February 8, 2007 | Read Time: 4 minutes
For every dollar a retail company, bank, or popular-goods manufacturer adds to its charitable-giving budget, it can expect sales to grow by an average of $6, according to a study by three university researchers who attempted to quantify the economic benefit of corporate giving.
In addition, a separate report released last month by the Conference Board, an association of businesses that is based in New York, says that giving by many of the country’s largest companies rose from 2004 to 2005. Among 130 of them, contributions grew from $5.8-billion to $6.9-billion, an 18-percent rise.
Donations to international causes and health and human services grew the fastest, the association found.
The increase in overseas giving was primarily due to corporate support for relief efforts in South Asia for the Indian Ocean tsunamis and Pakistan earthquake.
The Conference Board study, which collected data from 211 companies, says corporations gave a smaller percentage of their pretax income to charity in 2005 than in previous years, despite the growth in giving.
Corporate contributions equaled 1 percent of such income in 2005, versus 1.6 percent in 2004, the report says.
According to the study on philanthropy and revenue, businesses may be overlooking a significant approach to making money by not putting more dollars into their giving budgets.
“When firms increase their charitable giving, then we see in the future more revenue growth,” says Christine Petrovits, an assistant professor of accounting at New York University’s Stern School of Business and a co-author of the report. She says the findings should convince corporations to approach their philanthropy more seriously.
Ms. Petrovits conducted the research with Baruch Lev, a finance professor at Stern, and Suresh Radhakrishnan, a professor of accounting and information management at the University of Texas at Dallas School of Management.
The researchers examined the giving and revenue of 251 corporations from 1989 to 2000.
The study accounts for several mitigating factors, such as the state of the national economy and whether a company had managers who were particularly effective at increasing sales and philanthropy budgets simultaneously.
But while the study may please charities, it also found that when a company’s sales increase, donations do not always grow in turn. “We did not see firms growing their revenue and then giving more in the future,” Ms. Petrovits says.
Ms. Petrovits recommends that nonprofit groups use her economic argument to convince companies to give more, as opposed to accusing them of being misers. “They shouldn’t say, Oh, you have extra resources, give it to us. They should say, Give us your resources because look at what we can do for you,” she says.
Not surprisingly, Ms. Petrovits and her colleagues found that companies that sell directly to individual consumers, such as retail stores, financial institutions, and electronics manufacturers, are the ones that receive the economic benefit from giving.
“Contributions have this advertising effect to them, this image-enhancing effect to them. What we see is giving goes up first and then we see the sales go up,” Ms. Petrovits explains.
For other corporations, such as ones that sell goods primarily to businesses, the connection between philanthropy and revenue is less direct and harder to measure, says Ms. Petrovits. She says, however, that a steel company, for example, may support a university’s engineering program and reap a financial benefit eventually from having a better-educated work force.
For a company to turn its philanthropy into financial gain, the report suggests that a business advertise its giving in television commercials, on billboards, and through other marketing efforts.
Wal-Mart’s Example
One company already carrying out that recommendation, Wal-Mart Stores, in Bentonville, Ark., this month announced it will broadcast a national TV advertisement that highlights its charitable contributions and other socially responsible efforts.
The ad proclaims that the retail giant donated $245-million in cash and products in 2006, a $19-million increase from 2004.
If Ms. Petrovits’s calculations are correct, last year’s giving could help increase Wal-Mart’s sales by as much as $114-million.
The 34-page report “Is Doing Good Good for You? Yes, Charitable Contributions Enhance Revenue Growth” is available free online.
The Conference Board’s 55-page report, “The 2006 Corporate Contributions Report,” may be ordered from the organization’s Web site. The cost is $425 for nonmembers and $125 for members. The report’s reference number is R-1399-06-RR.
