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Why Businesses Should Help Charities

Aug - 22 - 2013
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Every year businesses donate around $15 billion to charities, but this number underestimates the effect that businesses have on the charitable sector. We only have to look at the decisions by Bill Gates and Warren Buffett to donate the vast majority of their wealth to philanthropy. While they choose to make donations individually, both these entrepreneurs were only able to make such substantial commitments because of the success of their respective businesses.

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Businesses are entities that, above all else, are supposed to serve the interests of their shareholders. While an individual could choose to donate all their earnings to charity, this could be legally challenging for larger businesses to pull off. After all, company management has a fiduciary duty to serve the interests of their shareholders. Were they to voluntarily donate too much of their earnings, they could be deemed to have failed in their duties.

“Corporate charitable donations are subject to attack under two doctrines: ultra vires and breach of fiduciary duty. Neither is likely to succeed, so long as the amount in question is reasonable and some plausible corporate purpose may be asserted,” writes legal scholar Stephen Bainbridge. “Virtually all states have adopted statutes specifically granting corporations the power to make charitable donations, which eliminates the ultra vires issue. Although these statutes typically contain no express limit on the size of permissible gifts, courts interpreting the statutes require corporate charitable donations to be reasonable both as to the amount and the purpose for which they are given.”

It is important to understand that, while there are no hard limits placed on donation amounts, there are clear barriers that exist. If a business were to be crippled under the weight of the donations it made, and the donations were not made with a clear commercial purpose in mind, we can be sure that class action law suits would follow. If a public company were to donate over 50% of its earnings to charity, it would not just be vulnerable to shareholders, but also to corporate raiders.

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Imagine if a company’s stock was priced on the assumption that 50% of its earning would go to charity. A savvy investor might decide to buy shares in the firm, replace the management, substantially reduce the amount of the donations, and possibly double the firm’s value in the process. A firm’s competitors might also be able to win market share by offering lower prices, which could pose a real risk for a company that was too generous.

Of course, donating too much is rarely a problem. The real problem is companies that decide not to donate anything at all. Companies have access to wealth that is simply out of reach for most individuals. A $100,000 donation from a Fortune 500 company would make almost no impact on its bottom line, but it could enable charities to do so much good in the world.

Charitable donations can improve the economic environment in which businesses operate. When a charity improves education, businesses have access to better employees. When crime is reduced, businesses can reduce their expenditure on security.

A great example of this is the work of Co-operation Ireland. Their mission statement is “to underpin political agreement on the island of Ireland by building positive relationships at community level, both within Northern Ireland and between Northern Ireland and the Republic of Ireland, through the promotion of mutual understanding and co-operation.”

Through fostering good relationships and building communities, Co-operation Ireland is creating a better commercial environment. When violence is reduced and communities are more connected, firms see an improvement in their commercial prospects. While businesses stand to benefit, this is rarely the reason behind supporting the cause. Most of the time, they would simply like to do their bit toward making a difference.

When you look at Co-operation Ireland’s list of donors, you see firms like MediaWhiz and Zignals are among those making donations. Importantly, many of the firms are based far away from where the charity does its work, but they still feel a strong connection to the cause.

When businesses make charitable donations, they improve their standing among customers, suppliers and other stakeholders. Ultimately, it tells us that they take responsibility for the world around them. As well as donating money, businesses can donate their products, time or expertise. For example, a drug company could choose to donate medication, or a consulting firm could help impoverished entrepreneurs to start and grow their businesses.

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