Chapter 3: Philosophy of corporations, and the role of corporate community investment

In this section:

SNAPSHOT

Australian concepts of the role of corporations are drawn from Europe and the USA. Historically, in Europe, companies were licensed by the Crown and have traditionally worked with State and other social institutions. The USA has an historical focus on property rights and limited government, but strong obligations of citizenship. Each tradition includes inherent social obligations, which have been reflected in corporate behaviour.

In the USA concern developed about the economic power of managers as distinct from owners, including the way that power was used in communities. Milton Friedman (and some current commentators) claimed that the use of corporate resources for social purposes rather than maximising returns to ‘owners’ was inappropriate. At the other extreme some writers have suggested shareholders should rank only alongside, and not in precedence to other stakeholders.

Mainstream corporate thinking and practice reconciles these notions with the view that responding to the needs and interests of stakeholders, including through community investment, can be a means to optimising stakeholder returns in the longer term.

Recent public inquiries have explored public policy frameworks for CSR and corporate community investment. They have concluded that it would be inappropriate for governments to mandate CSR activity,and that companies and securities regulation do not inhibit corporate engagement in these activities. Current thinking supports the current bipartisan view that the government’s role should be limited to enabling, facilitating and in some cases partnering.

Over time there has been a trend leading companies away from the concept of philanthropy with arms length, ad hoc relationships to beneficiaries, and responding to external requests. Leading Australian companies are pursuing a much more strategic approach to corporate community investment, with business as well as social goals. This approach is the subject of the remainder of this report.

Debate on corporate community investment can trigger a deep reflection on the role of the corporation in society. The Western liberal concept of the corporation is a relatively modern construct. The legal framework of the corporation goes some way to determining its personality, form, privilege and obligations. However, in reality 14 Corporate Community Investment in Australia | 2007 the concept of the firm is manifest in the context of broader philosophical debates, evolving and contested views, changes in relevant environmental factors including globalisation of firms and their ownership, and the dynamics of capital markets.

Business in society

Leaders in Australian business, government and the community have inherited a variety of perspectives about the appropriate role of companies in society.

While the effect can be exaggerated, Australia’s British and European heritage (and current thinking from that quarter) tends to focus on social licence with an expectation of deep government involvement. This stems from the origins of commercial activity within a feudal ordering of society, and then licensing of commercial entities by the Crown — with privileges, including limited liability bestowed upon companies by society. This goes together with the concept of ‘societal obligation’ which has been one driver of the early forms of stakeholder theory, the obligation of firms to consider and to respond to, the needs of employees, customers, suppliers, neighbours, as well as shareholders; privileges are bestowed by the community with a reciprocal responsibility to the community as a whole.

Business philosophy across the Atlantic, however, developed with a subtly different emphasis. Traditional American ideology was essentially individualist, with a premium on property rights, individual endeavour, reward for individual effort and a strong distrust of the state and social control.

Social wellbeing was based on the individual’s strong obligation of citizenship. Those who succeeded in free markets had an obligation as citizens to give back to the community through individual philanthropy and, as the corporate world evolved, corporate philanthropy.

The distinctions between the British and US business ideologies are symbolised by language in statements of philosophy and other ways by corporations. For example, US companies commonly use the language of ‘corporate citizenship’ in documents or commentary in reports, while Europeans are more likely to use the language of sustainability or ‘stakeholder’.

In reporting on a CSR survey of CEOs in 2006, the US-based Conference Board said:

…sustainability is widely used and accepted in Europe, especially
by large industrial companies. In the United States the citizenship
term has a long pedigree of use for corporate philanthropic and
community activity…¹¹

The classical theory of the firm captures the American concepts of risk capital, limited role of government and the primacy of shareholders in free and open markets. Corporate community investment in the US, for example, was symbolised by the individualist philanthropy of the Carnegie, Mellon and Rockefeller families as citizens in an environment in which the government is kept at bay.

The classical model of the firm was challenged in the USA. Small owner controlled enterprises were agglomerated into major public companies (for example Chevrolet, Oldsmobile, Packard and Buick, were incorporated as General Motors). Owners became increasingly less engaged in daily decisions and were perceived to become more like passive investors.

