Why do corporate managements spend corporate money on charities? The obvious reason is to reduce the amount of corporate income tax due. Yet another motive, not as transparent, has to do with reputational capital, and that motive may also explain corporate social responsibility.
At the end of 2013, the American news media reported that Bernie Madoff had donated a lot of money to charity. In 2004, the Ponzi man claimed $3,918,347 as “gifts to charity” in 2004. His taxable income for the year was $12,912,498. He owed just $2.8 million in income taxes, a 12.6% tax rate on his adjusted gross income of $22.2 million. “That’s really low by anyone’s standards,” Adam Fayne, a lawyer practicing in Chicago, said.
Bernie Madoff, surrounded by police, after having been arrested. Wikimedia Commons
Achieving the low 12.6% effective tax rate was undoubtedly on Madoff’s mind in making his charitable contributions. This rationale was by no means unusual at the time. Additionally, Madoff would not have been above using charity in order to display himself as a very wealthy person. According to Martin Press, a tax attorney, “If [Madoff] actually gave the money to charity, it is a common theme of Ponzi scheme people to make large charitable contributions to show people how wealthy they are.” The perception of Madoff as a financially successful personally rendered him trustworthy in being capable of making investors rich, and the apparent charitable giving gives the impression of trustworthiness in its normative sense (e.g., honesty and integrity).
Similarly, moreover, corporate strategies may include programs under the rubric of corporate social responsibility as a means of cultivating the impression that the corporation itself is financially successful and trustworthy both in terms of competence and fairness. In other words, corporate social responsibility may be more about amassing reputational capital for the corporation than any acknowledged responsibility to society (other than to provide consumers with effective products). Perhaps the real question is why we are so gullible.
1. John Waggoner, “Madoff ‘Donated’ a Lot to Charity,” USA Today, December 13, 2013.