Valuing Social Impact is part two of a four part series on optimizing corporate philanthropy.
In part one, we talked a little bit about the difficulty encountered when optimizing corporate philanthropy (which is just a single tactic in the overall CSR/ESG strategy). Can it be optimized, and if so, how?
When you say “optimize…”
Getting the most out of your corporate philanthropy hinges on several assumptions:
- Assumption #1: Resources buy impact
- Assumption #2: Impact generates corporate social performance (CSP)
- Assumption #3: CSP generates corporate financial performance
A corporation’s first instinct in valuing social impact is to try to control assumption one. Staff generate grant applications, grant reporting forms, grant review panels, check with charity watchdog groups, etc., all to prove that the resources provided by the corporation are actually having some positive social effect.
Far less effort is put into the second two assumptions, and this post is going to look at assumption number two.
Assuming there’s some kind of positive social impact, how does that turn into positive corporate social performance? This is much easier to answer when we’re discussing remediation of negative items — less resource usage, ethical governance practices, better worker safety… But when we’re talking about, for example, giving a charity money to fix up houses for low income families, how does the impact created by that act of charity result in positive CSP?
Ready for the totally crazy answer? It doesn’t. The impact generated by corporate philanthropy has no positive effect on corporate social performance. Somewhat surprisingly, the impact generated by corporate philanthropy can only have either a neutral or a negative effect on CSP.
An example: Firm A gives $10,000 to the symphony. Firm B gives $10,000 to a homeless shelter. Firm C gives $10,000 to an organization that is later implicated in a scandal. Just by using that information, rate the CSP of each firm. A and B are equal, and C is somewhat lower, right?
Or, you may have rated A higher than B, or B higher than A, but both were always higher than C.
In other words, the existence of corporate philanthropy has a positive effect on the firm, regardless of how the money was actually spent – unless it was a bad decision.
Every magazine disagrees
I’m aware that this seems to contradict a lot of magazine articles and much conventional wisdom on the subject. But we’re not done yet.
What those articles1 all fixate on is that corporate philanthropy must be strategic. But they then go on to provide a framework that focuses on the agency theory component., i.e., making sure that the dollars spent generate actual social impact. Instead, they should be focusing on the stakeholder theory component, i.e., making sure that the dollars spent generate units of positive corporate social performance.2
How was that for jargon? Units of positive corporate social performance. Sheesh. Okay, let’s look at it from the stakeholder’s perspective to make it clearer.
Quick list of stakeholders: Employees, management, customers, regulators, the community, government. shareholders, the CEO’s spouse, potential customers, etc.
Each of the groups in the list above has some interest, or stake, in the corporation. When it comes to corporate philanthropy, some stakes will be more important than others. Along those same lines, some impact outcomes will be more important to some stakeholders than others. Employees may be much more interested in the outcome than potential customers will be.
Time for a matrix
The y-axis is the continuum of social impact, from low to high, and the x-axis is the continuum of stakeholder interest, also from low to high. In general, we end up with five different outcomes, three of which are positive, one is negative, and one could go either way.
Hypothetical scenario one: The employees of Corporation Y are raising money for a neighborhood cleanup effort sponsored by a local community foundation, and request a match of $10,000 from the corporation.
- Stakeholder interest – High (the employees are requesting it, and it’s a match)
- Social impact – Moderate (it will help, but the neighborhood will just get dirty again…)
That places it somewhere in the good effort/perfect range. The corporation is likely to benefit from the gift because of the positive effect on the employees.
Hypothetical scenario two: Corporation Z spends $10,000 to sponsor a table at the Sunscreen for Whales gala.3 They do this because an important customer is on the board of the organization, and has made an ask.
- Stakeholder interest – Moderate (The nonprofit requires board members to make these asks.)
- Social impact – Low to None (Not only does it sound like a bad idea, it’s for a gala event: a notoriously inefficient way to raise money.)
At best, this is a waste of time, and it might actually be risky for the corporation. This is one of the reasons that experts put so much emphasis on maximizing social impact. If it’s extremely low or nonexistent, it can backfire — especially when there is high stakeholder interest. The likelihood of that happening, however, is very low. I’m not aware of any negative impact on a corporation due to poor charity performance. If you have an example, email me!
Valuing Social Impact
Note that the line separating good from bad outcomes is hugging the axes. What that means is that it takes a very small increase in either stakeholder interest or social impact to turn an indifferent investment into a good one.
Increase social impact by converting that gala gift to a straight-up donation of $10,000. You just added at least $3,500 to the value of your gift (that’s the low end of gala overhead), and can likely get better PR in return.
Increase stakeholder interest by publicizing the impact of your gift, or by selecting issues that are inherently more meaningful to powerful stakeholders.
In other words, a corporation should give equal weight to both valuing social impact and discerning stakeholder needs.
1 Straw man alert. I purposefully haven’t linked the dozens of articles. Type “strategic corporate philanthropy” into Google if you want them. Here’s one, though.
2 Note that this is different for foundations, individuals and government interested in charitable giving. The research on measuring social impact isn’t wasted, it’s just not as meaningful for corporations.
3 The urge to link this to a certain Rick Astley song was overwhelming, but the real link is even weirder, so I left it in.