The view developed that professional managers, as distinct from the owners (with their capital at risk), had accumulated excessive economic power, and were exercising this power to indulge their own personal interests and values in the community and elsewhere. This included managerial patronage, with shareholders’ funds, of favourite causes. Pet projects, for example, in the arts or sports were indulged, without the constraints of profit maximisation or the preferences of the disempowered ‘owners’ of the capital.

This led to an early American version of stakeholder theory regarding companies responding to societal claims according to management’s judgements. Professional managers were seen to be effectively trading off the interests of various stakeholders according to their judgements or the strength of pressures.

It was in the midst of this discussion that Nobel Laureate Milton Friedman reasserted the classical model with his well known statement:

In a free enterprise, private property system, a corporate executive
is an employee of the owners of the business. He has a direct
responsibility to his employers [ie. owners]. That responsibility is to
conduct the business in accordance with their desires, which generally
will be to make as much money as possibly while conforming to
the basic rules of society… Insofar as his actions in accord with his
‘social responsibility’ reduce returns to stockholders, he is spending
their money. Insofar as his actions raise the price to customers, he is
spending the customer’s money. Insofar as his actions lower the wages
of some employees, he is spending their money.¹²

The implication was that if executives used their time at work, and other company resources (as distinct from their own time and resources) for social purposes, they were in effect imposing a tax on those with interests in the enterprise and took it upon themselves to decide how this tax would be spent.

There was also a reaction against corporate social involvement following the Great Society program in the 1960s when US President Lyndon Johnson turned to the corporate sector to lead in such sensitive areas as urban renewal, high school adoption programs and community programs.

Results of this 1960s surge of business community activism in social planning can provide lessons for today:

business lacked the experience to take the lead on social issues; managerial solutions failed because they did not take into account real community needs, or were resented as misconceived or paternalistic by those they were trying to help;
anti-business forces resented corporate sector involvement and distrusted
their motives;
there was concern that business was assuming a quasi-political role in
deciding social priorities, and was without social or political accountability;
some in business felt this was a distraction from their proper function of
generating community prosperity through more traditional business activity.

Most major Australian companies would respond to Friedman that he is inappropriately perceiving resources spent on social amelioration as a zero sum game. Community investment can generate returns to all stakeholders and when properly conceived is not inconsistent with optimising long-term financial returns. The complaints against the Great Society initiatives are these days negated by companies working in partnerships with non-profit organisations close to the social market place.

Misguided virtue?

Contemporary critics of corporate social investment do need to be heard. Perhaps the boldest and most articulate is Professor David Henderson, CMG, former chief economist of the OECD, Reith Lecturer, and academic-at-large. His paper ‘Misguided Virtue: False Notions of Corporate Social Responsibility’ (see extracts from executive summary at Box 3.1) is a version of the Friedman position that responds to contemporary circumstances. His view is basically that modern corporate approaches to CSR are revolutionary; are a response to anti-capitalist forces; show a lack of understanding of the underlying social role of profits and the market system; and reflect appeasement or at least collaboration with the opponents of our private enterprise system. In particular he is hostile to ‘new tripartism’ involving NGOs (who, he says, lack legitimacy) in governance. The executive summary concludes with an attack on companies that are at the forefront of the CSR and community investment movement.

Taking the path of CSR is often presented as a way of disarming
opposition to globalisation and capitalism, by giving them a ‘human
face’. Its supporters show little awareness that the case for private
business derives from its links with competition and economic
freedom. Instead, they mistakenly identify defence of the market
economy with making business more popular and more respected
though meeting ‘societies’ expectations’…

CSR does not stand alone: it forms one element of a new millennium
collectivism. Its adoption would reduce competition and market
freedom, and undermine the market economy. The commitment to it
marks an aberration on the part of the business concerned, and its
growing hold on opinion generally is a matter for concern. ¹³

Box 3.1: ‘Misguided virtue: False notions of corporate social responsibility’

(Extracts from Executive Summary)

