This is part four of a four part series on optimizing corporate philanthropy.
In part one, we framed the problem encountered when trying to optimize corporate philanthropy. Part two discussed generating social value, and part three was about creating and capturing financial value. Finally, we get to the payoff: How do you optimize corporate philanthropy?
Back to the Budget
Way back at the beginning, I proposed a hypothetical budget narrative for the corporate philanthropy line item:
XYZ Corporation is proud to invest in areas that enrich the lives of our community members, our customers, and our employees. For that reason, we have budgeted $1 million for charitable purposes, which will result in goodwill, advertising and risk protection valued at $1.3 million, and social impact valued at $2.1 million.
So how would we go about doing that?
Dangerously paraphrasing a lot of research on how to value CSR activities, I’ll throw out a proposal:
Companies invest in CSR in order to generate value for some stakeholders. Sometimes, that social value is converted into financial value that the firm is able to capture.
Compare that to a definition of research and development:
R&D comprises creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and the use of this stock of knowledge to devise new applications.¹
Applied to corporations, you could add “sometimes those new applications are converted into financial value that the firm is able to capture.”
There’s a lot of research on exactly how to value R&D despite the inherent variability of outcomes. One interesting finding is that R&D spending is reliably associated with subsequent stock returns. In other words, companies that spend money on R&D turn out to be worth more later on.
Researchers have published hundreds of studies on how to select from a portfolio of possible R&D activities. One system that could easily be translated to the context of corporate philanthropy is a peer-reviewed merit/cost process. This is simply a questionnaire for ranking several aspects of a philanthropic investment, weighted by the importance of each aspect. Stakeholders with a legitimate interest fill out the questionnaire, and the possible charitable investments are ranked.
I’ve created a sample questionnaire about which charities should receive a hypothetical $10,000 gift. Fill it out and then come back.
That simple four question form will optimize any charitable investment that you want to make. There are a few tricks to making it work:
- Each question needs to be assigned a weighting. Depending on the company and the stakeholders, some of the questions will be more important than others. For example, which is more important to your firm: brand alignment or social impact? If it’s brand alignment, weight the answers to that question more heavily in your final calculation. But how do you decide?
- Poll your stakeholders. This is one of the most powerful tools that you have. The more people that you engage in this process, the better results you will get. Consult your stakeholders in the process of not only selecting charities and filling out the forms, but also in developing the weightings for your evaluations.
- Don’t obsess over the details. As we saw back in part two, if your stakeholders are interested in the social issue, you’re in pretty good shape. That goes for the “financial impact” question, too. Exact data on the eventual financial impact may be hard to come by (without spending a lot more money) but the relative weightings will take care of that. A quick example:
In this scenario, brand was most important, followed by recognition, impact, and finally, return. Scores were totaled for each question and charity, and then the totals were multiplied by the weighting. The Food Bank comes out on top, due to its strong impact score, even though its brand score is tied for second.
Does this work?
This method is very close to the one described in James Surowiecki’s book The Wisdom of Crowds. When groups of people collectively make optimization decisions, the results are often strikingly accurate. Combine this with the weightings made by folks who know what they’re talking about, and you can be sure that the results will be pretty close to optimal.
Using this tool, optimizing corporate philanthropy should be easier. Back in part one, our corporate philanthropy person asked three questions. We now have answers!
- How do we know if we picked the right charities? Your stakeholders will tell you. Just ask them.
- How do we know if the gift amounts are right? For any given amount, you can expect a particular impact. The larger the gift, the larger the impact. But gift size also affects recognition. A small gift to a large charity typically won’t get you much. The key is finding the charity that will give you the best recognition score for a particular gift amount. It might be interesting to vary the gift amounts on your survey and see how the recognition scores change.
- What should the total gift pool be? Let’s look at the chart again. We can consider any charitable investments below a particular score as “not a good fit.” Here, we’ll draw the line at 600, giving us a total budget of $20,000 for the year.
Optimizing Corporate Philanthropy
Optimizing corporate philanthropy is not only possible, it’s actually pretty easy. Put the focus on the stakeholders that are most important to you, and give them the opportunity to optimize your program for you. Finally, use a simple weighting tool to get the best investments to float to the top.
Please let me know what you think in the comments, or email me at email@example.com.
¹ This definition is adapted slightly from the one found in the Frascati manual.