April 17, 2011 | Read Time: 5 minutes
Twenty five years ago, America’s businesses carved out 2.5 percent of their pre-tax profits to support nonprofit programs and causes. Since then, corporate philanthropy has been on a downward track with company charitable donations now hovering at around 1 percent of before-tax profits.
What is so astounding about this decline is that it has happened while corporate profits have been on an opposite trajectory. Corporate earnings are nearly nine times higher than they were in 1985, according to the Commerce Department. Even at the nadir of the recession, American companies made $1.3-trillion in annual profits.
While the reasons for the falloff in giving differ for each company, lurking behind the fall in business benevolence is the state of confusion among senior executives about what is the “right” amount for a company to give.
Here’s the challenge senior executives face when it comes to figuring out the size of a company’s contributions budget: Spend too much on philanthropy and risk the ire of unhappy shareholders who think philanthropy is another word for earnings dilution. Spend too little and risk complaints from disgruntled nonprofit officials who bad mouth the company to current and prospective customers.
What would help, many corporate leaders contend, is a minimum-contributions spending target that can be explained to supporters and defended to critics. The mathematician and computer scientist Arthur Sabsevitz tackled this problem and has come up with a solution that will work for all companies regardless of their size or class of industry.
Mr. Sabsevitz has developed a complicated algorithm that translates into an easy way to peg how much cash should be in a corporation’s contributions budget. Multiply 1.2 percent times a company’s pretax earnings a year ago (e.g., 2010) and that will equal approximately 1 percent of next year’s (e.g., 2012) pretax profits.
Why 1 percent? Since it is currently the approximate national average for corporate giving, it is a number easily explained and quite palatable for most audiences. It allows a senior executive to say to shareholders and nonprofits that the company meets the minimum standard for corporate philanthropy in America (and for those who want to exceed the amount suggested by the formula, they, too, have a way to show that their corporate social investing goes beyond the norm).
If companies adopt this new formula, it won’t make a big difference to the majority of businesses in the United States. An estimated 60 percent of large companies that file tax returns with charitable deductions already give more than the formula suggests. But for the remaining 40 percent, giving that much would require an increase in spending. For some, the adjustments would be minor, but in other cases, it would require an annual increase of millions of dollars.
If those four out of ten companies that now lag behind the current national corporate giving average can be convinced to ante up, company donations would have increased by an estimated $8-billion last year.
In an era of trillion-dollar deficits, this might not register as a big deal. But consider this: Corporations now deduct only about $15-billion a year for charitable donations. Under the Sabsevitz formula, corporate donations would grow by 50 percent.
Beyond setting a minimum baseline for corporate contributions, this formula offers another advantage. It is designed solely to account for cash gifts. For corporations that rely heavily on giving away products, the approach would have major implications. But for banks, insurance companies, and others that have no products to donate, it is a way to even out the philanthropic playing field.
Over the past several years, the top tier of America’s most generous companies has been dominated by businesses that include the fair market value of product gifts as part of their publicly reported donation totals. In 2009 only 3 percent of the total contributions awarded by Pfizer, the corporation that topped The Chronicle’s latest list of big company donors, was cash; for the second-largest donor (Oracle), just 1 percent was cash.
Businesses that don’t have products to donate are routinely irked by widely reported comparisons that make their cash contributions look cheap. The “top 10” list of big corporate donors would indeed get a major makeover if just cash contributions were compared.
Companies should not be dissuaded from making product donations. Such contributions are important and enormously beneficial to corporate donors. But the fair-market value of these donations should be reported as add-ons to cash contributions that are equal to or higher than the proposed minimum giving standard for all businesses.
Under no circumstances should companies give simply for the sake of giving. They should have a clear business-related rationale that stands behind any contribution a corporation makes. So in adopting a new minimum standard, the focus should not be just on the numbers but also on making sure such commitments are channeled toward programs and causes important both to society and to the company.
The time to reverse the downward trend in corporate philanthropy is long overdue. The formula gives business leaders what they say they want—an easy-to-use resource for calculating a contributions budget.
Regardless of size or class of industry, businesses should use the Sabsevitz tool now to make sure their corporate social investing is at or above the recommended minimum. When companies provide the right amount of cash for corporate contributions and take steps to make sure that that money is used effectively, the term “good corporate citizen” takes on a more obvious and important meaning.
