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Shifts in corporate philanthropy

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Should Today’s Companies Be Doing More To Make Society Better? – Part 1

By Richard Tomkins

Published: January 17 2009 02:00 | Last updated: January 17 2009 02:00

For Quakers, career options in the early 19th century were limited. Excluded from the universities, which had strong links to the established church, they could not obtain qualifications and so couldn’t pursue professions. They were in effect barred from public office and, as pacifists, they couldn’t join the armed forces. So it was more than just a coincidence that many of them went into business, often with conspicuous success.

One of these Quakers was John Cadbury, who in 1824 opened a shop in central Birmingham selling mainly tea and coffee, with cocoa and drinking chocolate as a sideline. This was a business with a conscience: Quakers believed in equality and social justice, and Cadbury hoped his products would prove an attractive alternative to alcohol, seen as the principle cause of poverty and deprivation among the working classes. As the chocolate business grew, Cadbury’s sons decided to build a factory in what was then open countryside a few miles south of the city centre. The “factory in a garden”, named Bournville, greatly improved working conditions for employees, who also benefited from decent wages, medical services and a pioneering pension scheme. But that was just the start: the Cadburys then set about improving the workers’ lives by building a new village for them consisting of light, airy cottages with gardens, a park, several acres of playing fields with a clubhouse and pavilion, a fishing lake, an outdoor swimming lido, adult education classes – and not a single pub.

Paradoxically, Bournville chocolate is now made by a Cadbury subsidiary in France and, thanks to automation, the Bournville factory, which once had 15,000 employees, now has 2,500. Even so, the village, now run by an independent trust, remains as a visible monument to Victorian industrial philanthropy. And there are many more such monuments across Britain. On the Wirral peninsula, William Hesketh Lever built a soap factory surrounded by a garden village called Port Sunlight “to socialise and Christianise business relations and get back to that close family brotherhood that existed in the good old days of hand labour”. Outside Bradford, West Yorkshire, the magnificently named Sir Titus Salt built Saltaire, a textile mill and model village with bath houses, a hospital, a library, a concert hall, a laboratory, a gymnasium and an institute for recreation and education. On the outskirts of Halifax, on what was then virgin land, the mill owner Edward Akroyd built two model villages to improve the lot of his workers: the first at Copley and the second, designed in the Gothic style by no less an architect than George Gilbert Scott, at Akroydon.

A common thread running through all these schemes was the desire by businessmen to help solve the social problems that industrialisation had created. Certainly, industrialisation raised living standards in the long term, but for much of the 19th century, while businesses prospered, their workers lived in Dickensian squalor. Rural communities were broken up and families were herded into the towns and cities where people lived several to a room in filthy, overcrowded slums. Open sewers ran through the streets, the air was thick with pollution, and working conditions – for children and adults – were brutal. If children survived into adulthood, and many did not, their lives were often cut short by poor health or diseases such as cholera and typhoid that spread rapidly in the insanitary conditions.

Although that squalor has now gone, few would argue that society’s problems are over. In the past 20 or 30 years, western companies have benefited from two big labour market trends: globalisation, which has allowed them to take advantage of cheaper labour costs in other countries, and rapid technological progress, which has allowed them to replace humans with machines. As in the Victorian era, corporate profits have soared, but the human casualties have been heavy: millions of people have lost their jobs and, lacking the skills that employers are ready to pay for, have joined the hidden army of unemployed living more or less permanently on benefits. Government figures show that, excluding pensioners, more than six million Britons – 4.3 million adults and 1.8 million children – live in households where nobody has a job, giving rise to the ugly new term “the underclass” to describe those for whom society no longer has an obvious role.

So where are the Cadburys, Levers, Salts and Akroyds of today? Why do businesses no longer undertake great works to help the casualties of industrial progress when they could be building, if not garden villages, then schools, universities and training centres to give the unemployed the skills they need to get jobs? What’s more to the point, if the crash of 2008 marks the end of an era of turbocharged laisser-faire capitalism in which free markets ruled and the pursuit of self-interest was regarded as a virtue, will businesses now come under pressure to do a bit more for society than merely maximising shareholder wealth?