While issues concerning the social responsibilities of businesses have long been the subject of debate, today’s conception of Corporate Social Responsibility (CSR) marks a new departure.
CSR is a radical doctrine. It embodies a new and wider conception of the role of private business and the way in which it should be conducted.
CSR is in large part a response to recent outside pressures on businesses, and especially on large multinational enterprises (MNEs). The pressures have come from public opinion generally, and in particular from ‘public interest’ non-governmental organisations (NGOs) which are typically hostile to capitalism and the market economy.
CSR holds that businesses should assume a leading role in making the world a better place: they should demonstrate corporate citizenship. This is taken to mean endorsing and pursuing the objective of sustainable development. Sustainable development is seen as having three distinct dimensions — economic, environmental and social. Hence businesses should set goals, measure their performance, and have that performance independently audited, in relation to all three. CSR supporters presume, mistakenly, that the notion of sustainable development is well defined and universally agreed.
CSR involves the voluntary adoption by businesses of broader objectives, more complex procedures, and more exacting standards. To this extent it would tend to impair enterprise performance, with effects on both costs and revenues, short-run and long-run. These effects are played down by its supporters.
CSR is portrayed as a means to maintaining and increasing enterprise profits, on the grounds that failure to adopt it will bring loss of reputation in society as a whole, and among customers and employees in particular. Profitability is said to depend on meeting what are represented as ‘society’s expectations’. These expectations are treated as given and legitimate, even when they reflect anti-business attitudes and convictions…
[Companies] are apt to practice diplomatic silence and to make unwarranted admissions. The emphasis is on appeasement of critics and compliance with ‘society’s expectations’. Whether this is responsible conduct is open to doubt.
Many advocates of CSR, including spokesmen for large MNEs, show a lack of understanding of the rationale of a market economy and the role of profits within it. Like many of their critics, they want to see capitalism made anew. They therefore welcome outside pressures for the adoption of CSR. They are collaborators as well as appeasers…
Some pro-CSR business leaders, business organisations and commentators have endorsed the naive idea that a ‘new tripartism’ has arisen on the world scene: businesses, governments and selected NGOs now supposedly share responsibility for strengthening ‘global governance’. This reflects the salvationist illusion that globalisation has transferred power from governments to business. It also confers on businesses and NGOs alike a status which they have no rightful claim to, since they are neither elected nor politically accountable…
When as is probable the adoption of CSR impairs enterprise performance, the businesses that have taken this course have a strong interest in having their rivals follow suit. They can try to mobilise public opinion in this cause, or lobby for government regulations to be imposed on all: both courses are open. In either case, the effect is to limit competition and hence to weaken the performance of the economy as a whole. The system effects of CSR, as well as the enterprise effects, will tend to make people in general worse off…
Taking the path of CSR is often presented as a way of disarming opposition to globalisation and capitalism, by giving them a ‘human face’. Its supporters show little awareness that the case for private business derives from its links with competition and economic freedom. Instead, they mistakenly identify defence of the market economy with making businesses more popular and more respected, through meeting ‘society’s expectations’ by endorsing and giving effect to current radical proposals for change.
CSR does not stand alone: it forms one element of new millennium collectivism. Its adoption would reduce competition and economic freedom, and undermine the market economy. The commitment to it marks an aberration on the part of the businesses concerned, and its growing hold on opinion generally is a matter for concern.

From David Henderson CMG, ‘Misguided Virtue: False Notions of Corporate Responsibility’,
Institute of Economic Affairs, London, 2002.

As with Friedman’s ideas, there are ‘strawman’ elements to the argument that social responsibility or community investments are negative to corporate and subsequent community interests, and take place in a zero sum game. Most corporate proponents of CSR, including community investment, still hold strongly to the primacy of shareholder and believe that when managed appropriately, CSR does not compete with long-term financial returns. This was characterised by the term used in our 2000 report and still current: ‘enlightened self-interest’. Even the most passionate supporters of community investment interviewed for this report remain firmly of the view that the most useful business contribution to the community is to produce goods and services in a free market environment generating best possible returns to shareholders. This community contribution is easily demonstrated in the generation of employment, payment

of taxes, production of the goods and services the community needs, return on savings for superannuants, investment and economic advancement in developing countries and general community prosperity.

