the way business views its role in broader social and economic development around the world. This change is being driven by five principle trends: globalization of business, requests from host governments that corporations contribute to national development, pressure from activist and issue-based organizations for multinationals to behave ethically and responsibly, demands from investors that the corporation provide competitive returns, and a shift within corporations from traditional philanthropy to social investing with expected business returns. These are described further below.


Globalization of Business. The spread of democratic governments and market economies throughout the world has led to fierce competition for these markets. To gain a competitive edge, many companies are globalizing their operations to access natural resources, labor, suppliers, and consumers. These changes have not only led to a dramatic increase in the total number of businesses operating globally, but have significantly increased the power that some of the large multinational corporations wield. Globalization has created a situation where businesses can no longer afford not to pay attention to social development in emerging markets. To be successful, they need a stable business environment.

Contribution to National and Local Development. The rapid move towards democracy and open markets has caught many countries off guard. These new and fragile democracies have not yet developed adequate legal frameworks to deal with environmental pollution, labor standards and worker rights, and consumer protection. The privatization of previous state-owned companies and an inadequate tax system has left many governments lacking for revenues to execute important social and economic programs. Furthermore, many developing countries are plagued with poverty, social disintegration, and environmental degradation, which impede social and economic development while discouraging investment from the private sector. 

Businesses operating in developing countries are beginning to realize that interdependent relationships exist between economic growth, human development, social cohesion, environmental sustainability, and a stable and productive business environment. Although not a panacea for development problems, strategic alliances between private, public, and civil society sectors are emerging in search of solutions that can benefit both society and the business. These alliances are discovering that they possess complimentary resources that when combined can make an important contribution to social and business development.

Pressure from Activist and Special Interest Groups. Democratization is also responsible for creating an environment where many new kinds of civil society organizations are emerging to meet important social needs. The private sector is being called upon by these organizations to behave responsibly towards society as well as the environment.

In countries where governments lack the proper legal framework and tax-base and businesses are expanding rapidly, certain national and international activist organizations are sending warning signals. Environmental organizations are protesting damage to the environment, labor organizations are protesting violations in living wage, age, and work condition standards, and consumer organizations are protesting unethical products and their marketing to vulnerable populations. 

Demands from Investors. An important element in the changing paradigm is the demand that shareholders are putting on corporations to limit charitable contributions. This sentiment is a re-emergence of the doctrine that is drummed into all business students. As Milton Friedman put it, the goal of a business is to create wealth for its shareholders. It is then up to the individual shareholders to decide how to use the wealth, which may or may not be for philanthropic reasons.

Another trend that is reinforcing Friedman’s point of view is the emergence of institutional investors. While individual investors have been more tolerant of the company’s philanthropy, mutual fund and insurance company investors are not. Institutional investors want the highest return possible for their clients and see corporate philanthropy cutting into their clients’ returns. 

In addition, a recent development in the US Congress that is also playing into this trend is a bill on Disclosure of Corporate Charitable Contributions introduced by Representative Paul Gillmor. The bill would require stock-issuing corporations that are registered with the Securities Exchange Commission to disclose the amount of money they give to charities each year, as well as the names of recipients. This is intended to make corporate philanthropy more transparent to shareholders.

Philanthropy to Social Investing.  In response to investors, many companies are evolving their corporate contributions program from pure philanthropy to social investing. David Grayson, Mark Vermillion, and The Corporate Communications project have all developed similar versions of a diagram depicting the evolution of corporate philanthropy. The diagram compares corporate philanthropy according to several characteristics over three generations.

The first generation of corporate philanthropy is characterized by pure philanthropy. The motive is based on morality or “it’s the right thing to do.” There is no specific structure within the corporation to make contributions. Rather, the CEO or other high-ranking executive controls a budget to make cash contributions to favorite charities. 

