Relationship Between Corporate Foundation Giving and the Economic Cycle for Consumer- and Industrial-Oriented Firms

Abstract

Panel data from 179 corporate foundations over a 9-year period were analyzed to examine how charitable giving was influenced by a recent economic slowdown. The results revealed that foundations sponsored by consumer-oriented firms reduced their support for charitable causes as economic conditions worsened. Foundations sponsored by industrial-oriented firms increased charitable contributions during the economic slowdown. The results were interpreted as being consistent with the proposed motivation for corporate giving. More specifically, it was assumed that charitable giving decisions by foundations sponsored by consumer-oriented firms are consistent with a marketing-related objective to increase sales through corporate philanthropy. Foundations sponsored by industrial-oriented firms were assumed to make charitable giving decisions more from an altruistic perspective. To achieve maximum corporate benefits from charitable donations, it was recommended that corporate foundations develop a giving program that avoids the potential negative consequences associated with reducing foundation giving when the need for charitable contribution increases.

Keywords

foundation giving consumer- and industry-oriented firms motivation for giving economic cycles

The recent downturn in the U.S. economy resulted in severe budget limitations for many nonprofit organizations due to less financial support from various sources such as the government and individual contributors (Strom, 2009; Watkins, 2009). The hardship was further compounded for charitable organizations catering to the needy as the recession created greater demand for their services. A pertinent issue within the domain of corporate social performance pertains to how corporations responded to the increased need for charitable contributions during a time when profits for most corporations were declining.

Collectively, there was a sharp decrease in total corporate giving in 2009 followed by a rebound in 2010 and 2011 (CECP, 2012). However, statistics based on the combined giving from all corporations provide little information about the behavior of individual firms. For instance, the composite data do not provide sufficient information to conclude that charitable giving decreased across all industries or whether the decrease in charitable giving is largely attributable to certain industry sectors.

This investigation examines data at the individual corporate level to examine the relationship between charitable giving through corporate foundations and industry type over a 9-year period from 2004 to 2012. It is proposed that the relationship between corporate foundation giving and fluctuations in the economy is moderated by the motivation for giving.

Giving Programs and Corporate Foundations

Corporations in the United States primarily donate to charitable causes either directly through corporate giving programs or through corporate foundations. Determining the exact amount U.S. corporations give directly to charitable causes through corporate giving programs has proven to be a very challenging task. A number of reputable organizations attempt to assess the amount of direct charitable contributions based on annual surveys. This includes surveys by the Committee Encouraging Corporate Philanthropy, the Foundation Center, the Taft Corporate Giving Directory, The Chronicle of Philanthropy, and Bloomberg Businessweek. The possibility of discrepancies between the amount corporations claim to give and the amount actually given has been a concern of researchers for a number of years (Fry, Keim, & Meiners, 1982).

In addition, there is clearly a lack of consistency in the results reported from the various surveys. For example, even for two surveys that are similar in nature (the Taft Directory and the Foundation Center), discrepancies in the data on corporate giving were observed for 34 of the 191 participating corporations (Seifert, Morris, & Bartkus, 2004). There are a number of reasons for the conflicting data, but most of the discrepancies can be attributed to how giving is defined and measured, and what is included as corporate giving (e.g., assessing gifts in kind, sponsorship of nonprofit events, and employee volunteer work). The lack of a uniform definition of corporate giving not only contributes to differences in the results reported between the various organizations conducting the surveys but also results in measurement error within a single survey as firms use different definitions for charitable giving (Lev, Petrovits, & Radhakrishnan, 2010). Still, the major problem with data obtained through surveys of corporate giving is the self-selection process with respect to participation in the survey.

In contrast to direct corporate giving, data on giving through corporate foundations are readily available. As corporate foundations are nonprofit organizations that support charitable activities and promote social welfare, they are tax exempt. Thus, corporate foundations are required to make their financial records public, which includes the total assets of the foundation, the amount contributed to the foundation by the sponsoring corporation, and the amount given to charitable organizations.

A recent survey which included the participation of 185 of the largest corporations in the United States reported that 82% of the corporations sponsored a foundation and that approximately 37% of all corporate giving was donated through the corporate foundation (CECP, 2012). The Foundation Center (2012) estimated there were approximately 2,700 corporate sponsored foundations which gave a total of US$5.2 billion to charitable causes in 2011.

Although corporate foundations are separate, legal organizations, they generally maintain close ties with the donor company. As opposed to public foundations (e.g., the Safeway and Rite Aid Foundation) which typically receive at least a third of their funding from the general public and grants from the government, corporate foundations rely almost exclusively on contributions from their company sponsor (Foundation Center, 2013).

Decisions regarding the management and distribution of foundations’ funds are made by the foundation’s board of directors which generally consists of 6 to 15 members. In the case of corporate foundations, the board of directors is predominantly staffed by employees of the corporation who are not paid for their participation on the board. In many cases, the CEO or other top executives in the corporation serve on the board and have a significant impact on the decisions made by the corporate foundation (Werbel & Carter, 2002).

As corporate foundations are allowed to maintain assets, the amount of annual charitable giving by foundations is not entirely dependent on the corporation’s financial performance during the year. The right to maintain assets allows corporations the opportunity to make substantial contributions (payins) to the foundation during years of economic prosperity. While some of the funds may be donated (payouts) immediately, the remainder can be maintained as assets by the foundation and invested to grow their endowment for future dissemination during less prosperous economic periods (Petrovits, 2006). Thus, in contrast to direct corporate giving programs, charitable giving through a corporate foundation should be less dependent on the firm’s annual financial performance. Therefore, corporate foundation giving may be impervious to fluctuations in the economic cycle.