In 1981, Britain’s inner cities were in flames. Tough anti-inflation measures introduced by Margaret Thatcher’s Conservative government had plunged the country deep into recession and, on top of that, exports had been badly hit by a rapid rise in the value of the pound. For the country’s manufacturing industry, much of which had been uncompetitive even before the Thatcher era, the effects were catastrophic: as factory after factory closed, millions of people were thrown out of work and, in the inner cities, the combination of high unemployment and simmering racial tensions erupted into some of the worst rioting in living memory.

A few years earlier, in the dying days of the Labour government, environment secretary Peter Shore had visited the US and was interested to see how public and private sectors were working together to tackle crime and unemployment in the inner cities. Returning to the UK, Shore invited American business leaders to a conference in Britain to talk about their role in the regeneration of Baltimore and Detroit. Soon afterwards, Labour left office, but the following year, with Conservative local government minister Tom King in the chair, the conference went ahead anyway and out of it emerged Business in the Community, an organisation of business leaders determined to do something about urban unemployment.

Sir Alastair Pilkington, the group’s first chairman, already had a plan to put on the table. His own company, Pilkington, had invented float glass technology, a new way of making sheet glass that greatly increased profits but which was putting thousands of people out of work in the company’s home town of St Helens on Merseyside. Pilkington had responded by setting up the Community of St Helens Trust, a partnership between businesses and local government that poured skills, resources and cash into energising people in the area to start their own businesses. The idea was born out of a recognition that, across Britain and the industrialised world, big companies were cutting jobs but small companies were creating them.

It was this model that Business in the Community replicated, fostering the creation of scores of local enterprise agencies across Britain. When the riots of 1981 broke out, many more big companies signed up – contributing not just cash but premises, equipment, know-how and seconded employees. In 1985, the Prince of Wales became the organisation’s president, and the following year, Thatcher attended the launch of the Per Cent Club, encouraging companies to donate at least half a per cent of pre-tax profits in cash or kind to Business in the Community and other projects.

It’s worth noting, however, that this outpouring of generosity by business was driven as much by self-interest as philanthropy. Like Pilkington, most of the big companies backing Business in the Community were cutting far more jobs than they were creating, and needed to show their remaining employees, trade unions and the communities in which they operated that they were doing something to help the victims. At another level, the prosperity of business was linked to the prosperity of society: right at the outset, David Sieff, a board member of Marks & Spencer and Business in the Community, remarked that the wealth of the high streets depended on the health of the backstreets, a catchphrase that was to become caring capitalism’s slogan. At another level still, there were very real fears that business’s licence to operate was at stake: in a document produced in 1980, the Confederation of British Industry warned that “if the existing system were to lead to socially and politically unacceptable levels of unemployment, then free enterprise itself could be under threat”.

In truth, it wasn’t much different in the Victorian era. People like the Cadburys were not just misty-eyed do-gooders. Usually, the main reason they built garden villages was because they needed greenfield sites on which to build bigger factories. Having done so, it made sense to house the employees nearby and it made even more sense to make sure they were happy, healthy and well educated. Most corporate philanthropy of the time was more about companies increasing the productivity and loyalty of their own workers than doing anything for wider society – although, as in the 1980s, there were political overtones to it as well, to the extent that it forestalled social unrest.

Ultimately, Victorian-style industrial paternalism died out mainly because it became redundant. Towards the end of the Victorian era, it became increasingly apparent that the enlightened self-interest of a few large companies was simply not up to the job of tackling the immense social problems of an urbanised, industrial society. Social justice, it was eventually decided, should apply to all workers, not just the lucky few: everyone should benefit from public sanitation, decent housing, safer factories, reasonable working hours, universal education, old-age pensions, free healthcare and unemployment benefits. So the state stepped in, and philanthropy went out of fashion.

From then until the 1980s, corporate philanthropy had for most companies meant little more than sponsoring the Royal Opera or writing out a cheque once a year to the chairman’s wife’s favourite charity. The 1980s brought a shift as the era of free market economics dawned and Thatcher sought to privatise as many state functions as possible; the private sector was not only welcomed but urged to become more actively involved in the relief of unemployment.

Since the 1990s, however, there has been another, even bigger, shift. In much the same way that business and the economy have become globalised, so have people’s social concerns. Once, people worried about local or national issues such as inner-city decay and unemployment; now, the most vigorous campaigning activity has shifted towards environmentalism, meaning the future of the entire planet, and the global labour market practices of the big multinationals, particularly in the developing world. Early manifestations of the change included the mauling handed out to Royal Dutch Shell over its plans to dispose of the Brent Spar oil platform in the North Sea and the sustained campaign against Nike over allegations that it exploited cheap sweatshop labour overseas.