The second generation is an attempt to become more strategic at making charitable contributions. Corporations establish foundations with themes and guidelines to focus their donations. Nonprofit organizations seeking corporate support are required to submit a proposal that meet these specific guidelines. The Conference Board has been able to document a shift in the ways corporations in the United States give to charities. Fewer corporate contributions are given to pet causes like symphonies, museums, art collections, and local clubs (first generation). Replacing this kind of philanthropy is one in which corporations are establishing foundations and using them to make more strategic contributions to community causes that are linked in some way to the business strategy.

In the third generation, corporate contributions are viewed as an investment with the expectation that there will be some sort of tangible business return on that investment. The company’s business units become important stakeholders and decision makers and contributions are charged as a business expense instead of a tax-deductible charitable donation. In this scenario, corporate assets besides cash are utilized such as product, transportation, or staff skills. In his book “Corporate Social Investing”, Curt Weeden refers to the third generation as social investing and argues that there is a growing trend among businesses to use not only cash but product and other company assets to leverage a social good that, at the same time, drives a business objective. 


TRADITIONAL PRIVATE VOLUNTARY ORGANIZATION APPROACHES

Traditionally, private voluntary organizations approach corporations either to raise funds or to protest what they consider to be socially irresponsible corporate policy and behavior. Most PVOs, however, view corporations as sources of money and products that can be accessed to support their activities. The trends in corporate philanthropy in the United States would suggest this approach is outdated and destined to the same fate as dinosaurs living in rapidly drying swamps. 

Between 1990 and 2000, corporate philanthropy in the United States remained consistently at about 5-6% of total charitable contributions. In 1999, total giving in the United States reached an estimated $190.16 billion. Of this total, $143.71 billion or 76% were gifts from individuals and another $15.61 billion or 8% were bequests from individuals. Therefore, individuals accounted for nearly 84% of all charitable contributions in 1999. The remaining 16% came from foundations (10%) and corporations (6%).

When examining the 5+ % that corporations contribute to total charitable giving, an even gloomier picture appears. Corporate giving as a percent of pretax income declined from 1% in 1968 to .75% in 1980 but rebounded to 2.3% in 1988. Since 1988, however, corporate giving has steadily decreased to less than 1% in 1999. The decline in corporate giving is occurring at the same time that corporate profits have steadily increased.

Corporate philanthropy has never been a significant part of overall philanthropy in the United States and is getting even more insignificant as corporations give less of their pretax profits. This trend is supported by a recent survey conducted by the Indiana University’s Center on Philanthropy. The survey polled a variety of professional fundraisers from nonprofit organizations regarding the charitable giving climate in the United States. While the survey found overall confidence in giving to be high, it found confidence in corporate philanthropy to be low. 

Interestingly but not surprisingly, the sources of private contributions at most U.S. PVOs mirror the national data noted above. For example, in 1998 CARE raised $52.3 million from individuals, foundations, and corporations. Of this amount, 85% came from individuals, 9% from foundations, 5% from corporations, and about 1% from other sources. Other PVOs like CARE have been receiving about 5% of their total charitable contributions from corporations, which is consistent with the national average. 

While there will continue to be opportunities for PVOs to raise funds from corporations, the amounts will be relatively modest and should not be viewed as significant replacement funding for dwindling grants from the U.S. government such as the United States Agency for International Development (USAID). The real potential lies in the ability of PVOs to constructively engage corporations on issues aimed at achieving sustainable development goals that benefit both society and business.


THE BUILDING BLOCKS FOR A NEW APPROACH

The trends in corporate social responsibility and corporate philanthropy discussed previously raise the question of how PVOs should engage corporations. Many will continue to pursue corporate fundraising strategies while others will continue to protest bad corporate behavior such as unfair labor practices, pollution, corruption, irresponsible products, or some social injustice. PVOs that assume traditional fundraising and activist approaches, however, will likely miss important opportunities to engage corporations in ways that will help discover solutions to the forces driving global poverty. 