There is an overwhelming view, with varying levels of sophistication, that a business case exists for not only acting responsibly with an eye to community expectations, but that significant investment in the social wellbeing of communities is aligned with, and increasingly integral to, corporate economic success.

While there continues to be a broad spectrum of opinion in the corporate community from Friedmanite to ‘the corporation as a social activist’, most senior executives of public companies would endorse the words of Chip Goodyear, CEO of BHP Billiton:

The debate around the role of corporations in the community versus
their role in maximising shareholder profits seems to fire up again
and again. What surprises me is that a debate exists at all. The
business case for corporate social responsibility is clear. For BHP
Billiton, corporate social responsibility isn’t a case of a stockholder
versus stakeholder argument, but is a critical part of maximising
shareholder returns. Simply, corporate social responsibility is in
the best interests of our shareholders and is fundamental to profit
creation and sustainability. ¹⁴

The stakeholder corporation

Subtle distinctions between US and European notions of the role of corporations in society were noted above. European based multinationals, including those with subsidiaries in Australia, are more likely than US companies to work with governments, align with government based agencies such as those in the UN, develop global partnerships with NGOs, or work in collaboration with other corporations in collective efforts.

Most Australian companies still relate more closely to the American paradigm, though companies in the finance and resource sectors — highly sensitive to global reputations, global endorsement, and prone to international NGO interest and regulation — are more inclined to join in UN and other international collaborations and structured, formulaic, CSR commitments.

Some recent academic thinking in the USA has challenged ‘shareholder primacy’ with ‘stakeholder’ theory of the firm.

Post, Preston and Sachs recently developed a most articulate presentation of the stakeholder theory was developed by in Redefining the Corporation: Stakeholder Management and Organizational Wealth. This book observes the global practice of three major companies, Shell, Motorola and Cummins Diesel:

[The book] presents a view of the corporation quite different
from its medieval origins — in which its social purpose was its
dominant consideration — and also different from both the model
of comprehensive social control by government and the currently
prominent ‘ownership’ model that places primary emphasis on the
private interests of investors. Our analysis is based on the empirical
proposition that ‘corporations ARE what they DO’. The modern
corporation is the centre of a network of interdependent interests
and constituents, each contributing (voluntarily or involuntarily)
to its performance….. as a result of the corporation’s activities.
Our proposed redefinition of the corporation…is based on this
observation.’ ¹⁵

Post et al go on to say:

…share owners hold securities, but they do not own the corporation
in any meaningful sense, nor are they the only constituents vital to its
existence and success. [shareholder dominance]…is inconsistent with
the observed behaviour of successful firms. This leads the authors to
place shareholders in line with other ‘stakeholders’…
The corporation is an organization engaged in mobilising resources
for productive uses in order to create wealth and other benefits…for
its multiple constituents, are shareholders. ¹⁶

Corporate leaders interviewed in the study would not go as far as Post et al. They saw long-term returns as the primary mission of the enterprise while acknowledging legitimate claims on the entity of those who are affected by it, such as employees (including themselves, neighbours, customers and so on). Some acknowledged the reality that a required ‘trade-off’ of various interests against others in the stakeholder community would be arbitrary at times but generally, they claimed, these trade-offs would be made in the long-term interests of shareholders within a complex framework of values, stakeholder pressures and enterprise needs.

