For 10 days after Hurricane Katrina, Web portal Yahoo! dedicated its front page to news and information about the disaster. Charities listed on the portal raised $40 million within the first 48 hours after Katrina struck, and an additional $20 million in subsequent weeks. “You could see the ticker rising minute by minute by hitting the refresh button on your screen,” recalls Meg Garlinghouse, director of Yahoo! for Good, the company’s community relations program.

Yahoo!’s Katrina response was not just an isolated charitable impulse. Instead, Yahoo!, the world’s largest online services provider, weaves philanthropy into the fabric of its business. Garlinghouse and her team evaluate hundreds of potential charitable opportunities for Yahoo! every year, with the litmus test for adoption being that “they are somehow related to our core competencies,” she says. Yahoo! for Good then makes charitable giving both easy and personal for visitors to its Web site by organizing causes, supporting e-mail alerts, and letting users personalize their online avatar.

Playing to core competencies while meeting beneficiaries’ needs – as Yahoo! does – is the most effective form of corporate philanthropy, find Heike Bruch and Frank Walter in a fall 2005 MIT Sloan Management Review article. “Only philanthropic activities that both create true value for the beneficiaries and enhance the company’s business performance are sustainable in the long run,” the authors write. To date, however, they find that few corporations have adopted this approach, which they call “strategic philanthropy.”

Bruch, a professor of leadership at Switzerland’s University of St. Gallen, and Walter, a research associate there, base their findings on more than four years of research with seven global companies (including Lufthansa and Tata Steel) and 12 small- and medium-sized enterprises. Using questionnaires and interviews, the authors identified two dimensions that define different approaches to corporate philanthropy. The first dimension, market orientation, is how much an organization’s philanthropic policies are geared toward the expectations of its employees, customers, shareholders, regulating agencies, or surrounding communities. Competence orientation, the second dimension, is how much corporate philanthropy is aligned with the companies’ abilities and core competencies.

By crossing these two dimensions, the authors then pinpointed four different types of corporate philanthropy programs (see chart at TK), ranging from “dispersed philanthropy” which is not clearly defined on either dimension, to “strategic philanthropy,” which is highly responsive to both external market forces and internal competence resources. (The other two types of corporate philanthropy, peripheral and constricted, are high on only one of the two dimensions.)

Strategic philanthropy works best because it allows companies not only to benefit society, but also to learn how to apply their core competencies in new areas, improve employee morale, stimulate customer demand, and enhance their attractiveness in the labor market, the authors write. In other words, strategic philanthropy strikes a balance between meeting the corporation’s needs as well as those of the beneficiaries, says John Coy, who handled John Deere’s contributions for years and now consults to Fortune 500 companies about giving. “Somewhere between pure philanthropy and commercial self-interest,” he says, “lies a strategic approach to being a responsible corporate citizen where a company voluntarily addresses issues important to both society and its business, and at the same time builds valuable goodwill with key stakeholders,” he says.

Garlinghouse articulates the happy medium this way: “The best philanthropy is in the best interest of the company, but will also ultimately make the biggest difference for the world.”