Corporate Philanthropy
Ninety percent of giving comes from individuals (direct giving and bequests) and about 10% from institutions such as corporations and foundations, historically about five percent from each.
We have seen that foundations emerged from the effects of the industrial revolution in the early years of this century. So, too, developed the modern, publicly owned corporation.
The notion that corporations should contribute from their resources more than a fair wage and a useful product or service, thereby stimulating economic growth, is a twentieth century phenomenon. In the past it was generally held, and for many contemporary thinkers such as Milton Friedman, still is, that "the business of business is business" and only that. There is no place in their thinking for corporate philanthropy.
During the 1800s, what philanthropy there was from private business was the result of activity of businessmen and their wives. As members of communities in which they conducted business, they expected to receive appeals from colleagues who in turn were volunteers in the community seeking to help those in need. There was recognition that business depends upon a contented labor force and a buying public---in short, a healthy community, Such giving generally was designed to provide a direct benefit to the business. For example, railroads would support the building of YMCAs as a benefit for their workers, but were reluctant to do more than that in support of communities.
In the late part of the 19th Century and early 20th, the captains of industry accumulated great wealth. Some, such as Carnegie and Rockefeller, devoted much of their fortune to philanthropy. Further, it was in this era that publicly held corporations developed and proliferated.
During World War I, the Red Cross faced a funding crisis. Although support from the public-at-large was substantial, it was not enough. Support from business was needed as well, and a clever device was thought up to make it possible. It was the "Red Cross Dividend " which enabled companies to request that stockholders authorize a special dividend to be contributed to the Red Cross.
Congress, however, was slow to respond to the movement to broaden the notion of corporate giving and in the Revenue Act of 1919 the trend was specifically rejected.
However, by 1921 the Internal Revenue Service had accepted the idea that corporate contributions to charitable, educational or health care institutions were legitimate if the institution served the needs of the firm’s employees---expanding somewhat on the notion that giving must directly benefit the business.
As late as 1934 the extent to which corporations could contribute to the community and claim it as a deductible expense was still an open question. In that year a business in San Francisco sought to give to the community chest there. (Community chests developed throughout the country in the 1920s, and it was undoubtedly inevitable that the issue of business support to them would be challenged.) In this case, the Old Mission Portland Cement Company defended its giving to the San Francisco community Chest. The Supreme Court, relying on the position of Congress in 1919, ruled against the company.
This resulted in an energetic lobbying effort on behalf of the strengthening community chest movement, ultimately resulting in the Tax Act of 1936 which, for the first time, permitted, in addition to usual allowable deductions for expenses of doing business, deduction for charitable contributions up to five percent of the pre-tax income of corporations. (The ceiling has since been raised to 10%.) For the first time this Act created the distinction between a deductible charitable gift and a business expense.
Still, the determination of what would and would not qualify as a deductible gift tended to be narrowly defined. Essentially the direct benefit doctrine still held.
For example, it was well established that contributions to universities in support of research would constitute direct benefit to the corporation, but that general support for capital or operating needs would not.
In 1953, however, the Supreme Court of New Jersey overturned the direct benefit rule. The A.P. Smith Manufacturing Company made a $1,000 gift to Princeton for operating support and a stockholder named Barlow sued claiming damages.
The court ruled for the company saying: "When the wealth of the nation was primarily in the hands of individuals, they discharged their responsibilities as citizens by donating freely for charitable purposes. With the transfer of wealth to corporate hands and the imposition of heavy burdens of individual taxation, they have been unable to keep pace with increased philanthropic needs. They have, therefore, with justification, turned to corporations to assume the modern obligations of good citizenship in the same manner as humans do."
Although this case did further open the door for expanded corporate giving, direct benefit has continued to be the safe harbor for giving in the view of conservative executives. To this day you will find corporate giving largely carried forward under the rubric that such giving is most appropriate when it serves the "enlightened self-interest" of the corporation.
The watershed of the movement to establish corporate philanthropy as an integral part of corporate social responsibility came in March, 1981, with publication by the Business Roundtable of its "Position on Corporate Philanthropy." (The Business Roundtable is the premier organization representing the interests of the nation’s most prominent CEO’s).
The paper said: "All business entities should recognize philanthropy both as good business and as an obligation if they are to be considered responsible corporate citizens of the national and local communities in which they operate."
Many corporations have had and many continue to have significant programs of giving which reflect this principle. Individuals such as Walter Haas, Jr. (Levi Strauss), John Filer (Aetna), and Ken Dayton (Dayton-Hudson) have been notable leaders in corporate philanthropy. Some communities have "2% Clubs," meaning corporate members of the Club are those that subscribe to the ideal and achieve giving at 2% or more of pre-tax net income, and there is even a "5% Club" in Minneapolis.
Although corporate giving remains an important element of institutional giving in America, there has been erosion in recent years. While giving from individuals and foundations has grown, corporate giving has been relatively static. The movement to be "bottom-line" driven, to achieve efficiency (at least in theory) through acquisitions and mergers, and to downsize, has led to reduction in some giving programs and outright elimination of others. Further, it appears that many of the "new breed" of senior executives do not share the same enthusiasm for the ideal of responsible corporate philanthropy stated by the Business Roundtable as did those that framed the declaration in 1981.
