An Analysis of Corporate Philanthropic Practices

Eric Helland* Claremont McKenna College

500 E. Ninth St. Claremont, CA 91711

310-530-4882 eric_helland@mckenna.edu

Janet Kiholm Smith*

Von Tobel Professor of Economics 500 E. Ninth Street

Claremont McKenna College Claremont, CA 91711

909-607-3276 janet_smith@mckenna.edu

April 2004

Abstract

We study corporate philanthropy using an original database that includes firm-level data on dollar giving, giving priorities, governance, and managerial involvement in giving programs. In the context of an agency cost explanation for corporate giving, we find that: larger boards of directors are associated with significantly more cash giving and with the establishment of corporate foundations; consistent with effective monitoring by creditors, firms with higher debt-to-value ratios give less cash to charities and are less likely to establish foundations. The empirical work controls for corporate performance, industry effects, and for state efforts to regulate corporate behavior through both fiduciary responsibility laws and philanthropy laws. We also analyze variations in firm philanthropic priorities and in the governance structures of giving programs.

*Much of the research for this project was conducted while Helland was an Olin fellow at the Stigler Center for the Study of the Economy and the State at the University of Chicago. He gratefully acknowledges the support of the foundation and the Graduate School of Business. Research funding was provided by Mayr Foundation and the Financial Economics Institute, Claremont McKenna College. We also thank Tom Borcherding, Bill Brown, Tyler Cowen, Mark Crain, Dhammika Dharmapala, Gerry Garvey, Lisa Meulbroek, Harold Mulherin, Josh Rosett, Richard Smith, Gordon Tullock, and seminar participants at the Claremont Colleges and George Mason University for constructive comments on an earlier draft.

An Analysis of Corporate Philanthropic Practices

Abstract We study corporate philanthropy using an original database that includes firm-level data on dollar giving, giving priorities, governance, and managerial involvement in giving programs. In the context of an agency cost explanation for corporate giving, we find that: larger boards of directors are associated with significantly more cash giving and with the establishment of corporate foundations; consistent with effective monitoring by creditors, firms with higher debt-to-value ratios give less cash to charities and are less likely to establish foundations. The empirical work controls for corporate performance, industry effects, and for state efforts to regulate corporate behavior through both fiduciary responsibility laws and philanthropy laws. We also analyze variations in firm philanthropic priorities and in the governance structures of giving programs. Key words: Corporate philanthropy, corporate governance, boards of directors, monitoring, agency costs JEL classification: G34, G38, K22, L51, M41

An Analysis of Corporate Philanthropic Practices

I. Introduction

In this paper we examine the sources of variation in corporate philanthropic practices.

Most previous research has focused on aggregate contributions by corporations and on their

timing and responsiveness to taxes, aggregate corporate earnings, and other market

characteristics.1 In contrast, we use a sample of Fortune 500 firms and focus attention on firm-

specific giving practices. The dataset includes dollar giving by firm, giving program

governance, corporate governance, and corporate financial data. Our objective is to evaluate an

agency cost theory that postulates that firm managers and board members increase their own

utility through corporate philanthropy. Accordingly, we analyze how corporate governance

structures, including board size and composition, affect variations in corporate giving and the

organization of giving programs. We also examine the impact of monitoring by blockholders,

debtholders, and institutional investors. Finally, managers and directors of corporations are

subject to state philanthropy laws and fiduciary duty laws, and we examine the impact of these

laws on giving behavior.

The literature identifies two explanations for corporate philanthropy. One is that

philanthropy enhances firm value. While there is no evidence of any direct relationship between

profits or shareholder value and philanthropy, firm managers often justify corporate giving on the

basis of its claimed indirect benefits to shareholders. The indirect benefits may arise, for

example, from goodwill that is created by corporate involvement with charitable causes, leading

to enhanced morale among employees, and more loyalty among customers. Charitable giving,

1 Clotfelter (l985) provides a comprehensive review of the economics and accounting literature on corporate giving. Also see an update by Webb (l996). Early economics studies, based almost exclusively on aggregated data, provide useful insights as to tax incentives for making deductible contributions, corporate income elasticity for giving, and the impact of market structure on giving. See Schwartz (l968), Johnson and Johnson (1970), and Johnson (l966).

much like a form of advertising, also may influence regulators and government officials in ways

that indirectly benefit shareholders.

The alternative explanation is that contributions represent a form of agency cost. Giving

programs provide a way for managers and directors to involve themselves in their own pet

charities and to do so at shareholder expense. Such involvement can enhance the reputations of

corporate managers or directors in their social circles and provide them with other benefits (such

as tickets to events, access to celebrities) irrespective of any corporate benefit. Managers and

directors may be willing to accept lower compensation if they are in a position to derive utility

from their involvement in the companys giving program. However, unless the value of increased

utility is offset by reduced compensation, corporate spending on charity represents an agency cost

that is borne by firm owners. An agency cost explanation also contemplates that managers may

authorize gifts out of an altruistic belief that firms have a social responsibility to contribute to

worthy causes, even if the managers derive no personal benefits from the giving. Giving based

on this type of motive, nonetheless, is an agency cost as it indulges the managers utility for

doing good while shareholders incur an opportunity loss. Also, if managerial discretion is not

effectively constrained by monitors, managers may be more likely to indulge in spending that

doesnt benefit shareholders.

There is an enormous literature on corporate charity that spans multiple disciplines,

including economics, finance, accounting, law, management, and ethics. However, given the

difficulty of collecting firm-level data on giving, there are only a few studies that provide cross-

sectional analysis of firm behavior. Three papers most closely related to ours are Navarro (1988),

Boatsman and Gupta (1996), and Adams and Hardwick (1998). Navarro concludes that corporate

contributions represent a form of advertising, as he finds that firms that spend more on

advertising also tend to give more to charity. He interprets his overall findings as generally

consistent with profit maximization, and somewhat consistent with managerial utility-

maximization. Boatsman and Gupta (1996) study changes in firm contributions in response to a

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specific change in marginal tax rates that occurred in 1986 (Tax Reform Act of l986). They

interpret their findings as evidence that charitable contributions go beyond what would be profit-

maximizing. Their findings leave open the question of whether an empirical connection exists

between corporate giving and monitoring/agency cost measures.2 In this regard, suggestive

evidence is provided by Bartkus et al. (2000), who reason that active, powerful investors may

perceive corporate giving as excessive and act to curtail it. Using a matched-paired sample to

control for industry and company size, they find that big givers are associated with fewer

numbers of blockholders and less institutional ownership than are small givers. However, given

the small sample size (66 firms) and lack of control variables, the paired-sample mean difference

tests are not conclusive with respect to the influence that concentrated ownership may have on

agency costs. Adams and Hardwick (l998) use a sample of UK firms and find that larger, more

profitable firms, and firms with lower leverage tend to give more to charity and political causes.

In contrast to Bartkus, et al., Adams and Hardwick do not find any connection between giving

and ownership structure (concentration of holdings in top three shareholders).

Hence, while previous studies document some specific empirical relationships regarding

charitable giving, they employ models that include only a few independent variables and do not

control for industry effects or regulations that may affect propensity to give. No previous

empirical study has examined the role of the board of directors on giving or the role of corporate

foundations and there is little modern evidence on corporate giving priorities and how those vary

by industry.3

2 The economics, management, and accounting literature on corporate philanthropy is intertwined with the social responsibility of business debate, prevalent in the policy literature in the l960s and l970s. One side of the debate, articulated best by Milton Friedman, states that, Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their shareholders as possible. (Friedman, Capitalism and Freedom (Chicago: University of Chicago Press, l962) quoted in Levy, at p.113). Paul Newman articulates an alternative view: The Country is waiting; it is scanning the horizon hoping for some institution to distinguish itself to be the standard bearer for social and civic responsibility. (FRM Weekly, November 24, l999, quoted in Anne E. Kaplan (2000) at p.74. 3 We located one early study by Holmes (l977) that examined giving priorities by large corporations. The evidence is based on responses to survey, in which mangers were asked to identify the primary areas of

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II. Determinants of Corporate Giving Behavior and Testable Hypotheses

Our approach recognizes that the profit-seeking and agency-cost theories of corporate

giving are not mutually exclusive. Contributions could simultaneously cater to a managers taste

for charity and have a positive impact on profit. However, the distinguishing feature is that if

shareholder value were the exclusive goal for giving, then there is no reason to expect that cross-

sectional variations in giving or establishment of corporate foundations would be explained by

firm variations in monitoring effectiveness of the board, shareholders, and creditors.