Altruistic and Instrumental Motives for Charitable Giving

There has been considerable speculation in the literature as to why profit-making companies would donate large sums of money to charitable causes (J. L. Campbell, 2007; Dennis, Buchholtz, & Butts, 2007; Godfrey, 2005). Generally, motives for corporate giving can be broadly classified as altruistic with the goal of benefiting society or instrumental with the goal of either directly or indirectly improving corporate financial performance (Gautier & Pache, 2015).

The altruistic motive assumes firms make philanthropic contributions for the concern and advancement of human welfare without the expectation of producing any benefits for the firm. This motive is exemplified by Carroll’s (1979) proposal that firms have a philanthropic or discretionary responsibility to engage in socially desirable actions that are beyond the economic, legal, and ethical obligations of the firm. Many credit altruistic giving to the benevolence and integrity values of top management (Choi & Wang, 2007). However, a more recent theory attributes the collective empathy of lower level employees as the primary impetus for altruistic corporate giving (Muller, Pfarrer, & Little, 2014).

Alternatively, a number of perspectives such as the enlightened self-interest, social legitimacy, reaction to institutional pressures, and the strategic approach assume that corporate philanthropy is motivated by self-interest (Gautier & Pache, 2015; Ricks & Peters, 2013). Thus, the expectation is that corporate giving will improve the firm’s financial performance.

Classification of Instrumental Benefits

Research on corporate philanthropy has identified a number of business-related benefits associated with a variety of stakeholders. Several attempts to develop a scheme to categorize the various types of instrumentally motivated corporate philanthropy have been reported in the literature. For instance, corporate philanthropy could be viewed as a means to achieve economic goals (to increase corporate profits) or for political reasons in which corporate philanthropy represents a reaction to institutional and political pressures (Dennis et al., 2007). Alternatively, corporate philanthropy could be categorized as a long-term community-oriented investment or as marketing tool (Gautier & Pache, 2015). Unfortunately, in neither case are the classifications in the typology completely exhaustive or mutually exclusive. For the purpose of the present study, it will be sufficient to simply make a distinction between using corporate philanthropy as a marketing tool versus other forms of corporate philanthropy motivated by community or political interests.

Included in the community/political reasons for corporate giving is the goal of influencing the attitudes of various stakeholders, such as the government, the local community, and the employees of the firm. For instance, the government represents an important stakeholder for businesses as the government has control over a number of factors that influence the business climate, including environmental regulations, trade restrictions, and tax rates. Corporations may use charitable giving as a means to enhance their reputation and nurture political connections with the expectation of being granted a more favorable business climate by the government (Su & He, 2010).

The local community also represents an important stakeholder as businesses cannot flourish in a degraded environment (Porter & Kramer, 2002). Philanthropic activities contributing to the improvement in the local infrastructure, living conditions, and reduction in criminal activity create a favorable climate for businesses. Investing in the local education system ensures a reliable supply of well-trained workers for the community (Sanchez, 2000). Furthermore, investing in the local community enhances the firm’s reputation and increases the firm’s perceived legitimacy and social acceptance by the community.

In addition, corporate philanthropy may have a positive effect on employees. Employees value working for a firm with a highly regarded reputation on social issues (Turban & Greening, 1997). Employee morale, cohesion, and productively are positively related to corporate giving (Brammer & Millington, 2005). Management may also use philanthropy as means to appease workers to avoid complying with union demands in other areas such health care benefits (Miller, 2008).

Research evidence indicates corporate philanthropy is also used in a reactive fashion as a means of repairing a corporation’s damaged image following the detection of fraudulent or socially unacceptable activity. For example, firms may increase philanthropy to mitigate damage to their reputation resulting from unwanted publicity regarding issues such as environmental mishaps or product liability lawsuits (Ricks & Peters, 2013). Moreover, research evidence reveals that firms with a history of poor performance on environmental issues and product safety are more likely to engage in corporate philanthropy (Chen, Patten, & Roberts, 2008).

A more direct approach to improving the firm’s financial performance through corporate philanthropy is to engage in charitable giving as a means to market the firm’s products and services. Corporate philanthropy is often regarded as a marketing tool which may be used to foster favorable attitudes among the general public and develop customer loyalty (Mullen, 1997). In addition, research evidence suggests that corporation may use philanthropy either as a complement or as a substitute for advertising to promote their products and services (Fry et al., 1982; Wang & Qian, 2011).

Relationship Between Giving Motives and Industry Type

It is commonly assumed that corporate philanthropy decisions are not simply influenced by the multiple potential instrumental benefits but also by an altruistic desire to benefit society. Thus, many theoretical models include both an altruistic and instrumental components as the motives for corporate philanthropy (e.g., Dennis et al., 2007). Empirical support for the notion that corporations give to benefit both business and society was provided in a study that examined the relationship between corporate giving and a number of macroeconomic variables for 40 Fortune 500 companies over a 7-year period (Gan, 2006).

Although corporations may give for both altruistic and instrumental benefits, it is generally not assumed that each motive contributes equally in the decision-making process. It would seem reasonable to assume that how much emphasis is placed on instrumental benefits would depend on how much the firm expects to gain through corporate philanthropy. That is, firms that have the highest expectation of financial gains through corporate philanthropy would seem to be more likely to emphasize the instrumental benefits in making corporate giving decisions.

The corporations considered most likely to realize business-related benefits through charitable giving are consumer-oriented firms. Consumer-oriented firms may use philanthropy as a marketing tool to increase the sales of their products or services to individual consumers (Burt, 1983). Conversely, it is assumed that the potential marketing-related benefits associated with corporate philanthropy may be much less for industrial-oriented firms that are less dependent on the attitudes of the general public (Useem, 1988).

