Corporate charitable donations are subject to attack under two doctrines: ultra vires and breach of fiduciary duty. Neither is likely to succeed, so long as the amount in question is reasonable and some plausible corporate purpose may be asserted.
Virtually all states have adopted statutes specifically granting corporations the power to make charitable donations, which eliminates the ultra vires issue. Although these statutes typically contain no express limit on the size of permissible gifts, courts interpreting the statutes require corporate charitable donations to be reasonable both as to the amount and the purpose for which they are given. The federal corporate income tax code?s limits on the deductibility of corporate charitable giving are often used by analogy by courts seeking guidance on whether a gift was reasonable in amount.
As for breach of fiduciary duty claims, the principles announced in Dodge v. Ford Motor Co. arguably require that corporate philanthropy redound to the corporation?s benefit. As Shlensky v. Wrigley suggests, however, reasonable corporate donations should be protected by the business judgment rule. Consequently, Barlow?s discourse on corporate social responsibility properly is regarded as mere dicta.
Law professors worry a lot about corporate philanthropy?a small forest has died to print all the law review articles on the subject. Yet, the corporate law rules governing this subject are perfectly consistent with our theory of the firm. To be sure, corporate philanthropy poses a classic agency cost problem. Just as corporate managers may divert resources to perquisites for themselves, they likewise may divert resources to philanthropic giving from which they derive psychic utility. This suspicion is confirmed by Warren Buffet?s amusing anecdote:
I have a friend who is the chief fundraiser for a philanthropy. . . . All he wants is to take some other big shot with him who will sort of nod affirmatively while he meets with the CEO. He has found that what many big shots love is what I call elephant bumping. I mean they like to go to the places where other elephants are, because it reaffirms the fact when they look around the room and they see all these other elephants that they must be an elephant too, or why would they be there? . . . So my friend always takes an elephant with him when he goes to call on another elephant. And the soliciting elephant, as my friend goes through his little pitch, nods and the receiving elephant listens attentively, and as long as the visiting elephant is appropriately large, my friend gets his money. And it?s rather interesting, in the last five years he?s raised about 8 million dollars. He?s raised it from 60 corporations. It almost never fails if he has the right elephant. And in the process of raising this 8 million dollars from 60 corporations from people who nod and say it?s a marvelous idea, it?s pro-social, etc., not one CEO has reached in his pocket and pulled out 10 bucks of his own to give to this marvelous charity. They?ve given 8 million dollars collectively of other people?s money.
The identities of the typical beneficiaries of corporate philanthropy likewise confirm that it is driven more by managerial ego than corporate advantage. The charities supported by most corporations tend to be rich people?s charities: art, music, public television, and the like. One can but question how big a bang a company gets for its advertising buck in giving to those charities.
One can concede the agency cost story, however, without conceding that the legal system ought to regulate corporate charitable giving. In the first place, it seems unlikely that corporate charitable giving even remotely approaches a level that materially injures shareholders. Although estimates vary widely, it seems unlikely that corporate charitable giving amounts to more than a couple of billion dollars annually, an infinitesimally small portion of total corporate earnings.
More important, deference to corporate philanthropic decisions is consistent with?indeed, mandated by?[my theory of director primacy, as explained in detail in in my new book The New Corporate Governance in Theory and Practice]. The case for judicial and regulatory deference was developed in detail in our discussion of the business judgment rule. An abbreviated version is worth recalling here, however.
As noted, corporate charitable giving typically is defended on grounds that it produces good will and favorable publicity. In effect, charitable giving is simply another form of advertising. As such, it supposedly results in more business and higher profits. Who knows for sure if that is true? Maybe GM really does sell more luxury sport utility vehicles because it sponsors PBS programs?or maybe not. But that is not the right question. The right question is: who decides? The board of directors or the courts? That directors feel good about themselves for having made such a decision hardly seems like the kind of self-dealing that justifies heightened scrutiny.
Board discretion over issues like charitable giving is the inescapable side-effect of separating ownership and control. If there are good reasons for maintaining that separation, and there are, the board?s discretionary authority must be preserved. As we have repeatedly seen, holding directors accountable for their use of that discretionary authority inevitably limits that discretion. Consequently, deference to board decisions is always the appropriate null hypothesis.
There are cases where the board?s abuse of its discretionary authority warrants regulatory or judicial intervention. Breaches of the duty of loyalty spring to mind as the clearest example. As already noted, it seems doubtful that corporate philanthropy poses the sort of conflict of interest necessary to justify limiting board discretion. Yet, even if corporate philanthropy involved material sums, deference would still be appropriate. The theory of the second best holds that inefficiencies in one part of the system should be tolerated if ?fixing? them would create even greater inefficiencies elsewhere in the system as a whole. Even if we concede arguendo the case against board control over corporate giving, judicial oversight or regulatory intervention still would be inappropriate if it imposes costs in other parts of the corporate governance system. By restricting the board?s authority in this context, the various academic proposals to ?reform? corporate philanthropy impose just such costs by also restricting the board?s authority with respect to the everyday decisions upon which shareholder wealth principally depends. Slippery slope arguments are usually the last resort of those with no better argument, but one nonetheless must beware eviscerating exceptions that could swallow the general rule of deference. Once regulation of corporate philanthropy allows the camel?s nose in the tent, it becomes harder to justify resistance to further encroachments on board discretion.