Corporate Philanthropy and Economic Returns?: A Summary of Economic Impact of Corporate Foundations: An Event Analysis Approach
Summary by Jordyn Pimm, Ontario Hub PhiLab student
Philanthropic intentions with corporate incentive? While it seems contradicting, there may indeed be a relationship between social good and market success. Today, companies lacking corporate social responsibility (CSR) programs are few and far between. Yet the institutionalization of such business ethics does not necessarily guarantee the credibility of CSR initiatives. Rather companies, in an effort to strengthen the effectiveness, and arguably the reputation of their brands and CSR strategies may consider embarking on creating corporate foundations (Monfort et al., 2020).
In the study Economic Impact of Corporate Foundations; An Event Analysis Approach, authors Abel Monfort, Nuria Villagara, and Joaquín Sánchez, explore the relationship between the creation of corporate foundations and a corporation’s stock market value. In an analysis of 22 corporations listed on the IBEX, IBEX Medium Cap, FTSE, and Dow Jones stock markets, the authors found that beyond the boost in credibility, certain factors in relation to the creation of a corporate foundation can in fact positively impact the corporation’s stock market value.
Corporate Social Responsibility vs. Corporate Foundations
The authors acknowledge the challenge in measuring the economic impact of CSR initiatives. Historically, a variety of CSR initiatives have been studied as if each were homogeneous. Yet, while literature and data in relation to the market value of CSR programs and corporate foundations are limited, it is important to note that corporate foundations are merely extensions of the CSR initiatives and in fact operate as legally independent entities despite being created and financed through corporate donations (Monfort et al., 2020: p. 160). According to the authors’ “CSR programs can end up being tightly associated with business activities, leading stakeholders to perceive them as purely image building publicity stunts” (Monfort et al., 2020: p. 160). Corporate foundations, on the other hand, rely on donor funding and pursue long-term missions or objectives distinct from the goals of the corporation (Monfort et al., 2020: p.160). Despite the degrees of separation, corporate foundations can still provide the company with benefits by developing brand identity, encouraging loyalty towards the corporation and its products or services, and enhancing the organization’s corporate citizenship by creating opportunities to engage with the community (Monfort et al., 2020: p. 161).
Concepts to Consider
Focusing on the economic impact of the creation of corporate foundations, the article explores three concepts that potentially boost stock market values: the brand management model of the corporation, the communication of the initial endowment which with a corporate foundation is created, and the reference sector.
The authors (referencing Balmer & Gray, 2003; Keller, 2002, express that the corporate brand embodies the aspects of identity such as vision, mission, communication, culture, and design (Monfort et. al., 2020: p 161). Corporate foundations can act as a tool to aid in the creation of a reputable corporate brand (Monfort et. al., 2020: p. 160). That said, certain brand architectures may facilitate a corporation’s intangible values better than others. Specifically, CSR strategies may more effectively permeate through corporations that practice “endorsed” and “branded house” brand architectures (Monfort et. al., 2020: p. 162).
The authors suggest that when communicating the implementation of a corporate foundation, corporations must consider the structure of the organization’s brand portfolio (Monfort et. al., 2020: p.162). The authors note that it is not necessarily the presence of corporate philanthropy that affects stock market value but rather the way by which the corporation communicates and publicizes their commitment that has the greatest influence (Monfort et. al., 2020: p. 162). In sharing multiple previous studies (Hall & Rieck, 1998; Anderson & Frankle, 1980, Guirdy & Patten, 2010) the authors advance the concept that the corporations that willingly share or market CSR activities are likely to receive higher financial returns.
The authors also discuss the notion that the industry the corporation is seated, be it retail, agriculture, finance, entertainment and so forth, can potentially alter the expectations and activities of the organization in relation to corporate philanthropy (Monfort et. al., 2020: p.162). For instance, certain sectors naturally attract skeptics or mistrust. The authors refer to these industries as “sin industries” (Monfort et. al., 2020, p. 162). As Zolotoy suggests (as cited by Monfort et al., 2020: p. 162), the impact of corporate foundations will be enhanced when the commitment to giving surpasses expected industry norms (Monfort et. al., 2020, p.162).