Recent inquiries

The mid 2000s saw a significant debate in Australia around the legal and regulatory issues concerning CSR and corporate community investment. Throughout the debate the CSR and community investment issues were frequently, and sometimes confusingly, bundled. Much of the focus was on the role of corporate giving and other support for community wellbeing. A major report was from the Parliamentary Joint Committee on Corporations and Financial Services Inquiry into Corporate Responsibility and Triple-bottom-line

Reporting. The inquiry received submissions from corporations, associations, academic bodies and individuals reflecting a range of views on issues such as directors’ duties; whether corporate responsibility reporting should be mandatory; and whether regulation was required to increase responsible corporate behaviour. The committee heard evidence that major companies, and the Business Council of Australia believed mandatory reporting would lead to a ‘tick-the-box’ culture of compliance. Submissions also posited that directors’ duties already accommodate ‘enlightened self-interest’ (where directors consider key stakeholder interests, other than shareholder’s, that are relevant to the company). The committee’s recommendations included that mandatory approaches to regulating directors’ duties and sustainability reporting were not appropriate. The committee also recommended that more options be considered to encourage uptake and reporting of corporate social responsibility in Australia and suggested several ways in which the government could facilitate corporate community investment initiatives. Key recommendations are covered in further detail in Box 3.2.

Box 3.2: Key recommendations of the Parliamentary Joint Committee on corporations and financial services inquiry into corporate responsibility, 2005–2006

From 2005 to 2006, the Parliamentary inquiry received more than 140 submissions from corporations, associations, academic bodies and individuals
— the highest number of submissions to an inquiry of the committee over the past decade. The committee’s report, delivered in June 2006, contained twentynine recommendations, including the following:

that the Corporations Act 2001 permits directors to have regard for the interests of stakeholders other than shareholders, and recommends that amendment to the directors’ duties provisions within the Corporations Act is not required;
that sustainability reporting in Australia should remain voluntary;
that each company auditor on an annual basis: review the extent to which companies are making non financial disclosures in their Operating and Financial Reviews; and make recommendations to the company board regarding the adequacy of the disclosures to meet the evolving needs of shareholders, and the wider capital market in order to assess and value material non-financial performance, risk profile and risk management strategies;
that it is premature to adopt the Global Reporting Initiative Framework as the voluntary Australian sustainability reporting framework; and that the Australian Government continue to monitor the acceptance and uptake of the Global Reporting Initiative Framework, both nationally and internationally, with a view to its suitability for a voluntary Australian sustainability reporting framework;
that the Australian Stock Exchange Corporate Governance Council provide further guidance to principle 7 of the ASX Council’s Principles of Good Corporate Governance and Best Practice Recommendations to the effect that companies should inform investors of the material non-financial aspects of a company’s risk profile by disclosing their top five sustainability risks; and provide information on the strategies to manage such risks;
that the Australian Government provide seed funding to establish an organisation, the Australian Corporate Responsibility Network, to be modelled on the United Kingdom initiative Business in the Community;
that investors, stakeholders and relevant business associations should encourage companies to include long-term (beyond a three to five year timeframe) corporate responsibility performance measures as part of the remuneration packages of company directors, executive officers and managers;
that where appropriate, the Australian Government facilitate and coordinate the participation of Australian corporations in international corporate responsibility initiatives.
that as a way of facilitating greater uptake of sustainability reporting, the Australian Government should examine the feasibility of introducing inflated write-off arrangements for the year-one costs of initiating sustainability reports, to assist companies that commence sustainability reporting for the first time; and
that the Australian Government consider options for providing regulatory relief to corporations that voluntarily undertake specified corporate responsibility activities.

Source: Parliamentary Joint Committee on Corporations and Financial Services, ‘Corporate responsibility: Managing risk and creating value’, June 2006, available for download at http://www.aph.gov.au/senate/committee/corporations_ctte/corporate_responsibility/

The Corporations and Markets Advisory Committee (CAMAC) also conducted an inquiry into the social responsibility of companies. It looked into legal issues around duties of directors and corporate disclosure to examine any inhibitors to CSR and community investment activities. The sixty-one submissions received by the committee covered a range of views. Most agreed that current legislation provides company directors with flexibility to take into account the interests of stakeholders and the broader community. On the issue of corporate disclosure, some submissions supported the view that the existing mix of voluntary and mandatory non-financial reporting was sufficient. Other submissions considered the current level of disclosure inadequate and that mandatory reporting of environmental and social considerations should be introduced. Further information on the background and key conclusions is contained in Box 3.3.

