(Illustration by Paul Wearing)
How might companies direct charitable spending when they’re required to donate? In a new paper, two business scholars examine what happened in India when a 2013 law mandated that companies above a certain size or threshold spend at least 2 percent of their net profits on social initiatives. They find that Indian firms’ philanthropic outlays have generally been influenced by the desire to appease important stakeholder groups.
The authors—Aline Gatignon, an assistant professor of management at the University of Pennsylvania’s Wharton School, and Christiane Bode, an assistant professor of strategy at Imperial College London’s Business School—looked at an immense trove of data to determine what causes and how many they prioritized, where firms dedicated funds geographically, and whether they worked directly on causes or partnered with NGOs. Would firms newly subject to this mandate pursue projects that allowed them to use their specialized expertise, thereby perhaps helping nonprofits on related causes? Or would they take the easier route—writing checks to causes and groups, thereby gaining political or social currency among their stakeholders?
Gatignon and Bode used data from the Indian Ministry of Corporate Affairs covering 12,086 firms and 86,755 charitable projects over the period from 2014 to 2017. The data reveal that the majority of the projects funded under the law, 55.7 percent, aimed to solve education and health-care problems, with 6.1 percent going to rural development, 5.6 percent to anti-poverty and anti-hunger work, and 5.1 percent to environmental sustainability. Half of all firms chose to manage their own projects, while 39 percent worked with a nonprofit organization to put their funding to work.
Looking at the data through four separate analytical lenses, Gatignon and Bode found that Indian firms’ choices for corporate social responsibility (CSR) outlays were consistent with an “instrumental stakeholder” approach: Companies were selecting locations, projects, partners, and causes that they felt would make them look the best in front of important stakeholder groups such as investors, customers, and the government. For example, firms prioritized education and health care even in regions where educational and health-care resources were abundant.
The authors also found a missed opportunity: Companies were donating money as legally required but were not matching their donations by contributing knowledge or choosing sectors where they were uniquely qualified to help. In other words, the researchers didn’t find evidence of logistics firms aiding nonprofits with their supply-chain troubles, for example.
“Firms adopt two main CSR strategies: the first and most common has a narrow focus, while the second, pursued by few (typically leading firms and State-owned enterprises), is broader,” the authors write. “While the second leads to stronger differentiation and holds greater potential for social impact, neither strategy leverages firms’ comparative efficiency over nonprofit actors.”
The authors came up with the idea for the research question because India’s CSR law—a “pioneering” mandate unusual around the world—provided a unique trove of corporate filings. The database contained potentially revealing insights on corporate philanthropy in the developing world, an area where scholars “really struggle” to find data, Gatignon says.
The CSR law was an important step for India, “a huge country with a large population but substantial social issues to address,” Gatignon says. “These are the types of regulatory innovations that other countries might be looking at.” Similar legislation around the world could help move corporate money and know-how further into the nonprofit sector.
“This research offers one of the most comprehensive analyses of the patterns of social spending by the thousands of firms affected by India’s 2013 CSR law,” says Ramakrishna Nidumolu, professor of organizational behavior at the Indian School of Business. “The findings are significant because they suggest that CSR spending is typically more to satisfy stakeholders than to leverage the firm’s comparative efficiencies or target the neediest causes.”
Aline Gatignon and Christiane Bode, “When Few Give to Many and Many Give to Few: Corporate Social Responsibility Strategies Under India’s Legal Mandate,” Strategic Management Journal, forthcoming.
Read more stories by Chana R. Schoenberger.