Hypothesis Development and Methodology
Through reviewing the literature, the authors developed three hypotheses relating to the concepts above;
First, “The announcement of the creation of a corporate foundation does not have a significant positive impact on the market value of corporations” (Monfort et al., 2020: p. 161).
Secondly, “corporations that announce donations to the initial endowment when they communicate the creation of their corporate foundations experience a significant increase in their market value” (Monfort et al., 2020: p. 162).
Thirdly, “the presence of an “endorsed brands” structure in a corporation, with an associated foundation significantly increases the corporation’s market value when it announces the creation of an associated foundation” and “The presence of a “branded house” architecture in a corporation with an associated foundation significantly increases the corporation’s market value when it announces the creation of an associated foundation” (Monfort et. al, 2020: p. 162).
In order to examine these hypotheses, the authors applied three different approaches to analyzing data from 22 corporations (Monfort et. al, 2020: p. 163). Additionally, event and dependence models were constructed to calculate cumulative abnormal returns for each corporation and then evaluate the relationship between returns and certain characteristics of the corporation (Monfort et. al, 2020: p. 163).
In summary, the researchers’ analysis revealed that while the effects of announcing the creation of a corporate foundation may not be immediately realized, the creation can indeed affect a company’s market value as philanthropic initiatives can bolster the corporation’s corporate social responsibility initiatives and brand identity (Monfort et al., 2020: p. 161). It is however important to note that just under half of the corporations studied experienced significant cumulative abnormal returns (Monfort et al., 2020: p. 166). This reinforces the finding that in order to achieve such an effect the proper set of specific circumstances must be in place. First, only “endorsed brand” architecture realized noticeable improvements in market value (Monfort et al., 2020: p.166). Secondly, disclosing the initial endowment contributing to the inauguration of the foundation can have a negative effect and in fact reduce a corporation’s stock market value (Monfort et al., 2020: p. 166 ). Finally, the authors discovered that the business sector does not noticeably influence cumulative abnormal returns (Monfort et al., 2020: p. 167).
On a practical note, the study highlights key takeaways practitioners in the corporate field should recognize when considering the creation of a corporate foundation regardless of the industry the organization operates within. While corporate foundations may reside under the umbrella of a company’s CSR strategy, as a stand-alone entity corporate foundations are instruments investors value (Monfort et al., 2020: p. 167). When creating a corporate foundation, practitioners must take brand architecture into consideration for, while legally separate greater benefits to the corporation are derived when the corporate foundation aligns with the firm’s previously established communication strategies (Monfort et al., 2020: p.167). Finally, although the allotment of money towards social benefit traditionally tends to be a celebrated announcement, when announcing the creation of a corporate foundation, disclosing the size of the endowment can cause negative reactions among investors and therefore should be avoided (Monfort et al., 2020: p. 167).
It is important to recognize that current literature is only grazing the surface of the implications and motivations behind corporate foundations. The authors’ analysis suggests that under certain circumstances, corporations should consider investing in the creation of corporate foundations for the entities may reinforce the brand, CSR initiatives, and thus increase the corporation’s market value (Monfort et al., 2020). Yet it is important to recognize the data presented in the article cannot be relied upon to fully explain why a corporation may seek to create a foundation. According to a 2006 survey, cited by the authors, approximately 84% of Fortune 500 companies have corporate foundations (Monfort et al., 2020: p. 160). To illustrate the proportion of wealth concentrated among foundations, note that in 2017 contributions from foundations alone in the United States accounted for $66.9 billion (Monfort et al., 2020: p. 159). As members of the philanthropic field, it is important for us to ask if the continued proliferation of private or corporate foundations is a positive development for the philanthropic sector. If an organization’s investment in social development is motivated by improving the company’s bottom line within an economy reliant on exploitative practices, do their intentions really align with the morals of philanthropy? If studies suggesting business ethics and “moral-driven management” (Monfort et al., 2020, p.161) have greater impact on brand attitude than CSR programs hold true, would corporations not be better advised to invest in developing ethical business practices that reflect the social needs highlighted in today’s public discourse?
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