Accordingly, in this paper we evaluate the agency cost explanation for philanthropy by

developing measures for when monitoring is likely to be effective at disciplining agent behavior.

The variables we use are: total board size, ratio of the number of insiders to total board size, debt-

to-value ratio (where value is defined as total assets), percent of equity held by blockholders and

percent of equity held by institutions. We also include the firms market-to-book ratio as control

variable to measure the firms access to economic rents.

Board size and composition: There is a considerable empirical literature on boards of

directors and their effectiveness as monitors or agents.4 Much of this literature has focused on

board composition, particularly the fraction of outside directors, and the impact on firm

performance. The evidence, however, is mixed on whether companies perform better if boards

include more outsiders.5 There have been fewer studies on the impact of board size, as distinct

from other board attributes, but such studies provide evidence that board size matters. Yermack

(1996) uses a sample of 452 large US industrial corporations between l984 and l991, and finds

social concern. They find that the most popular area of concern is a very general one: assistance to charities, welfare, health funds, etc. Manufacturers exhibited the least cohesiveness in their social endeavors. Overall, the study indicates that corporations were beginning to specialize in social activities and that in some cases, these specialties varied systematically by industry. 4 See Hermalin and Weisbach (2003), who survey the economic literature. 5 Hermalin and Weisbach (2003) report that there is little evidence to indicate that board composition has any cross-sectional relation to firm performance. Studies using event study methods, examining the addition of outside or inside board members, is less conclusive.

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that small boards are associated with higher market valuations. Eisenberg et al. (l998) document

a similar pattern for a sample of small and midsize Finnish firms.

Several explanations have been offered as to why board size may affect monitoring

efficacy. Drawing from lessons of organizational psychology, Jensen (l993) suggests that as

boards increase in size, candid boardroom discussions are displaced by discussions that

emphasize politeness and courtesy. The underlying hypothesis is that as boards become larger,

they tend to become symbolic and a source of social interaction for the directors, and become less

connected to the managerial process. More specifically, a positive relationship between board

size and giving may arise for two reasons. First, the free-rider problem and communication

problems that plague group oversight functions is likely to be more acute the larger is the group.

Hence, larger boards may provide less effective monitoring. Second, if involvement with

charitable giving is perceived as a job-related perquisite, then the larger the board, the more

directors are likely to push for their own causes, leading to larger dollar contributions.

If corporate giving is, in part, a form of agency cost, and if larger boards provide less

effective monitoring of managerial decisions, then we should see a positive relationship between

giving and board size. We find evidence consistent with this hypothesis: larger boards are

associated with more giving. These results are consistent with findings of Aggarwal and Nanda

(2004), who provide a theory for a positive relation between board size and the number of social

objectives (community, diversity, environment, etc.) a firm pursues. While boards provide a

monitoring function, they also set objectives for firms, and other things constant, larger boards

are associated with multiple objectives that go beyond shareholder value maximization.

We also consider a governance variable that measures the ratio of inside directors to total

directors. Most large US public companies have boards with a majority of independent directors,

and almost all have a majority of outside directors.6 This structure reflects the belief that the

primary task of boards is to monitor managers and that independent directors are more likely to 6 Bhagat and Jefferis (2002) at p. 10.

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provide rigorous oversight, and to curtail agency costs, than are inside directors. On the other

hand, if charitable giving is a form of agency cost, then anecdotal evidence suggests that it is not

only insiders, but also all board members, who benefit from the corporations involvement with

charitable causes.7 Accordingly, we can examine the issue of whether having a board comprised

of more outside or independent directors leads to less charitable giving. We find that board

composition does not have a significant effect on giving. The findings bear on the conventional

wisdom that independent directors are more effective monitors.

Debt-to-value ratio: Debt can provide a check on managerial excesses in several ways.

First, debt has a hands-tying aspect: if firm managers are committed to make regular debt

payments, free cash flow is reduced. In addition, the covenants and restrictions that accompany

debt agreements limit the managers ability to spend money. (See Smith and Warner, l979).

Jensen (1986) argues that debt acts as a check on managerial discretion by enabling managers to

effectively bond their promise to pay out future cash flows.8 Maloney, McCormick and Mitchell

investigate the influence of leverage on project selection, testing the hypothesis that while

leverage has costs, the necessity of making periodic, legally mandated, unalterable payments

to bondholders forces managers to take extra care in decision making. (1991, p. 190). By taking

on debt, managers can signal their commitment to continually raise capital in the market, thereby

subjecting the firm to continuous monitoring by capital markets (Diamond, l991). Hence, in the

context of our investigation, the predicted impact of debt on corporate giving is negative: higher

debt-to-value ratios are expected to restrict firms spending on charitable causes. Our evidence is

consistent with this prediction.

Blockholders and institutional ownership: Theory of the firm literature envisions that

shareholders can perform a monitoring role, disciplining against managerial excesses. However,

7As the recent Enron scandal demonstrates, outside director oversight is no answer to eliminating self-dealing. At least three independent directors of Enron reportedly were affiliated with charities that received large donations from the corporation. See Painter (2002) at p. 1228, who comments on Brudney and Ferrell (2002) at p. 1228. 8 Harris and Raviv (l990) and Stulz (l990) make similar formal arguments.

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the more effective monitoring is likely to come from those with concentrated ownership.9 Such

shareholders are more likely to involve themselves directly in oversight and to seek redress for

perceived corporate abuses. The two variables we use to evaluate this hypothesis with respect to

charity are: the percentage of the firms equity held by institutional owners and the percentage of

the firms equity held by blockholders (those shareholders who own 5% or more of the firm). We

find no evidence that these shareholders have a significant impact on corporate giving, although

corporations with large blockholders are significantly less likely to have established a charitable

foundation.

Market-to-book ratio: In evaluating the impact of monitoring variables on giving

behavior, we include, as a control variable, the firms market-to-book ratio. The rationale is to

guard against attributing explanatory power to monitoring variables when, in fact, giving is

associated with the presence of economics rents. While the q ratio is a common measure of

economic rents, interpretation is problematic, as a firm can generate rents for at least two, non-

mutually exclusive, reasons. One reason is that a high q ratio may reflect superior performance

for example, a firm may be well managed relative to other firms, but its managers are not able to

capture the rents as salary. Alternatively, a high q ratio may indicate that the firm has access to

unique assets, such as patents, regulation, or intellectual property, which create barriers to entry.

In industrial organization literature, the ratio of market value to its replacement cost is a

commonly used measure of market power, or monopoly rents (see, for example, Lindenberg and

Ross, 1977). If a firm participates in a highly competitive product market, then it should expect to

earn zero economic rents (normal rates of return), and the market value of the firms equity will

approximate its book value. If, on the other hand, investors expect the firm to earn economic

rents, then the rents will be capitalized in the firms market value, which will exceed replacement

cost. With respect to giving behavior, perhaps better performing firms are better positioned to

9 See Agrawal and Knober (1996). Among other control mechanisms, they examine institutions and large blockholders and their impact on firm performance.

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give to charity; it also may be true that managers are more likely to consume job-related

perquisites, such as giving to charity, in market settings where the firm faces less intense

competition from rivals, as reflected in a higher market-to-book ratio. Hence, while the empirical

relationship between q and giving is open to interpretation, our evidence indicates that firms with

higher market-to-book ratios do give more and are more likely to have corporate foundations.