Box 3.3: Corporations and market advisory committee inquiry, 2005–2006

In May 2005, the Parliamentary Secretary to the Treasurer referred the issue of directors’ duties with regards to corporate social responsibility to the Corporations and Market Advisory Committee. The advisory committee had been established in 1989 to provide independent advice to the Treasurer on
corporate or financial markets law reform or proposals to increase financial market efficiency. The committee was asked to consider the following issues:

Should the Corporations Act be revised to clarify the extent to which directors may take into account the interests of specific classes of stakeholders or the broader community when making corporate decisions?
• Should the Corporations Actt be revised to require directors to take into account the interests of specific classes of stakeholders or the broader community when making corporate decisions?
• Should the Corporations Act require certain types of companies to report on the social and environmental impact of their activities?
• Should Australian companies be encouraged to adopt socially and environmentally responsible business practices and if so, how?

Directors’ duties: In response to the first two questions, the committee did not support any revision to the Corporations Law. It felt that the current laws provide flexibility to directors to take interests of stakeholders and the broader community into consideration. If there were concerns about the environmental or social impact of business behaviour, the Committee considers that specific legislation would be more appropriate as it would ensure consistency and be applicable to all enterprises (public and private, including companies, partnerships, trusts, unincorporated entities, sole traders and other individuals). Corporations law does not have this wide coverage.

Corporate disclosure: The committee recognised the importance of disclosure as a means to encourage responsible practice, however felt that s299A of the Corporations Act already provided for disclosure of relevant non-financial information. It considered that reporting obligations under the Act should be extended to all listed entities, and that there was no need for the current Act to further require reporting on social and environmental aspects of a company’s operations.

Encouraging responsible business practice: The committee considered the principal role of government as ‘providing the public policy settings within which companies operate’. It did however refer to ‘light touch’ or areas where the government can encourage socially and environmentally responsible business practices including:
– policy coherence and integration, including a whole-of-government approach;
– leadership by example through public sector governance and disclosure;
– promotion and dissemination of information or commission of research; and
– encouraging participation in international codes or guidelines and other non-government initiatives.

Source: Corporations and Markets Advisory Committee, ‘The Social Responsibility of Corporations’,
December 2006, available for download at http://www.camac.gov.au

It is not the purpose of this study to respond to these recommendations although they do raise some issues appropriate for this study to address.

Role of government

A number of activists and commentators have called for greater government intervention, for example in mandating CSR reporting and using government purchasing to influence corporate behaviour. In a report to Congress, the US Government Accountability Office reviewed government activities related to CSR activities in the US.¹⁷ It draws on a model of engagement options developed by the World Bank ¹⁸,
which listed enabling, facilitating, partnering and mandating.

Figure 3.1 : Range of US government activities related to global CSR

Source: GAO illustration based on World Bank report

Generally, government in western democracies have been wary of mandating CSR. In relation to corporate community investment Australian governments have been active in endorsing, facilitating and partnering. The most focused overall initiatives, covering all these aspects, have been developed through the Prime Minister’s Community Business Partnership.

Prime Minister Howard’s strong promotion of enhanced business sector activity in community and non-profit organisation support caused concern for some within both the community and business sectors. They were suspicious that this was an attempt to shift burden from the government — a view the Prime Minister quickly sought to refute.

There is now a general acceptance that the approach of the Commonwealth Government is based on at least two propositions. The first is that modern society has created pressures that threaten social cohesion and a sense of mutually dependent communities, and that this trend needs to be countervailed.

The second is that the government will be less able to solve community problems in the future for a range of reasons, including globalisation, the pace and complexities of life as well as a limited mandate in our democracy for governments to intervene.

Indeed there is a very strong trend in government itself, endorsed by public policy theorists and leading practice, to engage business and communities more deeply in the core business of government.

[We] expect greater collaboration on social issues between business,
government and community and industry groups.
Public affairs practitioner

This trend is characterised by governments developing flexible community based solutions through community partnerships and supporting them with funds and capacity building initiatives. In these partnerships, expectations of business, governments and community leaders are heightened.

