Corporate Philanthropyin the United Kingdom

ChristopherJ. Cowton

ABSTRACT. The increasing demands placed on private welfare selMces and calls for business to fulfil its social responsibilities have heightened interest in corporate charitable donations in the United Kingdom. Adjustments to the corporation tax system have been made to encourage companies to give more. The article outlines the legal and fiscal background to company giving, examines its magnitude and reports on a survey of company practice.

Legal and fiscal context

The legality of the practice of companies supporting charitable causes when no direct business purpose appears to be in contemplation has, in the past, been subject to some doubt in the U.K. This is in contrast to the U.S. where the practice seems to have been reasonably well established for some time (Stead, 1985). In British company law, the whole question of gifts and gratuities, of which charitable donations are a type, raises problems of considerable complexity (Sealy, 1978). Legal cases on the matter are variously concerned with ultra vires, illegality and the excess of authority of directors. Most writers treat the rules governing the validity of charitable payments as an aspect of the ultra vires doctrine, but Boyle and Sykes (1977) consider the rules to have a distinctive enough character to warrant separate treatment. The traditional view regarding legality is reflected in the 1883judgment ofBowen, L.J., who stated:
. . it seems to me charity has no business to sit at boards of directors qua charity. There is, however, a kind of charitable dealing which is for the interest of those who practise it, and to that extent and in that garb (I admit not a very philanthropic garb) charity may sit at the board, but for no other purpose. [Hutton v. West Cork Rly (1883) Ch. D654 (C.A.)]

Introduction
Corporate philanthropy is much less developed in the U.K. than in North America, but the growth of debate on the social responsibilities of business and discussions of the appropriate size and role of government-funded welfare have heightened the significance of, and interest in, companies' support of charitable activity. Furthermore, changes have recently been made to the corporate taxation system in an attempt to encourage companies to provide more assistance. The purpose of this paper is to provide an overview of corporate charitable donations. The paper is divided into three sections; the legal and fiscal context, a statistical overview, and company practice. The discussion of company practice draws primarily on original findings from a survey of leading U.K. industrial companies, conducted as part of a project concerned with the disclosure of information on donations (Cowton, 1986).1

The law is now rather more liberal, or so it seems. The Jenkins Committee, which had the task of reviewing company law prior to the Companies Act
1967, c o m m e n t e d that since 1921 the practice, which has developed, of companies (without express powers) making donations to general charities of no direct interest to the companies' business has never been challenged in the Courts in this country and we

ChristopherJ. Cowton is a Research Fellow of Templeton College, The Oxford Centrefor Management Studies. His main research interests are in accounting, which he teaches on the College's executiveprograms and to Oxford University undergraduatesand postgraduates. He is the author of a recent research monograph on the disclosureof corporatecharitabledonations.

Journal of Business Ethics 6 (1987) 553--558. 1987 byD. ReidelPublishing Company

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ChristopherJ. Cowton
the net cost to the company is only 60% of the amount received by the charity. In most cases, the sum specified in a deed of covenant is a fixed annual amount. It is possible to vary the amount, but only according to an objective formula written into the deed - for instance, a covenant of 1% of pre-tax profits, if any (Knox and Ashworth, 1985). Flexibility can also be enhanced by covenanting to an intermediary charitable body such as the Charities Aid Foundation (CAF), which then sets up an account containing both the initial net payment and the tax recovered thereon from the Inland Revenue. The donor then makes disbursements from this account to charitable organisations as and when desired. Some companies also set up their own charitable trust to facilitate their giving. More recently, the tax situation has been liberalised so that companies no longer have to commit themselves to a series of annual payments if they wish to make tax-enhanced charitable donations. By the Finance Act 1986, if a company is not a close company, a qualifying donation can be treated as a charge on income for the purposes of tax relief. 'Qualifying' simply means that the donation has not been made under a deed of covenant and does not qualify as a deduction in calculating trading profits for corporation tax purposes, otherwise double counting would be involved. The only constraint on the relief is that qualifying donations shall not exceed 3% of the dividend paid on the company's ordinary share capital in the relevant period. It will be interesting to see what impact this increased flexibility will have on company donations, both in the aggregate and in terms of the destination of donations. There is still no limit on covenanted giving.

venture to think that this practice, which is regarded by businessmen as necessary to create or preserve goodwill for their companies,would, on that ground, be acceptable to the Courts today (Report of the Company Law Committee, para. 52). The absence of recent cases concerning the validity of company charitable donations means that the law is still unclear. However, the scarcity of cases suggests shareholder and public acceptance of the practice, and it has been argued that the requirement that companies reveal information on their payments for charitable purposes (Companies Act 1985, Schedule 7, paragraphs 3 to 5) appears to confirm their general legality (Gullick, 1981; Hadden, 1977). The requirement for companies to disclose information on their charitable giving, which was originally mandated by Section 19 of the Companies Act 1967, is coupled with a requirement to give information on political contributions. The basic rule is that, if the sum of payments for political and charitable purposes exceeds 2002 both individual totals should be disclosed in the directors' report contained in the annual report and accounts. Any political or quasi-political body to which more than 200 has been given during the year should be named, but no details have to be given of charitable giving and, in practice, few are (Cowton, 1983). In the past, the fiscal context for donations to charity has been both less generous and more cumbersome in the U.K. than in the U.S.A. For a contribution to be allowable as an expense in calculating taxable profit, it has to be made in furtherance of trade, which is confined to payments for research or technical education in fields closely associated with the company's business. For a donation falling outside this narrow definition to attract any benefits from the tax system, it used to be the case that it had to be made under a deed of covenant. A deed of covenant is a disposition by which a company irrevocably binds itself to make certain payments. If, at the time of the deed's execution, the period of commitment is capable of exceeding three years and the company receives no material quid pro quo, the payments are viewed by the Inland Revenue as income of the charity rather than of the company.3 Since a charity is not normally liable to taxes on income, no tax should be paid on the sums involved. The effect is that, if a company is paying tax at 40%,

Statistical overview
In spite of supposed benefits to donors, the total of charitable payments by companies in the U.K. is not large when compared to total profits, the aggregate income of charities or the amount that U.S. corporations give. Some figures produced by the Central Statistical Office (C.S.O.) are shown in Table I. The C.S.O. does not claim great accuracy for this statistic (Barker, 1981) and contrasting estimates have been prepared (Moyle and Reid, 1975; Barratt et al., 1980).