Legal Considerations Influencing Corporate Giving Behavior

Prior to the mid-l950s, the prevailing legal view was that corporate contributions to

philanthropic causes were described as ultra vires, or beyond the power of the corporation.

Such laws held illegal those contributions not directly related to the purposes of the corporation,

as defined by charter.10 These common law prohibitions changed as case challenges in the mid-

century began to eat away at the knife-edged standard that held that managers and directors

would be violating their fiduciary responsibilities by making contributions not directly related to

corporate purposes. The turning point case occurred in l953, when the Supreme Court of New

Jersey ruled that a cash contribution by a business to Princeton University was deemed legal even

though there was no direct benefit to the business.11 Other states followed with a succession of

similar common law rulings. Also, states began to modify their incorporation statutes to

recognize philanthropy as a sanctioned business activity and today every state has passed

legislation that gives authority to corporations to make gifts for charitable purposes.12

The changing legal backdrop concerning philanthropy raises the question of whether

cross-state variations in state regulations produce differential effects on corporate giving

behavior. One rationale for enacting corporate fiduciary responsibility laws, for example, is to

10 See Kahn (1997) and Muirhead (l999). 11 A.P. Smith Manufacturing Co. v. Barlow, 98 A.2d 581 (N.J. l953). 12 While these laws provide general authority to make gifts, early laws were more prescriptive than are current laws (see Kahn, l997). For example, early law typically limited acceptable charitable recipients to those located within the state or community in which the corporation did business. Pennsylvanias earliest laws required shareholder approval of donations and Hawaiis required an affirmative vote of a majority of shareholders.

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curtail agency costs by clearly defining shareholder interest as the primary interest of

management (Delaware). Such laws are more likely to restrain agency costs than laws that

mandate that managers consider interests other than shareholders be considered in decision-

making (Connecticut). Similarly some states have adopted philanthropy laws that authorize firms

to make contributions irrespective of shareholder interest.

Below we provide original evidence on the efficacy of state laws that potentially affect

agency costs in the context of corporate giving.

State philanthropy laws: All fifty states have passed philanthropy statutes that validate

the corporations authority to make contributions. Twenty-four states, including Delaware, have

adopted the phrasing that enables corporations to make donations for the public welfare or for

charitable, scientific or educational purposes. Nineteen states have adopted a two-provision

statute that specifies that corporations may make contributions for either of two reasons:

furthering the business affairs of the corporation or for charitable purposes. The remaining

seven states authorize corporations to make contributions irrespective of corporate benefits. In

the models below we identify the relevant state law by the state of the firms incorporation and

include dummy variables to test the hypothesis that state laws impact on corporate decision-

making. If they are economically significant, we expect that state laws that allow contributions

irrespective of corporate benefit would enable managers to impose agency costs by generating

higher levels of giving than other state laws. More restrictive laws, in contrast, would perform a

monitoring function and restrain agency costs in the form of philanthropic giving that is not in

shareholder interest. Our evidence is consistent with the hypothesis that, in spite of stated

legislative intent, these laws have no significant impact on corporate behavior.

Corporate fiduciary-duty laws: Most states have enacted statues that provide guidelines

as to whose interests firm managers are to consider in their decision-making. These laws can be

interpreted as efforts to moderate agency costs. For example, Delaware imposes a shareholder

primacy criterion on managers (managers must place shareholders interests first). Other states

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allow managers to consider the effects of an action on some broader constituency such as

employees, suppliers, customers, communities, etc. The statutes generally do not mandate that

stakeholder interests be considered; instead they are permissive, absolving management of

liability provided if they can demonstrate that they considered such interests.13 There are three

different formulations currently in place: Delawares shareholder primacy statute, Connecticut

law, which requires consideration of non-shareholder interests, and other constituency statutes,

which indicate whose interests a board may consider in making decision. The latter states give

broad discretion to consider non-shareholders interests, and are used in 26 states.14 The

remaining 22 states have not enacted specific laws with respect to stakeholder interests, but

instead follow the business judgment rule, which holds that directors decisions are presumed

to be informed decisions, made in good faith, and in the honest belief that the action is in the

interest of the shareholders. If a plaintiff (shareholder) were to object, such a plaintiff would have

to show that the board failed to meet either its duty of care or its duty of loyalty to the

shareholder.

To evaluate the significance of these laws on agency costs and corporate giving, we test

the hypothesis that giving is positively associated with fiduciary responsibility laws that go

beyond the business judgment rule in defining interests to be considered in corporate decisions.

We classify states by state of incorporation, and find that these laws have negligible effects on

corporate philanthropy.

III. Sample Selection and Descriptive Data

Our sample consists of all Fortune 500 firms identified in the l998 issue.15 To obtain

charitable giving data, we then matched these firms with data provided in the l999 Corporate

13 See Dunfee (1999). 14 Leung (1997) 15 The Fortune, April 27, 1998 issue classifies firms based on l997 data.

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Giving Directory (Taft Group/ Thomson Gale).16 The Directory contains information on annual

charitable cash contributions by firms, and unlike other data sources, contains firm-level data on:

the allocation of the contributions (arts, health, science, and other categories reported below),

management of the corporation, management of the giving program or foundation, and statements

of corporate giving philosophy. Corporations sometimes report their giving figures for more

than one year. To take advantage of this additional information, our database includes up to three

observations for the same firm. We combine the survey information from the Directory with

financial data from COMPUSTAT, corporate governance data from SEC filings, and data from

other sources identified in the tables below. Not all Fortune 500 firms report information on

charitable giving and, consequently, the resulting sample consists of 728 firm years of data for

262 firms.

Giving is defined as the dollar amount the corporation identifies as cash contributions to

not-for-profit organizations. Firms with foundations may make contributions both directly and

through their foundations.17 The giving amount includes cash contributions made through the

corporate direct giving program and, if the corporation has a foundation, contributions made

through the foundation. Some corporations also make in-kind contributions (complimentary use

of corporate facilities, donations of products, services, employee volunteerism, etc.), but given the

ambiguity and inconsistencies in how these contributions are valued by the firm, we do not

include non-cash items in the measure of giving.

A. Selection of Reporting Firms

There is no legal requirement for firms to make public disclosures of their charitable

giving. Because the Corporate Giving Directory contains data only for firms that choose to

16 Corporate Giving Directory, 1999, Detroit: Taft/Thompson Gale (2000). 17 According to Conference Board estimates, during the l990s, about half of corporate cash contributions were made through foundations and about half were made directly, although the proportion of direct giving and foundation giving varies by year. In 2002, direct cash contributions and cash giving through foundations accounted for 30 and 34 percent of total giving, respectively (the remainder was non-cash giving.) Source: Conference Board, Corporate Contributions in 2002 (2003).

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report details of their charitable giving practices, we use the Fortune 500 sample to evaluate the

selection of firms that did report relative to those that did not. Accordingly, we compiled publicly

available data, including measures of agency cost and monitoring effectiveness, variables, for the

Fortune 500 firms that chose not to report. Table 1 contains two probit regression models, where

the dependent variable equals 1 if the firm reports data, and 0 otherwise. The first model includes

firm attributes related to firm size and age, along with agency cost and monitoring variables. The

second model supplements the independent variables with industry indicators to assess whether

there is a systematic difference in reporting propensities by industry.

One interpretation of the choice to report is that it reflects the firm managers perceptions

of the importance of charitable giving. Presumably, managers chose to report if they believe

public disclosure serves their goalseither value maximization for shareholders and/or

indulgence of a personal desire to be associated with charitable giving. The results show that

larger firms are more likely to report, as are older firms. Consistent with an agency cost

interpretation that envisions both outside and inside directors benefiting from corporate giving,

firms with larger boards are more likely to report, as are boards that include a higher proportion

of outsiders. In addition, industry variables are important determinantsthat is, utilities,

retailers, wholesalers and service firms are significantly less likely to report their charitable

giving than are manufacturers. In subsequent analysis, we find that firms in those industries that

do not report are less likely than firms in other industries to have established foundations and are

less likely to report details of their giving.