The greater emphasis on the use of corporate philanthropy as a marketing tool by consumer-oriented companies has often been alluded to as a potential explanation for differences in the amount of charitable giving by corporations in various industries. For instance, empirical data indicate that retail or consumer-oriented companies make greater charitable contributions (Fry et al., 1982). Empirical evidence also indicates that corporations in high advertising intensive industries such as consumer-oriented companies give more to nonprofit organizations (Zhang, Zhu, Yue, & Zhu, 2010). Similarly, companies with “high name recognition” among the general public tend to give more to charitable causes (D. Campbell & Slack, 2006). These studies suggest that consumer-oriented firms give substantially more to charitable causes than industry-oriented firms and strongly supports the notion that the marketing-related benefits are a primary motive for charitable giving among consumer-oriented firms.

If it is true that the primary motive for corporate philanthropy may differ according to industry type, then how corporations’ responded to the increased need for charitable contributions during a recession may depend on the type of industry. The present study explores the possibility that consumer-oriented firms are more likely to view corporate philanthropy as marketing-related tool. As consumer-oriented companies typically decrease advertising budgets during a recession, it is anticipated that consumer-oriented firms will also decrease charitable giving during an economic slowdown.

As will be addressed more thoroughly in a later section, decreasing charitable contributions during a recession could have severe consequences and negate any positive business-related benefits of corporate philanthropy (Godfrey, 2005). More specifically, if the reduction in charitable contribution leads stakeholders to perceive the corporation as disingenuous in terms of their commitment to charitable causes then corporate philanthropy is unlikely to produce any business-related benefits. Thus, the present study potentially contributes to the existing literature in both theoretical terms with respect to the motives for charitable giving by consumer and industrial-related firms and in practical terms with respect to developing corporate giving strategies that maximize business-related benefits. The following section provides a description of the variables examined in this study and the proposed relationship with charitable giving through corporate foundations.

Hypotheses

Economic Cycle

It is expected that the impact of the economic cycle on corporate philanthropy will depend on the motive for charitable giving. As will be discussed in subsequent sections, it is anticipated that if charitable giving is viewed primarily as a marketing-related tool, then giving is likely to decrease during an economic slowdown when profits and available resources tend to be lower. On the contrary, if giving is heavily based on altruistic reasons, then the amount of charitable donations is likely to increase during an economic slowdown when the need for charitable contributions is greatest. As some corporations are expected to give primarily for the marketing-related benefits while others are expected to base giving decisions more on altruistic reasons, it is anticipated that the conflicting motives will result in no significant main effect of the economic cycle.

Hypothesis 1: There will be no significant relationship between corporate foundation giving and a measure of fluctuations in the economy.

Industry Type

Consumer-oriented firms tend to donate more to charitable causes (Fry et al., 1982). This is generally attributed to the assumption that consumer-oriented firms have more to gain by enhancing their public image through corporate philanthropy. It is therefore anticipated that foundations sponsored by consumer-oriented firms will give significantly more to charitable causes.

Hypothesis 2: The amount of charitable giving by foundations sponsored by consumer-oriented firms will be greater than the charitable giving by foundations sponsored by industrial-oriented firms.

Interaction of Economic Cycle and Industry Type

Of primary importance in this study is the possibility of an interaction between fluctuations in the economy and type of industry. Consumer-oriented firms are expected to primarily give for instrumental benefits, particularly the marketing-related benefits associated with corporate philanthropy. That is, consumer-oriented firms may view corporate philanthropy as an alternative to advertising to promote the company image. It is well known that corporations tend to reduce promotional and advertising budgets during an economic slowdown (Tellis & Tellis, 2009). As promotional/advertising budgets often decrease during a recession, it may be reasonable to expect that consumer-oriented firms will also decrease charitable giving (another approach to promoting the company) when the economy contracts.

Conversely, the marketing-related benefits associated with corporate philanthropy may be much more limited for industrial-oriented firms. Thus, industrial-oriented firms are less likely to view corporate philanthropy as a marketing tool. Consequently, the relationship between advertising budgets and the economic cycle may not be relevant to the philanthropic decisions made by industrial-oriented firms. Therefore, industrial-oriented firms are not expected to decrease charitable giving during the economic slowdown.

As industrial-oriented firms may place less emphasis on the marketing-related objectives, it is possible that corporate giving decisions may be based more heavily on altruistic objectives for industrial-oriented firms. It would seem logical to expect corporate foundations that highly emphasize altruistic objectives would attempt to increase foundation giving during a recession when the need for charitable contributions is greatest. It is therefore anticipated that that foundations sponsored by industrial-oriented firms will increase charitable giving during an economic slowdown.

Hypothesis 3: The relationship between charitable giving by corporate foundations and the economic cycle will be moderated by the type of industry.

Control Variables

Financial Performance

As the recent economic slowdown in the U.S. economy did not have the same degree of adverse impact on all corporations, corporate financial performance is included as a predictor of foundation giving in this study for control purposes. That is, if corporate giving is related to financial performance then corporations in certain industries may give more during a recession than other industries because the recession had a less adverse impact on their financial performance.

The possibility that corporate giving is related to financial performance is consistent with the proposal that corporations are more likely to give when they have abundant or slack resources (Waddock & Graves, 1997). While empirical investigations have not always produced consistent results, the majority of the evidence tends to support the belief that financial success leads to increased corporate giving (see Amato & Amato, 2012; Wang & Qian, 2011). Although past studies have not examined charitable giving over time through foundations, it is anticipated that foundation giving will coincide with the financial performance of the sponsoring corporation.

Corporate Contributions to the Foundation (Payins)

Corporate foundations are almost entirely financially dependent on the sponsoring corporation. Thus, a lack of contributed funds by the sponsoring corporation during an economic slowdown could potentially limit the amount of charitable giving by the foundation. There are several plausible reasons why the amount contributed to foundations could vary by industry type during an economic slowdown.¹ For instance, financial success for consumer-oriented firms may be much more reliant on advertising. If advertising is viewed as crucial for consumer-oriented firms, then consumer-oriented firms faced with diminishing resources during an economic slowdown may decrease contributions to their foundation to maintain budgets for operations that are viewed as more vital.