Attempts [by governments] to deliver efficiently in a more complex world have led to the progressive engagement of business and communities and a blurring of the lines between the sectors. In some areas of policy, government’s role moved to ‘steering not rowing’, and now beyond that to facilitation or brokering. Occupational health and safety, community development, neighbourhood security and environmental protection are early examples of the shift from traditional roles to facilitation and brokering roles. This has led governments to relinquish some authority to empowered networks of players in which they may not predominate.

One analyst is not alone in suggesting:

…we are on an irreversible path away from traditional notions of
government to a more complex notion of governance, one of whose
defining characteristics is a reliance on networks and alliances, not
top down directive control from the centre…the business of public
policy will increasingly be carried forward through self-organising
networks of relatively autonomous players.¹⁹

The interaction between government policy and expectations on business continues to attract comment:

There are increasing expectations that corporates will fill some of the
space vacated by governments.

Government will continue to increase pressure on corporate
community to support social programs.
Public affairs practitioners

However, given the emerging model of collaboration between the sectors to solve complex problems, major government initiatives in this area should not be seen prima facie as burden shifting. The objective is to grow the community wellbeing pie, not cut it in a different way. However, there may be temptation to pursue burden shifting in some areas. One company interviewed in the study reported that an arts company it supported was advised by a state authority that funding would be cut because more support should be sought from companies ‘benefiting from the resource boom’.

The journey from traditional approaches

Great variations exist between companies in their approach to giving and community involvement. Leadership styles and values in individual firms influence different approaches. There are also significant differences between sectors. Change and innovation have been particularly strong in sectors such as resources and banking that are vulnerable to social and political pressures and have faced serious reputation challenges.

As a generalisation, there are considerable differences in the corporate community investment approach of large companies, especially multinationals, and small and medium sized enterprises.

The model that existed widely in corporate Australia only fifteen to twenty years ago was the establishment of a pool of funds (or some ad hoc access to funds) for grants to community supplicants at the discretion of the company chairman, CEO, or donations committee of the board. In high profile companies with many thousands of requests, support staff would help by sifting through applications and identify the most worthy causes.

In this environment, directors would sometimes find themselves in a round-robin of obligations, each seeking support for their favourite cause and expecting to contribute to the causes of those other companies who supported their causes in the first instance.

There are strong elements of ‘managerialism’ (the inappropriate exercise of management economic or social power) in this approach. While these practices have retreated considerably it would be false to claim these elements do not still exist to some extent in our companies. In any event, often the outcomes were still positive, and much community benefit has been derived on this basis. Behaviour that is now considered inappropriate, however, includes what is pejoratively called ‘the chairman’s wife syndrome’ with corporate support determined by senior executives indulging their personal interests rather than broader considerations. (Some companies still report receiving thousands of requests for support each year, processing them and responding positively. This approach is suspended in most companies, except for significant causes such as natural disasters.)

Given the extent of requests for dollars and a lack of focus or rationale for deciding on requests, companies have moved to narrow their fields of support, specifying for example that they would support a balanced or narrow portfolio or to include specified areas such as only education, arts and science and poverty relief. Potential supplicants were told not to bother applying for support outside specific criteria. Companies still used the term ‘philanthropy’ and the practice was characterised largely by the ‘cheque over the fence’ approach with loose relationships between donor and recipient. Relationships between supplicant and donor tended to be ad hoc, at arm’s length, and with little reference to a strategic business purpose. A typical example of this approach from one of Australia’s largest resource companies in the early 1990s is described in Box 3.4.

Box 3.4: Excerpts from Donations Policy [major resource company] 1992

[The company] has an obligation to maintain a community affairs program, which enhances its image as a responsible and responsive corporate citizen. This program includes providing assistance in the form of donations to various community based organizations. …on the basis of requests seen by the donations committee as meritorious, and given without conditions…

Broadly, donations should be seen as having merit in the areas of charitable welfare, sport, education, the arts and environmental protection. Donations that could aid the advancement of the industry may also be considered…

Guidelines for the distribution of budgeted funds:

The arts…20%
The environment…20%
Sport…20%
Community/charitable organisations…20%
Science/technology/education…20%

…where possible requests from charitable organisations must be directed to United Way which redistributes the company’s contribution to such organisations at its discretion.