B. Sample Characteristics

Table 2 panel A shows mean and median values for basic characteristics (income, assets,

employees and age) for the sample of reporting firms. The average firm age is 32 years,

measured as the greater of: years from the initial public offering date reported by Compustat, or

years from the date at which the company first appeared on the CRSP tapes. Panel B shows that

the mean annual cash contribution is $10.2 million dollars, which represents $292 dollars per

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employee, or about $1 per thousand dollars of sales. As an external check on the reasonableness

of these values, we consulted the annual reports compiled by the Conference Board and other

reporting agencies that compile aggregate statistics on corporate giving.18 Our values and those

of other reporting agencies are similar for the time period over which the sample was constructed

(mid-l990s). In our sample, average annual giving per director is $823,264, with values ranging

from a maximum of around $12 million per director to a little over $2000 per director.

Panel C reports mean and median values for our agency cost and monitoring variables.

Board sizes range between four and 29 for sample firms, with a mean of 12.45 directors, and a

median of 12. Inside directors (corporate officers and control persons) represent 20% of the total

board. Gray directors are those who have substantial business relationships with the company, as

reported in proxy statement in the director biography section or the section titled, related

transactions: Examples include attorneys retained by the firm, external auditors, and consultants.

If we define gray directors as insiders, the average percentage increases to 24% insiders. In the

empirical work that follows, we classify gray directors as outsiders, but results are not sensitive to

classification.

Panel D documents variations in governance structure of giving programs. The primary

distinction is whether the corporation has established a charitable foundation. Approximately

82% of the firms in our sample have a foundation. As noted above, even if a firm delegates some

of its charitable giving to a foundation, the firm may supplement with direct cash giving. We

measure firm giving as the sum of direct cash gifts and cash gifts made through the foundation.

Firms also vary in whether top managers of the corporation are involved in management

of the giving program. If profits guide decisions, corporations can be expected to involve their

top managers if they wish to impose some oversight, presumably to ensure alignment of their

18 The Conference Board is one of several research organizations that track corporate giving. Each organization uses a different methodology and sampling technique. Generally, they survey individual firms but report findings in a company-blind, aggregated format. Consequently, dollar estimates of aggregate corporate giving vary by reporting organization. The IRS, another source of contributions data, provides aggregated and company-blind data in Statistics of Income, Corporation Income Tax Returns.

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giving objectives with overall corporate strategy. However, time spent on philanthropy detracts

from other uses of time. As an alternative motivation, corporate officers may view close

involvement in their firms philanthropy as job-related consumption. The panel indicates that for

those firms with a charitable foundation, 40% of firms CEOs are involved in foundation

management, and a majority of sample firms (61%) involve at least one top corporate executive

(CEO, CFO, COO) in foundation management. These results contrast sharply with the sub

sample of firms that do have a foundation (20% of the sample). Only 2% of these firms involve

the CEO in running the giving program, and only 6% involve one or more of the top officers.

While industry breakdowns are not shown, depository institutions (banks) have the smallest level

of officer involvement in foundation management (34% of firms), while non-bank financial

institutions, Financial, nec, which is composed primarily of security dealers and investment

banks) have the highest level of officer involvement (84%). The results indicate that two

variables (the firms industry and the firms propensity to involve managers in its giving

program) are likely to be related to the choice to establish a foundation.

IV. Analysis of Giving Priorities by Industry

Table 3 contains information on how sample firms allocate their giving across twelve

categories of giving priorities. We show results for thirteen industrial classifications. We

identify each firms industry classification based on primary SIC code (as reported by

Compustat), and make further refinements to 2-digit classifications in cases where there are

sufficient numbers of observations to form more narrowly defined groups (generally four-digit

industries). This classification resulted in groups with roughly similar number of observations,

with the exception of manufacturing, which generates 45% of the observations. The

classifications and numbers of observations within an industry are identified in the table.

Stated priorities may provide insights as to whether giving appears to be consistent with

profit maximization. For example, pharmaceutical firms give significantly more to health causes

than other firmsthey allocate 42% of their total charitable giving to health. For example, they

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may give to hospitals to build relationships with doctors and hospital administrators who, in turn,

may buy their products and provide access to patients and facilities for testing new products and

drug treatments. Petroleum firms give significantly more to environmental causes than do firms

in other industries, perhaps aimed at counterbalancing the perception that petroleum-related

activities create environmental problems. However, the average percentage of giving to the

environment is only 4% of their total giving. Also, mining and construction firms do not allocate

any money to the environment and arguably these firms face similar image issues, although their

production processes involve higher labor-to capital ratios.

Other evidence in Table 3 indicates that firms are sensitive to a profit rationale when

establishing giving priorities: firms in industries that do no have much international exposure

(utilities, wholesalers, retailers, and transportation firms) generally do not give to international

causes. Also, science as a giving category holds little interest for firms: seven out of 13

industries report zero dollar giving to science, and science is the lowest overall percentage giving

category. If firms find it profitable to invest in scientific research and in cases where intellectual

property can be protected, it is likely that firms would incur those expenses as business

investment rather than as charitable gifts.

Giving to the arts is a candidate for agency cost interpretations, as it is difficult to link

such spending to bottom-line profitability. Instead it is likely to lead to good seats and VIP status

for managers and directors, private showings, social networking at events, etc. While access to

social networks may engender business relationships, shareholders may question whether these

business relationships can be pursued in alternative, more direct, and less expensive ways. As

shown in the table, firms in every industry give something to the arts. However, it is the financial

industry (financial, nec) that stands out as giving an unusually large amount to the arts relative

to other industries. In our sample, the financial industry category consists primarily of securities

dealers and investment banks, and they designate, on average, approximately 22 percent of their

philanthropy to the arts. The unusually large allocation does raise the question of why giving to

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the arts would be more value enhancing for these firms compared to other firms. Perhaps

building business relationships with wealthy clients (who are more likely to be patrons of the arts)

is more important in this industry than others, but we have no way to test this hypothesis. In

contrast, retail trade firms give a significantly lower percentage to the arts than do firms in other

industries, although retail firms are not very specific in their allocations, designating, on average,

48% of their giving to the general category.

The general category is one that firms may select if they do not wish to report details

on their giving. The firms that select this category generally designate 100% of their giving as

general. As shown, compared to firms in other industries, utilities and firms in transportation

and retail trade are significantly more likely to select this category in lieu of providing more

refined details of their giving.

V. Corporate Charitable Foundations

Corporate foundations derive their funds from their associated for-profit corporations, but

legally they are separate entities.19 While corporations establish foundations with the espoused

goal of promoting the interests of the corporation, the presence of a separate decision-making

body suggests that the foundation may have more autonomy to pursue interests that do not

conform to those of the corporation. The presence of corporate officers on the foundation board

may mitigate concerns with agency problems to some degree. However, corporate officers also

may receive benefits from these positions that are not offset by reduced compensation.

A foundations endowment can shelter the firm from business cycle fluctuations,

allowing a corporation to maintain a constant giving level over time.20 The corporation can

19 The Ford Foundation, for example, is not a corporate foundation. While it originally was endowed from the value of the Ford familys equity in Ford Motor Company, it now longer derives funds from Ford Motor Co. Instead, the corporation has established the Ford Motor Co. Fund, which helps to direct Ford Co. giving. See Webb (l996) for discussion of tax and government policies that affect corporate foundations. Webb constructs a theoretical model related to the impact of corporate and foundation tax rates on the type of gifts corporations will make and on the timing of those gifts. 20 Freddie Mac, for example, made a $225 million cash contribution to its philanthropic programs late in 2002, reducing its fourth-quarter earnings by $146 million after taxes (or $0.21 cents per diluted share).