Another possibility stems from evidence that firms strategically use contributions to corporate foundations as a means to manipulate earnings to achieve financial reporting objectives (Eldenburg, Gunny, Hee, & Soderstrom, 2011; Petrovits, 2006). This may particularly be relevant for consumer-oriented firms due to their higher visibility in capital markets. Consumer-oriented firms tend to attract a larger breadth of ownership in the firm’s stock (Grullon, Kanatas, & Weston, 2004). Consequently, consumer-oriented firms may experience greater stock market pressure during an economic slowdown as market participants form their own expectations with regard to the firm’s financial performance. Consumer-oriented firms may therefore be more likely to engage in real activity manipulation which could result in a reduction in contributions to corporate foundations during economic slowdowns.

As corporate contributions (payins) during an economic slowdown may vary by industry type, the amount corporations contribute each year to their foundation was included as a control variable. Consistent with previous studies (Petrovits, 2006), it is anticipated that contributions to foundations will be greater during economic prosperity when net sales are higher. However, it is not anticipated that contributions will be related to the type of industry of the sponsoring corporation, and thus, the amount of corporate contributions will not provide a possible explanation for the proposed interaction between the economic cycle and industry type.

Foundation Assets

The assets possessed by the foundations could provide another alternative explanation for the hypothesized interaction between economic cycle and industry type. Differences in foundation giving during an economic slowdown could result from the lack of available assets possessed by the foundations prior to the economic slowdown (see Note 1). That is, some foundations may be forced to give less during an economic slowdown due to depleted resources. Thus, differences among industries in terms of their ability to implement long-term plans to ensure that their foundations are adequately funded could provide an alternative account to the proposed motivational hypothesis for the anticipated interaction effect. Thus, foundation assets were included as a control variable. It is anticipated that foundation assets will not account for any of the observed differences between consumer- and industry-oriented firms with respect to charitable giving over the economic cycle.

Social Performance

As previously mentioned, a poor record on social performance is likely to lead to an increase in charitable giving (Gautier & Pache, 2015). Therefore, social performance was included as a control variable. The measure of social performance used in this study was taken from the KLD STATS database. Although a number of shortcomings have been identified with using the KLD database for research purposes, it appears to be one of the most valid measures of corporate social performance (Chen et al., 2008). In addition, the KLD database includes data for a large number of companies, and the database has been widely used in previous research.

Data

Panel data were collected for U.S. company-sponsored corporate foundations over a 9-year period from 2004 to 2012. As the analysis focuses on changes in the amount given over time rather than across companies, it was not necessary to control for variables known to be related to corporate giving that are generally time invariant (such as unionized vs. nonunionized labor).

Dependent Variable

The variable of interest is the dollar amount of charitable giving from year to year for individual corporate foundations. Therefore, the annual reported amount of giving on line 25 of the U.S. Internal Revenue Service (IRS) Form 990 was collected for all Fortune 500 companies that supported a company-sponsored corporate foundation. The IRS forms are publicly available on a number of websites (e.g., Economic Research Institute, 2013). The foundation data were combined for corporations that sponsored more than one foundation. Public, operating, and independent foundations were excluded from the sample. In addition, corporate foundations that did not file an IRS Form 990 for all 9 years were also excluded. A total of 184 corporate foundations met the criteria. The corporate foundation giving data were adjusted for inflation based on the U.S. Department of Labor–Bureau of Labor Statistics Consumer Price Index for all Urban Consumers (CPI-U) with a base year of 1982-1984. As the data exhibited a slight positive skew, the natural logarithms of the adjusted giving data were used in the analysis.

Foundation assets and corporate contributions (payins) were also obtained from the IRS Form 990 for each of the 9 years under investigation. These values were also adjusted for inflation, and the natural logs of the adjusted values were used in the analyses.

Economic Cycle

To measure fluctuations in the economy, the gross domestic product (GDP) percentage growth rates for the years 2004 through 2012 were obtained from the U.S. Department of Commerce. The percentage change in the U.S. GDP dropped from 3.8% in 2004 to −2.8% in 2009 and then increased to 2.8% by 2012.

Industry Type

As in several previous studies of this nature, four-digit standard industrial classification (SIC) codes were used to classify firms as either consumer-oriented firms that sell products and/or services directly to individual consumers or as industrial-oriented firms that primarily engage in transactions with other businesses or with the government (Srinivasan, Lilien, & Sridhar, 2011). Consumer-oriented firms, such as retail stores, manufacturers of consumer products, service providers (finance, insurance, energy, health communications, etc.), were contrast coded 1 for the analysis. The industry-oriented firms, such as mining, primary metals, textile, forestry, chemicals, railroads, were coded negative 1 for the analysis.

Company Financial Performance

A corporation’s financial performance can be measured by a number of variables, including cash flow, return on assets, net profit, and market-to-book ratio. However, studies of a similar nature to the present one have used net sales, because net sales figures can change “relatively quickly” which is a desirable attribute for studies examining the relationship between variables over time (Lev et al., 2010). Thus, annual net sales data were obtained from COMPUSTAT for the years 2004 to 2012. The net sales data were adjusted for inflation and then the natural logs of the adjusted net sales values were used in the analysis.

Social Performance

Based on previous studies with KLD database, the most relevant social performance factors for inclusion in this study were corporate governance, community, employee relations, environment, and product. KLD evaluates corporate performance on each factor based on several items with some of the items representing positive attributes (strengths) of the corporation while others representing negative attributes (concerns). Only the negative attributes were included in this study. An average score for each of the five factors was calculated based on items representing the factor. These scores were then averaged by weighting each of the five factors equally to derive a total social performance score on an annual basis for each corporation included in the study. The analysis was conducted on the average scores and referred to as social concerns. The inclusion of the social concern measure reduced the sample size to 179. The 179 corporate foundations analyzed in this study accounted for over 75% of the total charitable funds donated by all companies sponsoring corporate foundations during 2011.

