corporate governance

Why employees object when their company gives to charity

The recent story where employees are protesting at their employer giving €15 million to a local church raises the issue of the role and purpose of corporate philanthropy (RTE 2019).

Giving to charity is perceived as a moral good, required by many religions, and encouraged by tax policy in many countries.  However, there is an argument that this should not extend to companies.

Milton Friedman (1970) famously argued that “The only responsibility of business is to make profits”.  By making profits the company will contribute to society in making a product consumers’ desire, providing jobs for workers, and paying taxes to society. Profits earned follow from the efficient use of the resources provided, the “nexus of contracts” viewpoint, where the firm is simply an engine of efficiency (Alchian & Demsetz 1973). Profits thus earned are to return to those who supplied the resources, the shareholders, as argued by Jensen and Meckling (1976).  Giving money to charity is thus taking money away from those, the shareholders, who are entitled to it. Instead the company should distribute profits to shareholders and they can then decide to give it to charity.

The “nexus of contracts” approach to the firm also assumes a perfect market of exchange for the supplied resources, resulting in only shareholders being entitled to extra profits, as all others are protected by detailed contracts. However, increasing corporate power has arguable reduced the power of governments and workers to ensure a fair exchange, resulting in lower corporate taxes, wage stagnation and labour instability (Dallas 2017). In this context, corporate philanthropy is using money that could have paid a fairer wage or a higher rate of tax.

Finally, the law does not provide for a duty to shareholders or a duty to charity. The company is defined under law as a separate legal entity, it exists separate to the aggregate members, with its own rights and duties that do not derive from the rights of its members (Letza et al. 2008). As a distinct social entity, the directors’ duty is to that distinct entity.  In fact, the law has imposed positive duties on directors to certain stakeholders. In Ireland, Section 224, Companies Act 2014 provides that directors must have regard to the interest of employees, with a similar provision in UK corporate legislation. It is unclear what level of interest this is, such as the time horizon, and is it also uncertain if employees or regulators can enforce this duty.

Wrightbus has gone into administration, with shareholders at risk of losing their investment and control of the company, thousands of workers facing redundancy, and welfare and other demands on government spending. Management, a majority shareholder, gave millions in corporate funds to a charity when the company was struggling with cash-flow challenges.  Regardless of the legality of the donations, it is arguable that the donations were unjustifiable on commercial grounds and not in the interests of the body of shareholders, workers, taxpayers or society.  The workers are entitled to be aggrieved.

References

Kearney, V (2019, September 29). Hundreds protest following administration of bus building company Wrightbus. RTE News.  Retrieved September 29 2019 from https://www.rte.ie

Alchian, A.A. and Demsetz, H. (1973). The Property Right Paradigm. The Journal of Economic History, 33(1), 16-27.

Dallas, L. L. (2017). Is There Hope for Change: The Evolution of Conceptions of Good Corporate Governance. San Diego L. Rev., 54, 491.

Friedman, M. (1970, September 13). The Social Responsibility of Business is to Increase its Profits. New York Times Magazine, p.17.

Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of financial economics, 3(4), 305-360.

Letza, S., Kirkbride, J., Sun, X., & Smallman, C. (2008). Corporate Governance Theorising: Limits, Critics and Alternatives. International Journal of Law and Management, 50(1), 17-32.

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