16

smooth earnings by using windfall gains to add to the foundations endowment and by reducing

transfers to the foundation in other years. 21

Table 4 shows comparative statistics for firms with established foundations versus those

without. The comparisons indicate that larger and older firms tend to have foundations. On

average, those with foundations are nine years older and have 18,000 more employees than those

without foundations. Firms with foundations have larger boards of directors and lower average

blockholding. In terms of giving priorities, firms with foundations are more likely to specify

priorities rather than identify the general category. As shown, firms with foundations give

more to the arts, education, religion, and science. As discussed above, firms with foundations are

much more likely to involve corporate officers in the management of their giving programs. In

spite of these differences, the presence of a foundation does not result in significant differences in

giving, irrespective of whether giving is measured as total giving, giving per employee, giving

per dollar assets, or giving per dollar sales.

The results from Table 4 raise the issue of what factors are associated with a firms

choice to establish a foundation. While average giving amounts do not vary significantly with the

presence of a foundation, establishing a foundation may nonetheless reflect agency costs. Table 5

contains results of two probit models, where the dependent variable equals 1 if the firm has a

foundation, 0 otherwise. Given our data, there are several limitations associated with modeling

the presence of a foundation. One is that we are limited to cross-sectional data, as there is no

Reportedly, $205 million was put into the Freddie Mac Foundation and the remaining money was distributed directly to charities. The press release identified a terrific year enabled the firm to make the contributions and identified the motive as ensuring that the Foundation has a permanent and sustainable source of funds. Wall Street Journal, December 9, 2002. (http://online.wsj.com). On the heals of this announcement, Freddie Mac reported that it had underestimated its profits in previous years by up to $4.5 billion. This revelation has resulted in top officer replacement and calls for closer scrutiny of Freddie Macs Board of Directors. 21 Disclosure rules are different for foundation giving than for direct giving. See Kahn (l996) for documentation and analysis. The IRS requires foundations to file a return, Form 990-PF, which indicates amounts of the foundation grants and identities of recipients. However, Kahn questions the usefulness of the disclosure given the relative inaccessibility of the form. The only requirement is that the form is available for inspection on the premises of the foundation, but there is no requirement to make copies or to allow forms to be removed from the premises.

17

time-series variation in our data as to whether a firm has a foundation. Also, the firms choices to

establish foundations were made in previous years, although as we have noted above, charitable

giving is a relatively new phenomenon for corporations, having been legal only since the mid-

l950s. If board size, leverage policy, and ownership structure are roughly constant over time, then

we can assess whether agency cost and monitoring variables have an impact on the presence of a

foundation. We also can determine whether industry characteristics and state laws play a role in

predicting the presence of a foundation.

As expected, firm age is significantly and positively associated with the presence of a

foundation. However, perhaps surprisingly, none of the size measures (net income, assets,

employees) is significantly related to the presence of a foundation. Board size, however, is

significantly related: firms with larger numbers of directors are more likely to have foundations,

and model (1) indicates that boards comprised of relatively more insiders are more likely to have

foundations. The only monitoring variable that is significant in explaining presence of

foundations is the percent of equity held by blockholders: the greater the percentage, the lower is

the probability that a firm has a foundation.

Model (2) indicates that the firms industry is an important determinant of the likelihood

of having a foundation. The omitted industries in the models are: mining and construction,

pharmaceuticals, and communications (all of the firms in these industry groups have

foundations), and manufacturing. Compared to this group, all remaining industry groups, except

for utilities, are less likely to have a foundation. If foundations are used to smooth charitable

giving over time, we would expect that firms in industries characterized by more volatile earnings

are more likely to have established a foundation. In this regard, it is not surprising that utilities

are significantly less likely to have established a foundation than firms subject to more earnings

fluctuation, such a pharmaceutical companies, mining and construction firms, and communication

firms. Finally, state laws, which ostensibly are aimed at controlling agency costs and which

govern philanthropic behavior, are not significantly related to whether a firm has a foundation.

18

In summary, firms in the same industry share the propensity to establish foundations.

Among firm attributes, age and total number of directors are significant determinants. The latter

result is consistent with the view that board members drive the firms charitable giving behavior

and encourage the firms to establish foundations and to make donations that increase their own

utility. In contrast, the value-maximization theory does not suggest any systematic relationship

between board size and presence of foundations or the magnitude of charitable giving.

VI. Regression Models of Corporate Giving

Table 6 presents results of four OLS regression models of corporate giving. The

dependent variable in the models (1) and (2) is the natural log of total cash giving by a firm. The

dependent variables in models (3) and (4) are standardized measures of giving: giving per

employee and giving per dollar sales. The rationale for standardizing by employees (model 3) is

that a commonly stated philanthropic objective is to enhance firm image and employee morale,

and, as Navarro (l988) notes, many of the benefits of corporate contributions are likely to accrue

to labor rather than capital. Also, we are interested in explaining variations in giving relative to

firm size, and number of employees is a standard proxy for firm size, as is sales (model 4). We

also ran the same set of regressors as in model (4) on giving per dollar assets and found similar

results as those shown for giving per dollar sales. We also ran the regressions using a Heckman

model to control for the selection effect associated with the finding that larger firms are more

likely to respond to the survey questions regarding giving behavior (Table 1). While not shown,

the coefficients that are significant in table 6 remain significant and are of approximately the

same magnitude.

Models (1) and (2) differ only in the inclusion (exclusion) of the industry variables so

that we can evaluate sensitivity of results to industry effects. Models (3) and (4) include industry

dummy variables, as industry effects do add explanatory power, although the results for

remaining independent variables are robust with respect to exclusion of industry variables.

19

Firm characteristics: Results across the various models generally are consistent. Firm

size and age are significant determinants of giving. Models (1) and (2) show that firms that have

more employees, more net income and more asset value, are associated with more giving. In

models (3) and (4), we exclude employees and assets (both firm size proxies) as independent

variables because the dependent variable is standardized by a firm size measure. As a check on

sensitivity of results to alternative measures of current income, we also ran the regressions using

the Lehn and Poulson (1989) measure of free-cash flow instead of net income. The results for all

models are consistent with those shown in Table 6, as the significance of the coefficient estimates

for the independent variables are not sensitive to inclusion of the cash flow measure. Finally,

while we know from Table 4 that the presence of a foundation does appear to affect the allocation

of giving across various causes, it does not produce a significant impact on dollar giving.

Agency cost and monitoring variables: The results reveal several persistent

relationships: first, consistent with the view that charitable giving is affected by agency costs, we

find that larger boards are associated with significantly more giving. This result conforms to the

idea that directors are, themselves, agents and capable of imposing costs on shareholders. It also

suggests that larger boards are less effective monitors than are smaller boards. The composition

of the board does not appear to matter; that is, having relatively more outside directors does not

appear to dampen proclivity for charitable spending. Combined with studies linking lower board

size to higher firm values, the results point to the pivotal role of board size in corporate decision-

making, and contrast with the view that outside directors produce better governance and reduce

agency costs.

Blockholders and institutional investors do not appear to have an impact on charitable

giving, suggesting that any monitoring and discipline that these stakeholders provide is less

effective than is debt in controlling spending on perquisite consumption.22

22 Percent of equity held by blockholders is marginally significant in most of the models in Table 6, indicating that the presence of some blockholders (including company founders and others who have

20

Both the firms debt-to-value ratio and the market-to-book-equity ratio are important

determinants of giving. The results suggest that managers choose to spend less on charity when

they face fewer constraints on how cash flow is used, as indicated by a lower level of fixed debt

obligations). The positive sign on the market-to-book ratio could indicate that when managers

face less intense competition (as proxied by a higher levels of economic rents), they choose to

spend more on charity; it could also indicate that managers of better performing firms (again,

proxied by higher levels of economic rent) choose to spend more on charity. We cannot

distinguish which interpretation is more descriptive; both could be at play.

Corporate constituency and philanthropy statutes: While corporate fiduciary laws are

not specific to philanthropy, they do presumably control agency costs by identifying which

constituent interests (shareholder, employees, local community, etc.) are to be considered when

making corporate decisions, and in the case of Delaware, by ordering constituent interest by

importance (shareholder primacy). We find little evidence of impact, however. Only one

category of state law (laws that that mandate or allow managers to consider interests other than

shareholders interests in decision-making) has a significant impact on giving. The finding of a

negative-signed coefficient, however, is puzzling, as it runs counter to expectations; we would

expect that corporations headquartered in states that allow firms to consider non-shareholder

interests would spend more on charity than those located in (default) states where the law

presumes that decisions are made in the shareholders interest (business judgment rule states).