In a way, this latest shift has benefited big companies. Now, they are under no great pressure, moral or otherwise, to become vigorously involved in philanthropy or to set aside a big pot of money each year for donations to worthy causes. Certainly, they can do these things if they wish, and some do, to an extent; but it now seems widely accepted that the best way they can make a contribution to society is not by giving money away, but by making money as responsibly as possible – treating employees and suppliers fairly, minimising pollution and so on. David Grayson, director of the Doughty Centre for Corporate Responsibility at Cranfield School of Management, says: “There’s a recognition that, actually, the biggest impact a company has is in its core business activities. So you can’t, for example, claim to be a responsible company because you’re supporting an environmental charity if you’re an inveterate polluter in your own activities; you can’t say you’re a responsible business because you’re supporting Aids orphans in Africa if you’re discriminating against your own staff who are HIV positive; and you can’t say you’re a responsible business because you’re encouraging your staff to volunteer in their lunch hours to listen to kids reading in school if you aren’t encouraging your own people to learn and grow in the job.”

Arguably, this shift away from community giving and towards responsible behaviour has let companies off the hook financially. Although total charitable giving by the 500 biggest companies has grown in real terms over the past few years, it has tumbled by more than half as a percentage of pre-tax profits, according to the Charities Aid Foundation – from 1.6 per cent in 2001/02 to just 0.7 per cent in 2005/06, the latest period for which figures are available. Indeed, the Per Cent Club folded in 2006.

It gets worse. In theory, the value of the contributions made by companies in 2005/06 amounted to £1.1bn. But that’s a generous interpretation, because it includes not only cash but in-kind donations of products and management time. In fact, some 27 per cent of the entire £1.1bn was down to just one company, GlaxoSmithKline, and most of that consisted of in-kind donations of drugs to patient assistance programmes in the US for people without medical insurance.

The pattern is remarkably similar in the US, in spite of that country’s reputation for philanthropy. Although rising in real terms, corporate giving as a percentage of pre-tax profits tumbled from a peak of 2 per cent in 1986 to 0.8 per cent in 2007, according to the Giving USA Foundation, and at least a third of that consisted of in-kind donations of products, notably drugs for patient assistance programmes. In both Britain and the US, corporate donations in cash and kind amount to only about 5 per cent of all voluntary giving, well behind the contributions from individuals and trusts.

So, while companies talk the talk about corporate social responsibility, and publish lengthy reports advertising their sustainable business models and ethical trading practices, most of them are remarkably tightfisted when it comes to parting with cash. Should they be contributing more?

The argument that they shouldn’t was summed up by Milton Friedman, the arch-disciple of free market economics, in a New York Times Magazine article in 1970. The social responsibility of business was to increase profits, he said; the idea that it should be promoting desirable, social ends was “pure and unadulterated socialism”.

Companies, Friedman pointed out, were owned by their shareholders and the responsibility of the corporate executives was to conduct the business in accordance with the owners’ desires, which generally would be “to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom”. If they diverted some of that money to social purposes, they were levying a tax on other people to pursue their own personal vision of public welfare – something which, as unelected private individuals, they were not entitled to do.

Friedman had no particular problem with individual proprietors (such as those Victorian entrepreneurs) who used the profits from their businesses to pursue philanthropic ends; they could use their own money as they wished. But he was scornful of modern-day corporations that attached the label of social responsibility to actions that, in reality, were entirely justified by self-interest. This “hypocritical window-dressing” might earn them kudos in the short run, he said, but it undermined the foundations of a free society by strengthening the view that the pursuit of profit was somehow wicked and immoral.

On the other hand, it could be argued, much has changed since Friedman penned that piece. Over the decades, globalisation and the spread of free market capitalism have greatly increased the power of big business at the expense of democratically elected governments and other institutions – notably, trade unions. People rightly mistrust power without accountability, so when they see rapidly rising corporate profits accompanied by job insecurity, wage stagnation, plant closures and unemployment, it is hardly surprising if they begin to wonder whether a wider interpretation of corporate responsibility might be in order.