Results

Table 1 presents the descriptive statistics for the relevant variables by industry type. Values in Table 1 represent the grand mean for all 9 years under investigation. As can be seen in Table 1, nearly twice as many corporations were classified as consumer-oriented firms. The consumer-oriented firms were also over twice as large as industrial-oriented firms in terms of annual net sales. The ratio of annual foundation giving over annual net sales was nearly twice as large for consumer-oriented firms (consumer-oriented firms: 23,262,758 / 36,598,730,000 = .000636; industrial-oriented firms: 5,665,106 / 15,668,510,000 = .000362). Thus, the results are consistent with previous studies demonstrating consumer-oriented firms make larger charitable donations.

Table 1.

Descriptive Statistics.

	Consumer-oriented firms	Industrial-oriented firms
Sample size	118	61
Annual net sales	US$36,598,730,000	US$15,668,510,000
Foundation assets	US$56,981,766	US$29,720,868
Annual corporate contributions	US$21,457,410	US$5,305,681
Annual foundation giving	US$23,262,758	US$5,665,106

As the repeated measures for corporate giving (Level 1) are nested within corporations (Level 2), a multilevel modeling procedure was used to analyze the data. The multilevel modeling procedure is a useful method to account for dependence of residuals due to covariance between the levels in the data. The multilevel modeling procedure is frequently used to analyze hierarchically structured data in many disciplines, including psychology, education, social, and life sciences (West, Ryu, Kwok, & Cham, 2011). Multilevel mixed effects modeling makes it possible to examine within-corporation changes and between corporation variations in giving over time. In this study, the restricted maximum likelihood procedure (or REML method) was used for all models.

Model 1

The random effect, or intercept only, model (null model or unconditional mean model) serves as a baseline model. In this model, no explanatory variables are used. The model partitions the variability in charitable giving into variability between corporate foundations and variability within corporate foundations over time. The basic equation is as follows:

Y_{i j} = γ_{00} + μ_{0 j} + ε_{i j},

where

µ_{0 j} \sim N (0, τ_{00}), ε_{i j} \sim N (0, σ^{2}), and i = 1, \dots, 9; j = 1, \dots, 179 .

The response $Y_{i j}$ is the logarithm of the amount of giving during year i for corporation j. The dependent measure $Y_{i j}$ is expressed as a sum of the overall mean $γ_{00}$ of charitable giving, random effect $µ_{0 j}$ (random deviation of corporation j from the grand mean), and a random error $ε_{i j}$ associated with year i and corporation j. The random subject (corporation) effects $µ_{0 j}$ are assumed to be independent and have a normal distribution with mean 0 and variance $τ_{00}$ . The random errors $ε_{i j}$ , a term associated with the within-corporate variation of corporation j over time, are presumed to be independent and normally distributed with mean 0 and variance $σ^{2}$ . The random variables $µ_{0 j}$ and $ε_{i j}$ are assumed to be independent. The parameters $τ_{00}$ and $σ^{2}$ are the variance components. The results of the analysis for Model 1 are displayed in Table 2.

Table 2.

Parameter Estimates for Four Models With Charitable Giving as the Dependent Measure.

	Parameters	Model 1		Model 2		Model 3		Model 4
		Random effects		Control variables		Main effects		Interaction effect
		Estimate	SE	Estimate	SE	Estimate	SE	Estimate	SE
Fixed effects
Intercept	$γ_{00}$	14.674**	.1145	14.501**	.1112	14.448**	.1132	14.4516**	.1131
Net sales	$γ_{10}$			0.4338**	.0775	0.4159**	.0769	0.4200**	.0775
Assets	$γ_{20}$			0.1605**	.0309	0.1598**	.0308	0.1573**	.0305
Contributions	$γ_{30}$			0.0069	.0039	0.0072	.0039	0.0075	.0042
Social concerns	$γ_{40}$			0.3251	.1862	0.2937	.1865	0.2768	.1880
GDP	γ₅₀					−0.0082	.0052	−0.0148**	.0055
Industry type	γ₀₁					0.2061*	.0943	0.1825	.0938
GDP × Industry	γ₅₁							0.0211**	.0054
Variance components
Var(µ_0j)	τ₀₀	2.316**	.2487	1.932**	.2597	1.881**	.2524	1.874**	.2527
Var(µ_1j)	τ₁₁			0.5313**	.1638	0.5082**	.1568	0.5225**	.1601
Var(µ_2j)	τ₂₂			0.0955**	.0164	0.0939**	.0162	0.0923**	.0159
Var(µ_3j)	τ₃₃			0.0013**	.0003	0.0013**	.0003	0.0013**	.0003
Var(µ_4j)	τ₄₄			1.7487*	.967	1.7004*	.9693	1.777*	.9897
Covariance components
Cov(µ_0j, µ_1j)	τ₀₁			0.6381**	.1754	0.5853**	.1685	0.5952**	.1714
Cov(µ_0j, µ_2j)	τ₀₂			−0.1796**	.0489	−0.1770**	.0482	−0.1684**	.0475
Cov(µ_0j, µ_3j)	τ₀₃			−0.0032	.0058	−0.0043	.0058	−0.0052	.0058
Cov(µ_0j, µ_4j)	τ₀₄			0.9014*	.3736	0.8780*	.3682	0.8964*	.3719
Cov(µ_1j, µ_2j)	τ₁₂			−0.1351**	.0407	−0.1325**	.0398	−0.1302**	.0395
Cov(µ_1j, µ_3j)	τ₁₃			0.0041	.0044	0.0039	.0043	0.0041	.0043
Cov(µ_1j, µ_4j)	τ₁₄			0.5488*	.2763	0.5027	.2697	0.5190	.2756
Cov(µ_2j, µ_3j)	τ₂₃			−0.0079**	.0017	−0.0078**	.0017	−0.0079**	.0017
Cov(µ_2j, µ_4j)	τ₂₄			−0.3285**	.0959	−0.3181**	.0953	−0.3130**	.0942
Cov(µ_3j, µ_4j)	τ₃₄			0.0500**	.0117	0.0489**	.0117	0.0474**	.0116
Var( $ε_{i j}$ )	σ²	.2750**	.0103	0.1391**	.0065	0.1393**	.0066	0.1374**	.0065
−2 log likelihood		3,270.4		2,651.1		2,655.8		2,649.5

Note. GDP = gross domestic product.

p < .05. *p < .01.