Similarly, state philanthropy laws do not appear to be correlated with philanthropy. The

only significant finding across the four models is that giving per employee is lower in states that

permit charitable giving for specific purposes (public welfare, etc.) relative to states that allow

giving irrespective of business purposes.

charitable projects that they wish to promote) has a positive impact on the firm charitable giving. As examples, Eli Lilly, Hershey, Hewlett-Packard, and Kellogg are corporations in our sample that report significant blockholdings held by family charitable foundations. As charitable organizations, these family foundations have obvious proclivities for giving, which may translate into more generous giving by the corporation in which they own significant holdings.

21

Industry effects: Firms in mining and construction, transportation, and retail trade donate

significantly less to charities than do manufacturers. In contrast, utilities, petroleum, and

pharmaceutical firms donate significantly more than do manufacturers. It is not surprising that

similarly situated firms (in terms of regulatory constraints and other market attributes) make

similar calculations about optimal levels of charitable spending. For example, utilities, petroleum

firms, and pharmaceutical firms, as a general proposition, face more regulation than

manufacturers, suggesting that charitable giving by firms in these industries reflects concerns

with influencing regulators.

VII. Conclusions

In this paper, we document corporate philanthropic practices and analyze firm and

industry variation in cash donations, giving priorities, and likelihood of having a philanthropic

foundation. We evaluate an agency cost hypothesis that giving reflects managers tastes for using

corporate resources to satisfy personal preferences for charitable giving. This hypothesis

suggests that giving behavior varies systematically with the effectiveness of monitoring and with

variables that measure the firms exposure to competition. The null is that no such systematic

relationships obtain, as managers are motivated by value maximization so that giving is tailored

to complement the firms unique assets and to enhance the firms competitive advantage.

We find that larger firms with larger boards give significantly more cash to charity. Such

firms are more likely to report details regarding their philanthropy, and are more likely to have

foundations. We identify two possible reasons for this size effect. First, when boards are larger,

there are more members who may benefit from the reflected glory and related perquisites

arising from the firms involvement in charitable causes. Each director, for example, may have a

pet charity that she or he wants to support. In effect, board members are agents and can impose

agency costs, as can managers. As an indication of the benefits that directors may receive from

the corporations giving, our data show that, on average, charitable donations per director are

22

over $800,000 per year, and for some firms the values are considerably largera number of

pharmaceutical firms, for example, contribute around $10 million per year per director. Second,

larger boards may engender more charitable spending because, in terms of policing managerial

decisions, suggests that larger-sized boards are less effective at monitoring. As suggested by

recent studies on board size, their effectiveness may be mitigated by the free-riding that is

inherent in larger groups and by board meeting dynamics that emphasize courtesy at the expense

of objective criticism, a characteristic that is more pronounced as the number of meeting

participants grows. Interestingly, it is not the composition of the board (outsiders to insiders) that

appears to matter in generating more giving--it is the absolute size of the board that is associated

with more corporate giving.

Consistent with the view that higher levels of debt reduce agency costs, we find that

corporations with higher debt-to-value ratios give significantly less to charity. Using market-to-

book-equity ratio to proxy for the firms economic rents, our findings indicate that firms with

higher q ratios are more generous in their giving to charity, measured as total giving, and giving

standardized by various firm size measures.

No previous empirical study has examined the effects of state philanthropy statutes,

which presumably were enacted to guide corporate decision-making regarding charity. However,

the laws do not appear to have the intended effect, as they do not influence giving behavior in any

systematic way. We also consider corporate fiduciary responsibility laws and giving. While these

laws have multi-faceted objectives, they generally are aimed at controlling agency costs.

However, our findings question the efficacy of these laws, at least pertaining to charitable giving

behavior, as their impact is either negligible or, in one case, inconsistent with the predicted effect.

The total amount of corporate giving may appear small relative to other corporate

expenditures: for example, U.S. corporations gave approximately $12.2 billion in 2002, an

23

amount that represents approximately 1% of pre-tax income.23 However, as is well recognized,

direct estimates of agency costs are elusive. At best, we can develop measures that provide some

indication of the overall magnitude of agency costs. Charitable giving is a potentially useful

measure in that, even if the giving enhances a firms goodwill, it also can represent a form of

perquisite consumption for managers and directors who wish to be involved or associated with

philanthropy. In this broader context, the paper provides evidence on firm attributes that are

conducive to imposing agency costs on shareholders.

23 Dollar estimates include total cash and non-cash contributions as reported by The American Association of Fundraising Counsel (AAFRC) in Giving USA 2003 Edition, and reported in the Conference Board, Corporate Contributions in 2002. As background, corporations gave approximately two percent of pretax income in the l980s, which is double the roughly constant rate at which they gave from the l950s through the l970s (Clotfelter, l985). The giving rate in the l990s was approximately 1 percent of pretax income, and rose to a decade high of 1.2 percent in l999 (Conference Board, Corporate Contributions, l999).

24

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26

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27

Table 1 Probit Regression: Determinants of Firm Choice to Provide Charitable Giving Data

The table shows results of probit equations to explain which of the Fortune 500 firms report charitable giving information, as published in Corporate Giving Directory. The dependent variable equals 1 if the firm reports either giving amounts, information on the charitable foundation, or giving priorities (n= 728); variable equals 0 otherwise (n=417). Information on net income, employees, debt, equity, book/market values, institutional ownership, and blockholding are from COMPUSTAT and EDGAR. Firm value is measured as total assets. Firm age is measured as the greater of: years from IPO data reported by COMPUSTAT or the date the company first appeared on the CRSP tapes. SIC codes are from COMPUSTAT and matched with classifications in the l997 Economic Census. Manufacturing is the omitted industrial category. Robust standard errors are based on clustering by firm.

Firm Reports Charitable Giving Data (1) (2)

Independent Variables Firm Characteristics:

Coefficient Robust Std. Error

Coefficient Robust Std. Error

Net income .0002* .0001 .0002 .0001 Employees (Ln) .099 .074 .091 .100 Assets (Ln) .234*** .074 .258** .108 Firm age .017*** .004 .014*** .004 Agency Cost and Monitoring Variables: Total directors (Ln) .755*** .293 .699** .308 Ratio of inside directors to total directors -2.238*** .533 -2.183*** .550 Ratio of book equity to market equity -.086 .207 .072 .203 Ratio of total debt to value -.497 .447 -.079 .500 Percent of equity held by blockholders -.313 .363 -.435 .360 Percent of equity held by institutions .001 .004 -.001 .005 Industry Variables: Mining and construction -.341 .405 Pharmaceuticals -.073 .654 Petroleum .221 .490 Transportation -.488 .384 Communications -.341 .435 Utilities -.924*** .343 Wholesale trade -.751*** .308 Retail trade -.485* .260 Depository institutions -.377 .455 Insurance carriers -.251 .385 Financial, nec -.574 .523 Services -.853*** .310 Constant -3.575*** .893 -3.367*** 1.013 No. of observations 1149 1149 No. of firms 407 407 Pseudo R-squared 0.23 0.26 *** = z statistic significant at the .01 level, two-tailed test ** = z statistic significant at the .05 level, two-tailed test * = z statistic significant at the .10 level, two-tailed test

28

29

Table 2 Descriptive Statistics for Corporations Reporting Charitable Contributions

