The Value of Giving Back

“CSR can offer benefits to firms in many ways, including greater attractiveness of the firm to its employees, advertising and improved pricing power with customers, and insurance from activists. My research with Po-Hsuan Hsu at University of Hong Kong has focused  on how corporate philanthropy can benefit pharmaceutical innovation,” says Fred Bereskin, Assistant Professor of Finance at the Alfred Lerner College of Business & Economics at the University of Delaware. Bereskin’s focus is on corporate finance, particularly innovation and corporate governance, and he says that pharmaceutical firms are some of the most generous, in terms of their philanthropy; however, not all companies understand how philanthropy can ultimately benefit innovation and help develop partnerships with outside organizations. For one thing, collaborations with academic and not-for-profit organizations can include licensing deals that result in valuable patents. One common model in big pharma is to establish a research institute; the Center for Advanced Cellular Therapeutics created by Novartis and the University of Pennsylvania in 2012, for example. The center was partly funded by a $20-million grant from Novartis – and demonstrates how a direct donation can benefit innovation (as well as patients in need of cell therapies).

“Corporate philanthropy typically occurs in one of two ways: through direct contributions, or by donations from corporate-sponsored foundations. The most important difference is disclosure – whereas the activities of charitable foundations in the US are publicly available in Internal Revenue Service filings, direct giving is not,” says Po-Hsuan Hsu, Associate Professor of Finance at University of Hong Kong.

He adds that many companies often resist disclosing their direct-giving activities – perhaps because they are trying to protect certain competitive secrets associated with their partnerships.  “Conducting and funding research-related activities in the form of philanthropic programs has a number of advantages over conventional in-house R&D. From the perspective of an NGO that may otherwise be reluctant to develop a collaborative relationship with a for-profit firm, the partnership can be more readily justified under the auspices of philanthropic support,” explains Hsu. Traditionally in pharma, low-return or non-core projects can also run the risk of being shut down in company cut backs or facing difficult internal hurdles, but partnering with an NGO can help prevent this from occurring.

Consistent with the restrictions and limitations of foundation giving, Bereskin says that direct giving (and not foundation giving) is often associated with future innovation. “This makes sense when we consider that activities that are ostensibly promoted as direct giving can in fact be driven by the associated benefits to firms’ research activities,” he adds.

The findings of Bereskin and Hsu show that companies can “do good” while “doing well” for their shareholders. “Indeed, our findings can be seen as persuasive evidence that many activities that take the form of philanthropic giving are also designed to increase corporate sustainability and long-run values through effective collaboration with outside research organizations,” says Hsu.