An urban grants economy revisited: corporate charitable contributions in the Twin Cities, 1979-81, 1987-89

Administrative Science Quarterly,  Sept, 1997  by Joseph Galaskiewicz

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I heard so much about the City of Minneapolis, about its Chamber of Commerce, about the public spirit of its business community, about your remarkable Five Percent Club -- that I feel a bit like Dorothy in the Land of Oz. I had to come to the Emerald City myself to see if it really exists.

-- Speech delivered by John D. Rockefeller III to the Minneapolis Chamber of Commerce, June 30, 1977.

Corporate charitable contributions can teach us how social, political, and cultural contexts influence corporate behavior.(1) Charitable contributions are a type of discretionary expenditure, because it is difficult to measure and thus know what benefits these expenditures accrue to the firm (Sinclair and Galaskiewicz, 1997). In this respect, charitable contributions are similar to expenditures on lobbying, political campaigns, public relations, sponsorships, and memberships in peak associations. Benefits are often inclusive, almost in the nature of public goods. Thus, these expenditures fall to the discretion of managers who can only use their good judgment in deciding whether to give and at what level. The uncertainty surrounding these decisions frees them from strict efficiency norms and makes them susceptible to outside influences, including the larger business culture, public policies, and community institutions.

In 1987-89 I revisited a site first studied in 1979-81 and touted as an exemplar of corporate social responsibility, Minneapolis-St. Paul (Galaskiewicz, 1985). I returned to the Emerald City to retest the various theories of company giving by replicating my cross-sectional survey and doing an analysis of company giving over time. My goals were to see if the same factors that influenced corporate giving in 1979-81 were still important in 1987-89 and if firm-level changes affected levels of giving.

Theoretical Perspectives on Corporate Giving

The relationship between charitable contributions and company performance illustrates the ambiguous role of charitable contributions in the firm. Studies have attempted to measure whether companies that give more to charity are either better or worse off in terms of profitability and growth (Sturdivant and Ginter, 1977; Aldag and Bartol, 1978; Arlow and Gannon, 1982; Fry, Keim, and Meiners, 1982; Cochran and Wood, 1984; Ullman, 1985; Corcoran, 1987). Despite these studies, evidence remains inconclusive. Most would agree that "being socially involved does not appear to increase investors' total rate of return. Nor does it appear that being socially involved is dysfunctional for the investor" (Abbott and Monsen, 1979: 514).

Yet giving is not unrelated to profits. Nationally, giving has fluctuated between .7 percent and 2.3 percent of pretax net income for the last twenty years and has hovered around 1 percent (AAFRC Trust for Philanthropy, 1996). Numerous studies have shown that pretax net income (Maddox and Siegfried, 1980; McElroy and Siegfried, 1985, 1986; Navarro, 1988b; Galaskiewicz and Wasserman, 1989), the log of pretax net income (Clotfelter, 1985a; Galaskiewicz, 1985; McElroy and Siegfried, 1986), and ratios of pretax and after-tax net income to revenues, assets, and equity (Navarro, 1988a) predict company giving.

One reason why contributions are tied to profits is that firms time their charitable contributions so as to reduce their taxable income (Nelson, 1970; Clotfelter, 1985a, 1985b; Webb, 1994). To the extent that this reduces taxes (a cost savings strategy), giving serves a business purpose. Webb (1994) argued that the dramatic increase and then decline in tax-deductible charitable contributions between 1985 and 1987 was due to the Tax Reform Act of 1986, which led firms to stockpile contributions in their foundations before changes in the tax code went into effect and to decrease giving shortly thereafter. Another reason why contributions are tightly coupled to profits is that many firms use a fixed percentage of pretax net income to decide how much to give to charity (McElroy and Siegfried, 1986). These rules of thumb are arbitrary, however, and there is often no business rationale for giving at a certain percentage.

Because charitable contributions are not solely driven by norms of efficiency and financial incentives, researchers have tried to explain company giving using behavioral theories. Resource dependency theorists have argued that giving can benefit the firm but that the impact will be long term. Contributions can be vehicles to communicate illusions and negotiate favorable corporate images in the eyes of those on whom firms depend (Haley, 1991). In the course of this exchange, contributions also can communicate the company's message, its mission, its intentions, and its values. This not only can help to assure audiences, it can also alert them to corporate power. In the most extreme cases, contributions can extend corporate influence, ideologies, and values outside the business realm. When giving benefits the long-term interests of stakeholders and the firm, it is referred to as serving an enlightened self-interest. Several researchers reported that this rationale for giving was popular among corporate executives in the late 1970s and early 1980s (Bowman, 1977; Ostlund, 1977; Arlow and Gannon, 1982; White and Bartolomeo, 1982; Daniel Yankelovich Group, Inc., 1988).