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Balancing shareholders' needs with corporate philanthropy

by Simon Longstaff

Some people think that it is wrong for public companies to donate money to charities. Or more precisely, they object to corporate philanthropy unless it is specifically approved by shareholders.

One of the most powerful arguments against corporate philanthropy is based on claims about the rights of property owners. It is argued that, as owners of the corporation, shareholders are entitled to the full value of their investment. Donations by public companies amount to a kind of 'expropriation' of shareholders' property and are therefore morally objectionable.

The argument does not claim that there is anything wrong with giving to charity. Indeed, it accepts that there may be a moral obligation to do so. However, this is seen to be a matter for the individual to decide. Anyone wishing to support corporate philanthropy must first address this point of criticism. So, what might be said in response?

One might begin by noting that shares constantly vary in value (positively and negatively) as a result of decisions made by company boards. Temporary reductions in value can occur in cases where boards adopt a long-term view of the interests of the company and approve expenditure accordingly.

For example, a board might choose to exceed minimum environmental or safety standards on the grounds that benefits will accrue to the corporation for realisation in the future. These benefits need not even be of 'tangible' value, but could include such things as good standing in the community or improved employee morale.

Decisions such as these may, in the long run, turn out to be of great benefit to shareholders. But what of those who are dependent on dividend payments here and now? What of those who need to sell immediately - but find that the value of their shares has reduced because of company investment in projects generating returns only in the long-term?

Are we to conclude that current expenditure for deferred benefits amounts to an 'expropriation' of the property of those shareholders unable to wait for the accrued benefits to be realised? On the face of it, such a suggestion seems absurd. If accepted, it would force us to conclude that a huge number of ordinary business decisions are unethical.

If we reject such a conclusion in this general case, then what are we to make of donations to charities? Are they any more, or less, an 'expropriation' of shareholders' property than, say, workers' compensation payments or environmental programmes that exceed the bare minimum required by regulation or the law?

In both types of case it can be argued that directors have been elected to serve the best interests of the corporation as a whole. As Sir John Dunlop argued in the 1960s, directors must govern in the interests of shareholders in perpetuity. This, in turn, draws attention to the importance of taking into account the interests of other stakeholders - employees, customers, suppliers, the general community and so on.

So much for the side of the 'ethical coin' on which is emblazoned the property rights of individuals. The obverse of this concern is a recognition that limited liability corporations are social artefacts contrived and permitted by the community on the understanding that their existence will lead to an increase in the store of common good - usually by way of an increase in material wealth. Others wish to go further and argue that, in a democratic society where authority is ultimately derived from all citizens on an equal basis, wealth should be distributed in an equitable manner that recognises the claims of the least able or powerful.

Some argue that the task of such distribution should be left to government (through compulsory taxes and welfare expenditure) or to individuals (through personal acts of generosity). But why deny a role for the corporation? This is a particularly relevant question for those who seek to lighten the burden of government intervention. If self-regulation is a good idea (and it is!), then why should it be left to government to force the pace in this area?

Public corporations allow people to combine freely for purposes that could never be achieved by individuals acting alone. The reasons for combining in corporations are not exclusively economic in focus. Personal investment choices are coloured by considerations other than simple financial performance.

For example: some people like to invest in locally owned and managed enterprises; others are swayed by an ethical assessment of the corporation's products, services or business practices; others invest for emotional reasons. Some economists might question the 'rationality' of such decisions. However, it is clear that shareholders invest for a variety of reasons that cannot be reduced to purely economic concerns.

This is not to say that all (or even most) investors specifically expect the corporation to engage in philanthropy. However, such action on behalf of shareholders (and other stakeholders) is at least legitimate in principle. Of course, it is always open to the board of a company to seek guidance from its shareholders. At the very least, there should be full disclosure of amounts donated to charity.

It is not self evident that corporate philanthropy is morally objectionable. But beyond this, a mature sense of the ethical dimension of our lives requires something more. It compels us to examine the nature of moral obligations owed by the strong to the weak. It focuses attention on the possibility that charity is morally praiseworthy in itself - and not just in relation to some real or perceived reciprocal benefit for the giver.

It points to the way in which corporations (and their individual stakeholders) have an interest in promoting a fair and harmonious society. In short, it prompts us to conclude that corporations have a role to play in demonstrating the reality and power of simple acts of kindness.

Simon Longstaff wishes to disclose that St James Ethics Centre is a charity largely dependent on donations for its funding.

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