Against Corporate Social Responsibility and ESG
Would it surprise or cause concern to know that corporate charitable giving is controlled by insiders who often donate their stockholders’ money to the insiders’ “pet” causes? That’s what new research shows. Honestly, I’ve always been unperturbed by that unsurprising conclusion. As long as the corporation is giving money to any nonprofit, that’s gotta be a good thing, right? We’d rather corporations give imperfectly, and all giving is invariably influenced by somebody’s preferences anyway. Besides, the diversity of thought in corporate board rooms will lead to a distribution of corporate wealth amongst a wide variety of nonprofits. Right?
But the corporate governance eggheads think we ought to pay more attention because an insider’s self-interested decisions regarding corporate giving can have a negative impact on shareholder value. Here, from a recent paper, is a summary of the problems corporate governance folks think arise from “conflicted donations:”
The practice of opportunistic giving may have significant costs for the firm and its shareholders, and also society at large. First and foremost, conflicted donations may serve an important purpose for CEOs; specifically, as an off-the-radar currency to benefit independent directors, thereby reducing their monitoring effectiveness. If a firm generously donates to director-affiliated nonprofits, those directors may develop a sense of gratitude towards management, and find it difficult to challenge management in the boardroom. Thus, directors’ independence may be compromised by the practice of conflicted giving.
Second, as discussed previously, corporate giving travels mostly under the radar. Although corporate foundations are required to disclose their financial activities every year, detecting conflicted grants administered through such foundations is a highly cumbersome task. Other giving channels, such as giving directly to nonprofits or using a DAF, allow for complete anonymity. Absent adequate disclosure, shareholders are unable to assure that the corporation’s financial resources are employed in a manner aligned with their own interests.
Third, the practice of conflicted giving may lead to the suboptimal distribution of corporate charitable funds. Assuming that corporations allocate their charitable donations among recipients based on the value of a charity’s services to its community, or as a means to increase the corporations’ own utility, the ideal allocation of charitable funds may be skewed by the personal interests of insiders. Indeed, charities engaged in less valuable work may receive funding simply because they are affiliated with corporate insiders.
Fourth, as corporations are allowed tax deductions for corporate charitable contributions, taxpayers essentially subsidize opportunistic giving, which may not align with broader societal interests.
Finally, the usurpation of corporate philanthropy decision-making may serve as an indicator of other managerial issues that merit investors’ attention.
Those problems all seem focused on economic reasons for pushing back against corporate giving. But maybe we should be perturbed by corporate philanthropy for social justice reasons, too. Money and social power are but two sides of the same coin. We are living witnesses right now. The objects of corporate philanthropy are infinite, and corporate donations can often skew social debates towards the “wrong” outcome.
The paper’s author describes AP Smith Manufacturing Co. v. Barlow as a landmark. I teach it every semester in Business Organizations but I have never thought of it like that, or even given it much more thought. It only says that corporations don’t necessarily act ultra vires by making charitable donations. Shareholders argued that corporate donations are not conducive to shareholder value, and therefore directors violate a fiduciary duty by approving them. The 1953 New Jersey Supreme Court decision upheld what is now the unremarkable legitimacy of corporate charitable donations. The opinion first relates old authority for the proposition that corporations have no business being philanthropic or anything else that does not make money:
However, with later economic and social developments and the free availability of the corporate device for all trades, the end of private profit became generally accepted as the controlling one in all businesses other than those classed broadly as public utilities. As a concomitant the common-law rule developed that those who managed the corporation could not disburse any corporate funds for philanthropic or other worthy public cause unless the expenditure would benefit the corporation.
In the past, I’ve hardly spent 15 minutes over an entire semester on the case. But AP Smith Manufacturing is sometimes cited as an early endorsement of corporate social responsibility. The old rule seemed like Scrooge. The Court rejected it and progressives consider the case, and that corporations have social responsibilities, a win. I’m starting to think it is exactly the opposite. We almost instinctively support CSR and ESG, while at the same time rightly decrying “corporate influence” in everything, even the White House. But we can’t have it both ways. If you think about it, “corporate social responsibility” — the right and duty of corporations to be civic minded — gave us the Supreme Court we have today.
As it turns out, maybe the progressive world would be better if corporations weren’t allowed to spend on politics, charity or anything else other than buying and selling goods or services. Maybe if corporations were required to mind their own business, we would have more of what we think is the public good.
We can’t have it both ways.
darryll k. jones