Both estimated variance components ( $τ_{00} = 2.316$ and $σ^{2} = . 2750$ ) are significantly different from 0 (p < .0001). These results demonstrate that a multilevel modeling procedure is warranted. The ratio of the variance components suggests that variation between corporations is about 8.42 (2.3159 / 0.275) times as much as the variation within corporations. The estimated intraclass correlation coefficient (ICC) provides an alternative perspective. The ICC is equal to .894 (2.316 / [2.316 + 0.275]), indicating individual differences in corporate foundations account for nearly 90% of the total variation in charitable giving. For Model 1, the model fitting criterion is −2 log likelihood = 3270.4. The null model likelihood ratio test statistic is χ² = 2831.49 (p < .0001), which indicates a significant improvement of the model fitting criterion over the model with random subject (corporation) effect µ_0j. Thus, if the random intercepts µ_0j were not included in the model, the fitting criterion would have been −2 log likelihood = 3270.4 + 2831.49 = 6101.89.

Model 2

The second model includes the control variables net sales (Sales), foundation assets (Asset), corporate contributions to the foundation (Con), and social concerns (Soc) as concomitant variables. Model 2 is as follows:

Y_{i j} = α_{i j} {+ β}_{i j} + ε_{i j},

Where

α_{i j} = γ_{00} + γ_{10} {Sales}_{i j} + γ_{20} {Asset}_{i j} + γ_{30} {Con}_{i j} + γ_{40} {Soc}_{i j},

β_{i j} = µ_{0 j} + μ_{1 j} {Sales}_{i j} + μ_{2 j} {Asset}_{i j} + μ_{3 j} {Con}_{i j} + μ_{4 j} {Soc}_{i j} .

The response $Y_{i j}$ is decomposed into the fixed effect component $α_{i j}$ random effect component $β_{i j}$ and random error $ε_{i j}$ The variable ${Sales}_{i j}$ is the centered log sales (log sales minus the average of all log sales) of year i and corporation j, while ${Asset}_{i j}$ is the centered log assets (log assets minus the average of all log assets) of year i and corporation j, ${Con}_{i j}$ is the centered log corporate contribution (log contribution minus the average of all log contributions) of year i and corporation j, and ${Soc}_{i j}$ is the centered social concerns. The fixed effect $α_{i j}$ is a simple linear regression of giving on net sales, assets, contributions, and social concerns. The parameter $γ_{00}$ is the overall mean of log charitable giving. The regression coefficients represent the overall relation of giving and $γ_{10}$ net sales, $γ_{20}$ assets, $γ_{30}$ contribution, and $γ_{40}$ social concerns. The random regression line $β_{i j}$ is the deviation of corporation j from the fixed overall regression line $α_{i j}$ The term $ε_{i j}$ is the random within-company errors, which is assumed to be independent of $β_{i j}$ , and have normal distribution with mean 0 and variance $σ^{2}$ . The random intercept µ_0j and slopes µ_1j, µ_2j, µ_3j, and µ_4j are jointly normal with mean 0 and variances $τ_{k k} = {Var(μ}_{k j})$ , k = 0, . . . , 4, and covariance $τ_{k k'} = τ_{k' k} = Cov (μ_{k j}, μ_{k^{'} j})$ , k, k′ = 0, . . . , 4. The unstructured covariance approach was used in this study to estimate the variance and covariance matrix.

The results in Table 2 reveal the fixed effects of control variables: net sales and foundation assets are statistically significant (net sales: slope γ₁₀ = .4338, p < .0001; assets: slope γ₂₀ = .1605, p < .0001), while the fixed effects of corporate contributions and social concerns are not statistically significant (contributions: γ₃₀ = .0069, p = .0743; social concerns: γ₄₀ = .3251, p = .0810). The estimated within-corporation variance over the years (σ²) decreased by 49.4% ([.2750 − .1391] / .2750), which represents a statistically significant reduction from Model 1 (p < .0001). Thus, the control variables account for 49.4% of the unexplained within-company variation in Model 1. In addition, there was a significant reduction (3270.4 − 2651.1 = 619.3) of the −2 log likelihood fitting criterion which confirms a significant relationship between the control variables and foundation giving. The null model likelihood ratio test statistic associated with the introduction of the four control variables is χ² = 2412.7 (p < .0001).

The estimated variance components of the random regression coefficients are τ₀₀ = 1.932, τ₁₁ = 0.5313, τ₂₂ = 0.0955, and τ₃₃ = 0.0013 (all ps < .0001), and τ₄₄ = 1.7487 (p = .0353) are all significant. Thus, the random intercept µ_0j and slopes µ_kj, k = 1, . . . , 4, in the company level regression of giving on net sales, foundation assets, corporate contributions, and social concerns vary significantly around the mean regression line $α_{i j}$ .

