When Good Deeds Are Bad News
By Diane Brady
Charity is supposed to evoke images of good deeds. But sometimes, donations to nonprofits can take an ugly turn when corporations get involved. Take Tyco International, which disclosed that it paid one of its directors a $10 million cash fee for helping to secure an acquisition -- and then made another $10 million contribution to a charitable fund in which he was a trustee. Or allegations that Enron sent millions to charities that happened to involve its directors.
Such payments are perfectly legal, of course. But are they less acts of charity than another way to reward those who are supposed to be independent overseers of your business? Unlike business transactions with directors, which must be disclosed when the payments exceed $60,000, charitable donations are generally given free rein by the Securities & Exchange Commission. Companies are under no obligation to disclose publicly which nonprofits are getting their money. The recipients can choose to disclose the identity of their donors -- if they feel like it.
The only government overseer with any inkling of what's going on is the Internal Revenue Service, which has strict nondisclosure standards. For the rest of us, it takes a lot of sleuthing to figure out the connections between who gives and who gets. Often, the information just isn't available at all.
"THE BEST DISINFECTANT."
As regulators push for more disclosure from Corporate America in the aftermath of the Enron debacle, donations to charities connected with their directors should be high on the watchdogs' list. Companies should be forced to publish financial gifts to nonprofits that have links to directors or senior officers in the same way that they now disclose business dealings with those folks.
What's more, it should be done in proxy statements, the documents that shareholders now go to for information about corporate payouts to executives and directors. As Patrick McGurn, vice-president of Institutional Shareholder Services, points out: "Sunlight is the best disinfectant. If something is clearly defensible, then put it out there for all of us to see."
Ironically, previous efforts to craft laws that would force more disclosure were often opposed by the charities themselves. They feared that broad rules resulting in companies revealing every donation they made could result in a freeze on funding or decreased philanthropic activity. After all, some charities get donations from the very companies they lobby against. And companies themselves have argued that the paperwork of disclosing thousands of gifts each year would be overwhelming and meaningless.
TIES THAT BIND.
Maybe so, but the logic doesn't extend to directors and senior officers. There's a reason why even relatively minor transactions between companies and these officials are explicitly laid out to investors. Such payments and favors are the ties that bind. Corporate-governance experts have long frowned on related-party transactions because they compromise the autonomy of those involved. It's harder to be objective or neutral when you're getting consulting fees or other business from the company you oversee. And it's sneaky to get remuneration other than your paycheck or company stock.
This is an issue that pervades almost every public company. Most boards in Corporate America have at least one director who comes directly from the nonprofit sector, such as the president of a university. Add to that the many directors who are intimately involved in charities involving everything from street kids to high art during their free time. Other directors should know of the connections.
More important, investors have a right to know if a disproportionate share of money is going to those nonprofits because of who sits on the board. Among other things, says Sloan Wiesen, a spokesperson for the National Committee for Responsive Philanthropy, "how can shareholders have any idea what impact their dollars are having if they don't know where they go?"
SMELLS LIKE FAVORITISM.
Investors also have a right to question the nature of donations, especially in this tight economy. It's an expense like any other. As Bennet Weiner, chief operating officer of the Better Business Bureau Wise Giving Alliance, points out: "When you give to charity, you want to make the wisest choice."
And for many companies, the wisest choice may be to discourage donations to any charities in which directors are heavily involved. If such giving doesn't compromise the independence of the directors, it at least gives the impression of favoritism. With more than 1 million registered nonprofits in the country, companies have lots of good causes to choose from. Those linked to the people who oversee your company should, like other business transactions, generally be considered off limits.
In the end, it's up to investors to decide what is and isn't appropriate. With the current climate of unrest over accounting irregularities and opaque books, companies may not have the option of keeping such giving private for much longer. Howard Schilit of the Center for Financial Research & Analysis, for one, thinks that "the silver lining from recent events is that companies that don't disclose information completely will have a black cloud over them."
One thing that amazes many investors is how complacent some of these board members have been in the face of accounting scandals. A glimpse into the murky, tangled web of favors and donations may reveal why. Wiesen thinks revelations of Enron's charitable gifts is just the tip of the iceberg. He believes that the company tried to keep private as much of such information as possible and adds: "There's no way of knowing what other things were going on with corporate philanthropy there."
If corporate executives and directors want to regain the trust of investors, they have to extend the new spirit of openness to revealing the gifts they give each other's good causes as well.
Brady covers corporate strategy for BusinessWeek in New York
Edited by Beth Belton