The table shows mean, median, and standard deviation values sample firm characteristics. Data on asset value, sales, employees, debt, equity, book and market values, and institutional ownership are from COMPUSTAT and EDGAR. Firm age is measured as the greater of: years from IPO date reported by COMPUSTAT or the date the company first appeared on the CRSP tapes. Dollar giving amounts and giving program governance attributes (philanthropic foundation, CEO and officer involvement in foundation or giving program) are reported in Corporate Giving Directory. Data on board composition and block holdings are reported in proxy statements located on the SEC website: www.sec.gov/archives/edgar. Statistics are based on 728 firm-year observations. Panel A) Firm Attributes Mean Median Std. Deviation Net income, millions ($) 756.29 387.00 1196.53 Assets, millions ($) 24818 9411 46797.2 Employees, thousands 54.52 31.25 84.01 Firm age (years since IPO) 32 29 21.57 Panel B) Giving Rates Annual dollar giving ($000) 10,233.78 3,773.37 17,971.54 Annual giving per employee 292.10 139.49 531.70 Annual giving per director ($000) 823.26 303.42 1504.67 Annual giving per million $ sales 1014.22 556.64 2163.51 Annual giving per million $ assets 801.48 447.53 1399.1 Panel C) Agency Cost and Monitoring Variables Total directors 12.45 12.00 2.80 Ratio inside directors to total directors .20 .18 .11 Ratio (inside directors + gray directors) to total directors

.24 .22 .13

Ratio of book equity to market equity .42 .38 0.30 Ratio of total debt to value .26 .25 0.16 Percent of equity held by institutions 59.23 60.69 15.40 Percent of equity held by blockholders 15.72 10.94 17.94 Panel D) Governance of Giving Program Percent of firms that have established a charitable foundation

80.63 1.00 39.54

Percent of firms with a foundation that identify the CEO as running the foundation

41.01 0.00 49.24

Percent of firms with a foundation that identify a corporate officer (CEO, CFO, COO) as running the foundation

60.99 1.00 48.82

Percent of firms w/o a foundation that identify the CEO as running the giving program

2.13 0.00 14.48

Percent of firms w/o a foundation identifying a corporate officer (CEO, CFO, or COO) as running the giving program

6.38 0.00 24.53

30

Table 3

Allocation of Corporate Donations by Industry

The table shows percentage of charitable contributions that firms allocate to various categories, by industry. If a percentage range is reported, the midpoint is used. Those firms that respond that they contribute to a general category of causes generally identify 100% of their allocation as general. Data are from Corporate Giving Directory, 1999. Primary SIC codes are from COMPUSTAT and matched with classifications in the l997 Economic Census.

Charitable Giving Categories Arts Civic Educa-

tion Environ-ment

Health Inter- national

Matching Religion Science Social Science

Other General

Industry (SIC codes) Mining, Construction (1000-1900) N=18 7.67 4.33 32.00 0.00a 22.50 0.50 0.00 a 2.50 0.50 12.33 2.00d 16.67 Manufacturing (1500-3900) nec, N=327 7.83 6.55 32.09 b 1.19 14.28 0.75 1.61 0.77 0.15 13.35 3.95 d 18.97 d Transportation (4100-4700) N= 31 10.26 1.94 b 0.55 a 0.48 17.33 0.00 a 0.48 0.00 b 0.00 b 5.33 d 0.48 b 51.62 dPharmaceuticals (2834) N=27 6.05 4.42 18.69 0.40 42.04 a 1.59 1.77 0.00 b 0.00 b 7.50 d 4.80 13.64Petroleum (2900) N=32 11.16 5.05 33.00 3.70 c 10.6 1.00 0.00 a 0.00 b 0.60 13.31 1.70 20.00Communications (4800) N=24 6.88 6.63 49.00 d 0.00 a 6.88 c 0.88 0.88 0.00 b 0.00 b 8.38 3.00 12.50 Utilities (4900) N=40 7.13 7.13 18.68 1.50 6.23 b 0.00 a 0.00 a 1.95 0.00 b 10.65 0.23 a 47.50 dWholesale trade (5000-5100) N= 21 7.38 6.38 26.48 0.86 12.81 0.00 a 0.00 a 0.00 b 0.00 b 7.57 3.86 33.30 Retail trade (5200-5900) N=56 4.77 c 3.99 9.78 a 0.21 b 11.30 0.00 a 0.03 a 0.38 0.38 19.56 1.47 48.21cDepository institutions (6000) N=54 13.52 8.17 21.00 0.33 c 12.06 1.00 2.20 0.00 b 0.17 18.67 1.04 24.07Insurance carriers (6300) N=54 11.00 7.50 25.06 2.50 15.22 0.16 d 0.72 1.83 0.17 9.89 1.78 24.07Financial, insurance and real estate, nec (6100-6200,6400-6700) N=22

21.96 b 5.86 24.0 0.82 16.00 0.68 3.96 0.00 b 0.00 b 24.55 0.00 3.54 b

Services industries (7000-8900) N=22 8.05 3.09d 26.41 0.68 19.00 0.95 2.73 0.00 b 0.00 b 2.32 a 1.91 35.00Overall Mean 8.70 6.07 26.60 1.12 14.64 0.66 1.24 0.68 0.16 12.87 2.71 24.85 Note-- t-tests of significance of the difference between: the value of the specific industrys mean percentage contribution to a specific category relative to the mean percentage reported for all other industries, adjusted for multiple-year observations for a firm a= t-test significant at the .01 level, two-tailed test b= t-test significant at the .05 level, two-tailed test c= t-test significant at the .10 level, two-tailed test d= t-test significant at the .20 level, two-tailed test

Table 4 Comparison of Firms with and without Foundations

The table compares mean values of variables for those firms that have established a foundation and those that have not. The last column provides significance tests of the differences in means, based on a total of 728 firm-year observations (t-statistics are adjusted for multiple-year observations). Data on asset value, sales, employees, debt, equity, book/market values, and institutional ownership are from COMPUSTAT and EDGAR. Firm age is measured as the greater of: years from IPO date reported by COMPUSTAT or the date the company first appeared on the CRSP tapes. Dollar giving amounts and giving program governance attributes (philanthropic foundation, CEO and officer involvement in foundation or giving program) are reported in Corporate Giving Directory. Data on board composition block holdings are reported in firm proxy statements: www.sec.gov/archives/edgar. Panel A) Firm Attributes

Foundation (N= 587)

No Foundation (N=141)

t-statistic

Net income, millions ($) 813.46 518.29 1.449 Assets, millions ($) 27325 14380 2.284** Employees, thousands 58.01 39.97 1.487 Firm age (years since IPO) 34 25 2.285** Panel B) Giving Rates Annual dollar giving ($000) 10,768.83 7,473.29 1.051 Annual giving per 1000 employees ($) 289.72 304.40 -0.131 Annual giving per million $ assets 838.82 608.84 0.899 Annual giving per million $ sales 1056.75 794.78 0.760 Annual giving per director ($000) 850.47 682.90 0.296 Panel C) Agency Cost and Monitoring Variables Total directors 12.66 11.51 2.028** Ratio inside directors to total directors 0.20 0.19 0.732 Ratio (inside directors + gray directors) to total directors 0.24 0.26 -0.903 Ratio of book equity to market equity 0.42 0.43 -.0197 Ratio of total debt to value 0.25 0.27 -.0682 Percent of equity held by institutions 58.87 60.70 -0.613 Percent of equity held by blockholders 14.17 22.10 -1.847* Panel D) Allocation of Giving (% of total giving) Arts 9.50 5.37 2.178* Civic 6.50 4.31 1.307 Education 29.83 13.31 4.290*** Environment 1.16 0.94 0.326 Health 15.45 11.27 1.164 International 0.67 0.62 0.094 Matching gifts 1.29 1.06 0.229 Religion 0.84 0.00 2.336** Science 0.20 0.00 2.356** Social science 14.68 5.28 2.894*** Other 2.74 2.56 0.114 General 17.55 55.32 -4.134*** Panel E) Governance of Giving Program Percent of firms with one or more corporate officers (CEO, CFO, COO) identified as running the foundation/giving program

60.99 6.38 8.259***.