Model 3

In Model 3, GDP is added as a fixed effect to assess the average dependence of giving on GDP over time. Model 3 also includes industry type classified by the SIC codes as a dichotomous variable, coded as +1 for consumer-oriented firms and −1 for industrial-oriented firms. Model 3 is as follows:

Y_{i j} = α_{i j} {+ β}_{i j} + ε_{i j},

where

α_{i j} = γ_{00} + γ_{10} {Sales}_{i j} + γ_{20} {Asset}_{i j} + γ_{30} {Con}_{i j} + γ_{40} {Soc}_{i j} + γ_{50} {GDP}_{i} + γ_{01} {SIC}_{j},

β_{i j} = µ_{0 j} + μ_{1 j} {Sales}_{i j} + μ_{2 j} {Asset}_{i j} + μ_{3 j} {Con}_{i j} + μ_{4 j} {Soc}_{i j} .

The values for ${GDP}_{i}$ are centered (GDP in year i minus the average of GDPs over time). As shown in Equation 3, ${GDP}_{i}$ is treated as a fixed independent regression variable with slope $γ_{50}$ Similarly, ${SIC}_{j}$ is treated as a fixed effect explanatory variable with coefficient $γ_{01}$ The definitions and assumptions of other terms and parameters are same as in Model 2.

The results reveal that the estimated coefficient $γ_{50}$ of GDP is −.0082, which is not significant (p value = .1164). Thus, the data are consistent with Hypothesis 1, indicating that corporate foundation giving was not significantly related to fluctuations in the economy. The estimated coefficient of SIC is statistically significant (γ₀₁ = .2061, p value = .0302). This result provides support for Hypothesis 2 and is consistent with previous studies demonstrating that consumer-oriented firms make larger contributions to charitable causes. The inferential results concerning other parameters and effects are consistent with those in Model 2.

Model 4

To test for a possible interaction between the economic cycle (GDP) and industry type (SIC), Model 4 includes the product of GDP and SIC, as illustrated in the following equation:

Y_{i j} = α_{i j} {+ β}_{i j} + ε_{i j},

where

\begin{array}{l} α_{i j} = γ_{00} + γ_{10} {Sales}_{i j} + γ_{20} {Asset}_{i j} + γ_{30} {Con}_{i j} \\ + γ_{40} {Soc}_{i j} + γ_{50} {GDP}_{i} + γ_{01} {SIC}_{j} + γ_{51} {GDP}_{i} \times {SIC}_{j}, \end{array}

β_{i j} = µ_{0 j} + μ_{1 j} {Sales}_{i j} + μ_{2 j} {Asset}_{i j} + μ_{3 j} {Con}_{i j} + μ_{4 j} {Soc}_{i j} .

The interaction effect γ₅₁ of GDP and SIC is fixed. All other parameters in Model 4 are as in Model 3. As can be seen in Table 2, the interaction between GDP and industry type is significant (γ₅₁ = .0211, p < .0001). The interaction is illustrated in Figure 1. Figure 1 provides a graph of the fitted values for consumer- and industrial-oriented firms. Because consumer-oriented firms gave significantly more than industrial-oriented firms, the fitted values in Figure 1 have been centered. By centering the fitted values, the graph lines for both consumer- and industrial-oriented firms can be easily compared on the same scale in a single graph. Figure 1 illustrates the centered fitted values were highest in 2008 and 2009 for industrial-oriented firms, suggesting industrial-oriented firms gave the most during the 2 years in which the GDP was at its lowest points. For consumer-oriented firms, the centered fitted giving values indicate a substantial decline in giving during 2009 when the GDP was at its lowest point. Therefore, the data support Hypothesis 3.

Figure 1.

Centered fitted log values for corporate foundation giving by industry type.

Discussion

Consistent with the existing literature, consumer-oriented firms made larger charitable donations through their foundation than industrial-oriented firms (Fry et al., 1982; Useem, 1988; Wang & Qian, 2011). This result is typically attributed to the assumption that consumer-oriented firms are more likely to realize marketing-related benefits through charitable giving.

There was not sufficient evidence to conclude that fluctuations in the economy as measured by the GDP were related to foundation giving. Rather, the relationship between GDP and foundation giving was moderated by the type of industry. The interaction between GDP and type of industry was the result of a decrease in foundation giving by consumer-oriented firms and an increase in foundation giving by industrial-oriented firms during the economic slowdown.

It does not appear that the interaction between economic cycle and industry type can be attributed to financially related factors. That is, a significant interaction was observed between the fluctuations in the economy and industry type after accounting for differences in the control variables examined in this study which included net sales, corporate contributions to the foundation, and foundation assets. As financial constraints do not appear to provide a plausible account for the observed differences in foundation giving between consumer- and industrial-oriented firms, then it would appear that the observed differences resides in the decision-making process by the foundations’ board of directors.

For consumer-oriented firms, the evidence indicates that foundations chose to decrease corporate giving during the economic slowdown. The foundations sponsored by consumer-oriented firms are assumed to view charitable giving primarily as a marketing tool to promote the corporation. Empirical evidence has shown that corporations decrease their advertising and promotional budgets during economic slowdowns (Tellis & Tellis, 2009). Thus, it seems logical to expect that if charitable contributions are viewed primarily as a means of promoting the corporation, then charitable contributions might also decrease during an economic slowdown, which is consistent with the results observed in the present study.

Although it may be optimal to reduce advertising budgets during a recession (Srinivasan et al., 2011), there are potentially a number of negative consequences uniquely associated with reducing charitable giving during a recession. More specifically, it is doubtful that consumers’ perceptions of the corporation are adversely affected by a reduction in advertising during a recession. Conversely, there are several reasons why a decrease in corporate charitable giving during an economic slowdown could be considered imprudent if the corporation hopes to achieve business-related objectives through corporate philanthropy.