Something else has changed, too. Friedman said companies should make as much profit as possible while playing by the rules embodied “in ethical custom” as well as in law. But ethical custom has itself moved on. We now live in an intensely moralistic age, one weighed down by concerns over health and safety, the sensitivities of minority groups, obesity, the plight of battery hens, fair trading, global warming… the list goes on. Companies as well as individuals are expected to show that they care about making the world a better place, or risk becoming pariahs. These days, it would take a very brave, or very foolish, chief executive to stand up and declare: “We exist only to maximise profits.”

As it turns out, most big companies have settled for a compromise. To avoid being accused of misappropriating shareholders’ funds, they either find non-cash ways of doing good, such as reducing waste or trading ethically, or embrace only acts that are justified by their own self-interest – typically, because they burnish the company’s brand image or help it attract the best recruits. Ideally, of course, their good deeds will tick both boxes, being both cost-free and self-interested – at which point they become Friedman’s “hypocritical window-dressing” writ large.

Isn’t this appallingly cynical? “No,” says Cranfield’s David Grayson. “It’s much more honest and straightforward than the alternative because businesses are not, and shouldn’t be, behaving like charities or pressure groups or governments.” There is an important distinction to be made between what successful business people choose to do with their own money, “which hopefully will include a decent amount of charitable activity”, and what publicly quoted companies do with company resources, Grayson says. “I think it’s much more appropriate for businesses to find win-wins, to look for ways of running their core operations in a positive way, than trying to imagine that it could ever be appropriate for them to spend a lot of shareholders’ money on pure philanthropy.”

Besides, says the Charities Aid Foundation, which works with big companies helping them direct their charitable activity effectively, cash isn’t always what’s needed. “Different community bodies want different things,” says Russell Prior, head of company services. “For some, yes, cash is helpful. But for others it may be employee volunteering. Sometimes, getting the advice and guidance of senior managers is very helpful. Other charities want goods in kind. Over time, the range of possibilities for businesses to support community organisations has increased – and so, too, has the demand from community organisations for different forms of support.”

The point is taken up by Chris West, director of the Shell Foundation, Shell’s charitable arm. “You can’t fault people for having good intentions, whether it’s giving money to someone in the street or to an organisation in another country,” he says. “But you have to go back to the question of whether it actually adds any value, and I think just giving money doesn’t really play to where business has the most to offer.” West believes companies can do far more by forming partnerships with charities or development bodies to work on specific projects, injecting their management expertise and business skills into the partnership to help it achieve its goals. “Any business that’s successful has overcome a number of challenges and therefore has a lot of expertise and skills, and that’s the value that needs to be shared with others,” he says. “The way forward is to see businesses deploying non-financial assets in areas that they know about with carefully selected partners. That’s much more likely to produce a positive impact without creating long-term dependency, which of course is what philanthropy does. You give me £5 today and it’s not surprising if I come back to you for £5 tomorrow, which is not what any of us really wants.”

Is all this just an excuse for stinginess? British companies seem extraordinarily mean when it comes to contributing to the public good. The main rate of corporation tax has fallen from 52 per cent in the early 1970s to a record low of 28 per cent since last April, the lowest rate in the G7 group of leading industrial nations – yet even this is not low enough for the CBI, which last year called for a rate of 18 per cent within the next eight years. Incredibly, the public accounts committee reported last October that more than a quarter of Britain’s 700 biggest businesses paid no corporation tax at all in 2006/07, thanks to tax avoidance schemes, tax relief or tax losses.

The good news – or, perhaps, the final irony – is that, since companies give so little cash to charity, there is very little to cut as the economy goes into recession. Indeed, according to research carried out by Jeremy Moon, director of the International Centre for Corporate Social Responsibility at Nottingham University Business School, many companies may even try to do more. “Curiously,” he says, “some aspects of corporate community involvement actually increase in hard times. This was manifestly the case in Britain in the early 1980s with the formation of Business in the Community and the growth of local enterprise partnerships, and it was also true in Australia in the recession of the early 1990s.” Most companies, he believes, will carry on doing at least as much as before – though there will be even more emphasis on demonstrating the business case for community “investment”.

The story doesn’t end here. As we have seen, corporate philanthropy has metamorphosed more than once since the dawn of the industrial age and will no doubt continue to evolve. If the crash of 2008 marks an inflexion point for attitudes towards laisser-faire shareholder capitalism, will companies come under pressure to do a little more for society than simply pursuing self-interest? Until very recently, the answer would have been that business is already the biggest force for good society has ever known, generating the prosperity on which everything else depends. But in a changed world, will that be enough? What should the good company do?

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