***= significant at .01 level; **= significant at .05 level; *=significant at .10 level, two-tailed test

31

Table 5 Probit Models of Corporate Decisions to Establish a Charitable Foundation

The table shows results for two probit models. The dependent variable is a dummy variable signifying that the corporation has established a charitable foundation (yes=1; 0=no), as reported in Corporate Giving Directory. Data on asset value, sales, employees, debt, equity, book/market values, and institutional ownership are from COMPUSTAT and EDGAR. Firm age is measured as the greater of: years from IPO date reported by COMPUSTAT or the date the company first appeared on the CRSP tapes. Data on board attributes and block holdings are reported in proxy statements located on the SEC website: www.sec.gov/archives/edgar. State philanthropy laws are documented in Kahn (2001). Laws that define fiduciary responsibility in corporate decisions are documented in Dunfee (1999). State laws are classified by state of incorporation. In model (2), omitted industries are: mining and construction, communications, and pharmaceutical (all firms in these industries have foundations) and manufacturing. Primary SIC codes are form COMPUSTAT and matched with 1997 Economic Census classifications. Robust standard errors are based on clustering by firm.

Corporation has a Charitable Foundation (1) (2)

Independent Variables Coefficient Robust Std. Error

Coefficient Robust Std. Error

Firm Characteristics: Net income -.000 -.0001 -.000 .0001 Assets (Ln) .027 .095 .155 .147 Employees (Ln) .106 .105 .005 .154 Firm age (yrs from IPO) .012** .005 .009* .006 Agency Cost and Monitoring Variables: Total directors (Ln) .933** .384 .814** .415 Ratio of inside directors to total directors 1.516* .807 1.332 .854 Ratio of book equity to market equity .116 .263 .316 .261 Ratio of total debt to value -.879 .566 -.876 .672 Percent of equity held by blockholders -1.077** .493 -1.127** .522 Percent of equity held by institutional investors .000 .006 .001 .006 State Corporate Constituency Statutes: State has shareholder primacy law .541 .363 .479 .375 State permits/mandates consideration of constituency interests other than shareholders

.574 .336 .593 .367

State Corporate Philanthropy Statutes: Permits donations for the public welfare or for charitable, scientific, or educational purposes

.147 .350 .238 .382

Permits donations for furthering the business affairs of the corporation, public welfare, charitable purposes

.253 .380 .361 .416

Industry Variables: Petroleum -.277 .473 Transportation -.606 .429 Utilities -1.131*** .440 Wholesale trade -.707 .561 Retail trade -.345 .434 Depository institutions -.732 .547 Insurance carriers -.763 .361 Financial, nec -.075 .683 Services -1.167*** .438 Constant -2.866** 1.275 -3.077** 1.504 No. of observations 728 728 No. of firms 263 263 Pseudo R-squared .11 .16 *** = significant at the .01 level; **= significant at the .05 level; * = significant at the .10 level, two-tailed tests

32

Table 6

Regression Models of Corporate Cash Contributions The table shows results for four OLS regression models. The dependent variable in models (1) and (2) is the natural log of the annual dollar value of cash gifts made by the corporation. The dependent variables in models (3) (4) and (5) are, respectively, ln (dollar giving standardized by employees), ln (giving per dollar sales), ln (giving per corporate director). Data on asset value, sales, employees, debt, equity, book/market values, and institutional ownership are from COMPUSTAT and EDGAR. Firm age is measured as the greater of: years from IPO date reported by COMPUSTAT or the date the company first appeared on the CRSP tapes. Dollar giving amounts and giving program governance attributes (philanthropic foundation, CEO and officer involvement in foundation or giving program) are reported in Corporate Giving Directory. Data on board composition and block holdings are reported in proxy statements located on the SEC website: www.sec.gov/archives/edgar. State philanthropy laws are documented in Kahn (2001). Laws that define fiduciary responsibility in corporate decisions are documented in Dunfee (1999). All state laws are classified by state of incorporation. Primary SIC codes are form COMPUSTAT and matched with 1997 Economic Census classifications In models 2-5, the omitted industry is manufacturing. Robust standard errors are based on clustering by firm, and appear in parentheses below the coefficients. (1)

Dollar Giving (2)

Dollar Giving (3)

Giving per 1 M Employees

(4) Giving per Dollar

Sales Independent Variables Net income .0003***

(.000) .0002*** (.000)

.0001*** (.000)

.00005 (.000)

Employees (Ln) .263*** (.069)

.213** (.094)

Assets (Ln) .294*** (.064)

.518*** (.097)

Firm age .006** (.003)

.006* (.003)

.007** (.003)

.006* (.003)

Foundation .017 (.123)

.009 (.113)

-.002 (.139)

.067 (.118)

Total directors (Ln) .462* (.258)

.568** (.241)

.415 (.272)

.679*** (.251)

Ratio of inside to total directors

.009 (.567)

-.071 (.561)

.272 (.555)

.126 (.567)

Ratio of book equity to market equity

-.857*** (.202)

-.692*** (.204)

-.550*** (.221)

-.481*** (.199)

Ratio of total debt to value

-1.237*** (.363)

-1.538*** (.391)

-1.493*** (.474)

-1.483*** .(395)

Percent of equity held by blockholders

.207 (.347)

.562 (.361)

.794* (.423)

.535 (.469)

Percent of equity held by institutional investors

-.001 (.005)

-.003 (.005)

-.002 (.005)

-.001 (.005)

Shareholder primacy law

-.081 (.239)

-.160 (.219)

-.033 (.231)

-.109 (.197)

State permits/mandates firm to consider constituency interests other than shareholders

-.298 (.240)

-.398** (.200)

-.507** (.232)

-.380* (.198)

Permits donations for the public welfare or for charitable, scientific, or educational purposes

-.170 (.215)

-.141 (.210)

-.427** (.215)

-.156 (.197)

Permits donations for furthering the business

.037 (.266)

.023 (.220)

-.028 (.253)

.094 (.221)

33

affairs of the corporation, public welfare, charitable purposes Mining and construction -.703**

(.347) -.478 (.423)

-.867*** (.334)

Transportation -.555** (.242)

-.923*** (.267)

-.480* (.275)

Pharmaceuticals 1.295*** (.306)

1.496*** (.362)

1.455*** (.331)

Petroleum .163 (.204)

.941 (.188)

-.399** (.183)

Communications .006 (.339)

.359 (.379)

.302 (.324)

Utilities .149 (.283)

1.286*** (.278)

.469** (.241)

Wholesale trade .265 (.347)

.766 (.492)

-.279 (.312)

Retail trade -.093 (.247)

-1.069*** (.232)

-.428** (.222)

Depository institutions -1.029*** (.375)

.550* (.318)

.288 (.287)

Insurance carriers -.643* (.356)

.840*** (.246)

-.038 (.233)

Financial, nec. -.581 (.361)

.641** (.320)

.287 (.290)

Services .168 (.328)

-.047 (.483)

.370 (.329)

Constant 10.971*** 9.126*** 11.218*** 5.099*** No. of obs. 695 695 695 695 No. of firms 251 251 251 251 R-squared .51 .58 .38 .28 *** = significant at the .01 level; **= significant at the .05 level; * = significant at the .10 level, two-tailed tests

34

An Analysis of Corporate Philanthropic PracticesAbstractAn Analysis of Corporate Philanthropic PracticesAn Analysis of Corporate Philanthropic PracticesI. IntroductionII. Determinants of Corporate Giving Behavior and Testable HIII. Sample Selection and Descriptive DataA. Selection of Reporting FirmsB. Sample CharacteristicsIV. Analysis of Giving Priorities by IndustryVII. Conclusions

References

Table 1Probit Regression: Determinants of Firm Choice to Provide CFirm Reports Charitable Giving DataIndependent VariablesAgency Cost and Monitoring Variables:

Industry Variables:Comparison of Firms with and without FoundationsPanel B) Giving Rates

Panel C) Agency Cost and Monitoring VariablesPanel D) Allocation of Giving (% of total giving)

Table 5Independent VariablesFirm Characteristics:Agency Cost and Monitoring Variables:Ratio of book equity to market equityTable 6

Regression Models of Corporate Cash ContributionsIndependent Variables