To achieve business-related benefits through corporate philanthropy, it is considered vital that relevant stakeholders perceive that the corporation is genuinely and sincerely concerned about the social causes they support (Castaldo, Perrini, Misani, & Tencati, 2009). Survey studies have shown that consumers, financial investors, and potential employees are favorably impressed by corporations that are perceived to be sincere in their devotion to social causes (Porter & Kramer, 2002; Ricks & Williams, 2005). However, if corporate giving is merely viewed as an attempt to improve the company’s bottom line, then it is unlikely that charitable giving will result in any strategic benefits for the company. It has even been suggested that if corporate giving is perceived as a blatant attempt at ingratiation or is not authentic, then corporate philanthropy may have negative consequences (Godfrey, 2005).

It is therefore of utmost importance for corporations to appear to be genuine in their support of charitable causes. A corporation that reduces foundation giving when the need for charitable contributions is greatest would seem to risk the possibility that the stakeholders may view their involvement with charitable causes as disingenuous. Once stakeholders adopt the view that charitable contributions by a corporation is merely an attempt to improve the corporation’s bottom line, future charitable contributions are unlikely to produce significant corporate benefits (Godfrey, 2005; Ricks & Williams, 2005). The consequences of reducing charitable contributions or terminating a partnership with a charitable organization during a recession may go beyond simply a failed attempt to use philanthropy as a means to enhance the corporate image. Recent research has shown that the termination of a partnership with a charitable organization is likely to result in unfavorable consumer attitudes and a decrease in future patronage (Ruth & Strizhakova, 2012).

Although it may seem necessary for corporations to reduce charitable giving as sales decrease, evidence from the present study suggests that industrial-oriented firms were able to tap into their endowment to increase their level of charitable giving through corporate foundations even as their net sales decreased. It seems unlikely that the increase in corporate philanthropy by industrial-oriented firms could be attributed to marketing-related objectives. Industrial-oriented firms generally have little to gain by using corporate philanthropy as a marketing tool. Furthermore, promotional/advertising expenditures typically decrease rather than increase during an economic slowdown. It also seems unreasonable to assume charitable giving increased during the recession for community/political reasons. In the case of increased charitable giving as a means to repair a damaged corporate image, the present study included a measure of social concerns as a control variable. It would also seem unlikely that increased corporate philanthropy during the recession could be attributed to corporate benefits associated with the firm’s employees. The challenge of attracting and maintaining qualified personnel is likely to decrease rather than increase during an economic slowdown. Similarly, increased corporate philanthropy during an economic slowdown for government-related objectives would also seem unlikely. Rather than placing more restrictions on businesses, governments typically try to improve the business climate during a recession to stimulate the economy. The fact that federal contract expenditures were highest in 2008 and 2009 (National Contract Management Association, 2013) supports the notion that the federal government attempted to stimulate the economy and create a favorable business climate during economic slowdowns. Thus, attempts to use corporate philanthropy to influence important stakeholders such as the firm’s employees or the government seem less of a necessity during a recession.

It would appear that the most likely explanation for the increased giving by industrial-oriented firms during the economic slowdown is that charitable giving is highly motivated by altruistic objectives. Thus, if the primary objective of charitable giving is to benefit society, then it seems logical that corporations would make every effort possible to maintain a consistent level of giving or increase charitable contributions when the level of charitable need is greatest.

The increased giving by industrial-oriented firms does not imply that their commitment to charitable giving is strictly motivated by altruistic objectives. Given the vast array of potential benefits associated with corporate philanthropy, it is likely that industrial-oriented firms are also motivated for instrumental benefits. It is even possible that industrial-oriented firms increased charitable giving during the recession because they realize the greatest benefits of charitable giving may be achieved by giving when the need for charitable contributions is greatest. That is, industrial-oriented firms may realize that increasing charitable giving when the level of charitable need is greatest will likely enhance their reputation as a corporation that sincerely cares about social causes.

In summary, how corporations responded to the increased need for charitable contributions during an economic slowdown appears to depend on the type of industry. Foundations sponsored by industrial-oriented firms increased charitable giving during the economic slowdown. For consumer-oriented firms which would appear to have the most to gain in terms of business-related benefits through corporate philanthropy, the amount of charitable giving decreased as the economy declined. Thus, the collective decrease observed across all industries may be largely attributable to the decrease in giving by consumer-oriented firms.

If one of the primary goals of corporate foundation giving is to achieve financial benefits, it would seem advisable to avoid at all cost the necessity to reduce giving during an era when the level of charitable need is greatest. Reducing charitable contributions during a recession is likely to influence how stakeholders view the corporation’s motive for charitable giving. A reduction in corporate foundation giving could have a negative impact on attitudes of relevant stakeholders, which could have implications regarding future sales, risks, and investments, along with the hiring and productivity of employees (Orlitzky, 2008). By adopting a strategy that ensures a consistent level of foundation giving over fluctuations in the economy, corporations could avoid the negative consequences associated with a reduction in charitable contributions. Perhaps most importantly from a societal viewpoint is that if corporate foundations can maintain a consistent level of giving, then nonprofit organizations would have a reliable source of revenue during times when the need for charitable contributions is greatest.

Footnotes

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The authors received no financial support for the research, authorship, and/or publication of this article.

Notes

Author Biographies

Dane K. Peterson (PhD, Southern Illinois University) is a Dean’s distinguished research professor at Missouri State University. His current research interests include corporate social responsibility, business ethics, corporate philanthropy, and human decision processes. His articles have appeared in journals such as Business & Society, Journal of Applied Psychology, Journal of Business Ethics, Journal of Business & Psychology, and Organizational Behavior and Human Decision Processes.

Yingcai Su (PhD, University of North Carolina at Chapel Hill) is a professor of statistics at College of Natural and Applied Sciences, Missouri State University. His research interests focus on applications of linear statistical models, statistical inference for stochastic processes, and Monte Carlo methods. His articles have appeared in journals such as Annals of Institute of Statistical Mathematics, Genetic Resources and Crop Evolution, Multivariate Analysis, Statistical Inference for Stochastic Processes, Statistica Sinica, and Stochastic Processes and Their Applications.

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