Source: Selections from statement of company policy document

However, as firms thought harder about what criteria to impose, they applied the logic of relevance to their own sectors and enterprise needs, and moved towards a phase — borrowed from and still heavily employed in the USA — ‘strategic philanthropy’.

As approaches to donations and support became more strategic and processes more disciplined, directors and CEOs found it convenient to distance themselves from decisions, to inoculate themselves against unwanted requests from business peers and other pressures. They could then point to a set of criteria applied to grants that were managed outside their control by strict corporate policy or by the then fledgling public affairs or community relations function. Responding to requests however still characterises the approach of some large firms in whole

or in part and the realpolitik of organisations, connections, relationships and the personal preferences of senior managers can still have some influence over the direction of corporate support.

While not all major Australian companies are as advanced on this journey, the modern sophisticated Australian corporation has gone significantly beyond the traditional philanthropic model, a trend that was noted by the study in 2000 and that has strengthened through the first decade of the new century.

This emerging — in some cases fully matured — model is the focus of most of the rest of this report. It is symbolised in the shift in language from ‘philanthropy’ and ‘grant-making’ to ‘community’ or ‘social investment’. As illustrated in the numerous case studies cited below, much of the decision making is proactive and strategic, much is delivered in long-term partnerships with increasingly sophisticated recipients or non-profit organisations in fields relevant to the enterprise. And the approach and investment not only has a business case with reciprocal benefits, but is increasingly embedded in the business model of firms.

At one end of the continuum is the 1992 donations policy of a major resource company described in Box 3.4, at the other is the highly business focused set of principles adopted by another resource company twelve years later in 2004 (see Box 3.5).

Box 3.5: Excerpts from Principles To Guide Corporate Contributions [resource company] May 2 005

Strategic

The program is clearly aligned with business objectives not solely our vision
statement or broad enterprise mission…

Issues oriented

The program will be relevant to the company’s long-term issues agenda, finding alignment with community partners who are interested in these issues, and where some common ground might be established.

Collaborative

Long partnerships will be established with mutual benefits clearly established and spelt out in contractual relationships.

Company wide

Understanding and ownership of the program goes beyond public affairs and senior management. Line management and employees comprehend the rationale of the program and ownership is built by their engagement in relevant decisions where possible.

Results oriented

Specific targets are set and hard results are nominated, clearly understood by
giver and receiver and results are reported.

Social window

The program is an opportunity to understand and anticipate social values, attitudinal change and other external perspectives, and build that knowledge into the company’s management and strategic planning.

Proactive

The company identifies the key areas of interest and issues relevant to the enterprise, and then seeks the appropriate partners through which to best make the social investment.

Source: Selections from corporate policy document.

The Conference Board, Executive Action Series, No 216, November 2006.
Milton Friedman, Capitalism and Freedom, University of Chicago Press, 1962..
David Henderson CMG, “Misguided Virtue: False Notions of Corporate Social Responsibility”, Institute of Economic Affairs, London 2002.
CW Goodyear, “Social Responsibility has a Dollar Value”, The Age, 27 July 2006.
James E Post, Lee F Preston, Sybille Sachs, 2002, ‘Redefining the Corporation: Stakeholder Management and Organizational Wealth’, Stanford Business Books, p.8.
Op cit, p.11.
US Government Accountability Office, Report to Congressional Requesters, “Globalisation: Numerous Federal Activities
Complement US Business’s Global Corporate Social Responsibility Efforts”, Washington, August 2005.
World Bank, “Public Sector Roles in Strengthening Corporate Social Responsibility; A baseline study”, October 2002.
The Allen Consulting Group, Stakeholder Engagement and Consultative Arrangements in Government: A Collaborative Study [proprietary study for 18 Commonwealth and State Government agencies] 2006. Embedded quote from M Stewart-Weekes, ‘Trick or treat? Social Capital Leadership and the new public policy’, in Ian Winder (ed) in Social Capital and Public Policy in Australia, Australian Institute of Family Studies, Melbourne 2000, p.278.

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