The trends suggest that there is another, more measured, way to approach corporations besides fundraising and activism. This approach, which relies on constructive engagement, assumes that corporations are powerful entities that possess the potential to do a great amount of good or harm. For example, a multi-national oil company can harm the livelihoods of thousands of farmers or fishermen if it damages the environment on which those farmers or fishermen depend. The same oil company could invest in economic development or use its power to influence government policy in a way that could positively benefit those communities and their livelihoods. 

In a constructive engagement approach, a PVO’s relationship with corporations would most likely fall within three general types:

Strategic Alliance.  This kind of relationship goes well beyond a donation, grant, or other contracting arrangement. Rather, it is a partnership that drives both business and sustainable development objectives. An agreement of what is to be accomplished, the necessary resources, and the time it will take characterize it. 

In a strategic alliance, both partners contribute resources necessary to carry out a set of activities that, when accomplished, will achieve the goal. Resources might include people with a relative set of skills, money, materials, and other pertinent tangible or intangible assets. The goal is one in which both organizations believe is important and relative to its organizational mandate. 
Communication is a strategic alliance is also important. The partners agree to work together to monitor progress, identify problems and success, and make adjustments. Communication will usually include periodic meetings between representatives of the organizations where an open and honest exchange of ideas, concerns, and suggestions take place.

Issue Specific Engagement.  This relationship is similar to the strategic alliance with the exception that it is focused on an issue that is having a negative impact on sustainable development. For example, a PVO might decide to only work with Nike on issues related to child labor and finding a solution to balance the need to generate income for the family and receive an education. PVOs must be careful not to accept a grant from a corporation to implement a community-based project if that same corporation’s behavior is harming efforts to achieve sustainable development. 

Advocacy and Constructive Dialogue.  In this relationship, PVOs do not develop a partnership or accept any form of contribution from the corporation. The relationship is solely based on a constructive dialogue between the PVO and the corporation regarding the issues at hand. An example of advocacy and constructive dialogue could be the diamond industry in conflict zones like Sierra Leone, Angola, and the Democratic Republic of Congo. Diamond companies, such as De Beers, are under pressure from human rights organizations to verify that they do not purchase diamonds from conflict areas where the revenue can be used to fuel the civil war. Interested PVOs could band together to advocate that diamond companies develop a verification and certification system that demonstrates that the revenues from the purchase of its diamonds are not used to continue the fighting.


THE FUTURE OF PVO-CORPORATE RELATIONSHIPS

To date, corporations have attempted to fulfill their obligations to society by spending large amounts of money on philanthropy to address social and environmental concerns of stakeholders. However, there is little evidence to demonstrate that these investments have contributed significantly to social well-being and even less evidence to show that they have improved corporate financial performance. This uncertainty is leading many corporations to redesign their philanthropy programs so they are more strategically aligned with business models resulting in a more unified strategy.

To take advantage of new opportunities resulting from these trends, PVOs must broaden their view beyond traditional corporate philanthropy and activism to a point where they can see innovative ways to engage corporations in finding win-win solutions. PVOs that are able to develop new skill sets and engagement strategies will be well positioned to influence corporate behavior and harness additional corporate resources including skills, abilities, and other assets that can be used to promote sustainable development.

Dan O'Brien is President and CEO of O’Brien and Associates International, Inc (OAI). OAI specializes in assisting multinational companies operating in developing countries with social responsibility strategies. Specifically, OAI helps businesses develop, implement, and evaluate community-based social, economic, environmental, and disaster response programs that are designed to achieve both social and business objectives. OAI also specializes in assisting clients find the most appropriate partners to help ensure the success of these programs. Other complimentary services include strategic planning, social audits, community consultation and disclosure, and cross-culture training.

Before founding O’Brien and Associates International, Dan worked for CARE International in a variety of positions over a 14 year span that included Regional Director for Asia; Country and Assistant Country Director for CARE Indonesia, and Regional Program Advisor for Asia and Latin America. Most recently, Dan served as CARE’s National Director for Private Sector Programs where he was responsible for developing and supporting strategies in working with key businesses that included policy, consultation processes around social and environmental responsibility, and partnerships that promote sustainable development.