Corporate Philanthropy in the United Kingdom

TABLE I

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Company transfers to charity

Year

Industrial & commercial companies (m)

38 39 41 39 46 52 68 83 93

Financial companies & institutions (m)

5 6 10 13 16 17 18 22 26

Total (m)

1977 1978 1979 1980 1981 1982 1983 1984 1985

43 45 51 52 62 69 86 105 119

Source: United Kingdom National Accounts (The C.S.O. Blue Book), 1986 Edition.

It should be noted that the figures quoted so far tend to underestimate the charitable activities of companies, since only cash donations are counted. They do not include secondment of staff (which was encouraged by the Finance Act 1983), payments for sponsorship, advertising and joint promotions, and gifts of goods and services. The extent of these other kinds of aid is highly uncertain, although a 1984 publication contained a series of estimates which included sponsorship of 60 million, advertising of 10 million, joint promotions of 2.5 million and secondments worth 4 million (Norton, 1984). Companies can also help by administering payroll giving by their employees, which has recently received considerable publicity following the introduction of new tax concessions in the Finance Act
1986.

However, it does seem from Table I that total giving has been increasing quite quickly over the last five years or so. It will be interesting to see whether the recent tax changes reinforce this trend. Table I also indicates that the share of corporate donations accounted for by financial companies and institutions has been increasing rapidly, from 12% in 1977 to 22% in 1985 according to the C.S.O. figures. Indeed, financial firms are prominent givers, with the 'Big Four' clearing banks all appearing amongst the top twenty donors. The top ten donors are shown in Table II.
TABLE II

Company practice
Comparatively little has been published on the way in which U.K. companies organise and pursue their charitable giving. It was therefore decided to include a number of questions on the organisation and practice of corporate giving in a questionnaire on disclosure sent to companies. The main part of the survey was conducted in 1982. Questionnaires, followed by one reminder where necessary, were mailed to the chairman or managing director, named where known, of 240 companies randomly picked from the 500 largest industrial companies in the U.K. listed in The Times 1000 1981/82. A response rate of 44% was achieved, which compares favourably with other investigations of general corporate giving and support for the arts (Barratt et al., 1980; McQuillan, 1981; Mauksch, 1982). Some of the questions posed in the questionnaire were as follows: How much did the company give for charitable purposes during the year? How much of that was given under deed of covenant? Why, do you think, does your company give to charity? Who decides how much to give in total to charities each year? When do they decide this? Who decides how much to give to each individual charity? When do they make their

Top company donors

Rank Company Year Amount

end
1 2 3 4 5 6 7 8 9 133.M. B.P. Barclays Bank National Westminster Bank Marks & Spencer Shell U.K. I.C.I. Imperial Group Unilever Dec Dec Dec Dec Mar Dec Dec Oct Dec 85 85 85 85 85 85 85 85 85

donated (000)
2,301 1,789 1,732 1,461 1,453 1,348 1,300 1,100

977

10

AlliedDunbar Assurance

Dec 85

769

Source: CharityStatistics 1985/86.

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ChristopherJ. Cowton
TABLE III

decisions? What sort of policies do they use to guide these decisions? How many different charitable causes did your company support last year? How many of these were being supported for the first time? Do you think that your company would continue to disclose its charitable donations if the legal requirement to do so were withdrawn? (Please give reason.) In what ways, other than in the annual report, do you publicise your charitable activity? Does your company compare the level of its donations with that of other companies? (If so, how?) The questionnaires were completed by a variety of personnel, including company secretary or assistant company secretary (39% of respondents), finance director or accountant (21%) and chairman or chief executive (10%). Their replies are drawn upon, together with other literature where cited, in the following discussion. The whole question of the role of charitable giving as an aspect of company behaviour has been the subject of some debate, often reflecting the general debate concerning the legitimacy and appropriate scope of corporate social responsibility. Against this essentially ideological background, a number of researchers have attempted to investigate empirically the factors underlying corporate giving. For North America, some quantitative analysis of data has been undertaken (Johnson, 1966; Schwartz, 1968; Ermann, 1978; Levy and Shatto, 1978; Fry et al., 1982), but research in Britain has tended to use the simple approach of asking company representatives about motivations for giving. Interpretation of replies is a particular problem, and it is difficult to know how close to the real springs of action such methodology does come. However, the replies themselves are of interest in indicating the general nature of the rationalisation of ostensibly charitable behaviour. Table III summarises the replies of the 79 company personnel who answered the question posed on reasons for giving. It will be noted that some gave more than one reason. The categories are not rigorously distinct, but hopefully they give a flavour of the answers. The phrase 'social responsibility' figured frequently, but accompanying comments

Reason stated
Duty to do so Social responsibility

Frequency
11 48 13 8 17 3

Social responsibility:employee benefit Improve social responsibilityimage Trade related~commercial Other

Source: Questionnaire Survey of Companies (N = 79).

indicated different emphases, with some respondents apparently interpreting it in a very directly selfinterested manner. Very few U.K. companies have large donations programmes by U.S. standards. Only eight gave more than 1 m during the Charities Aid Foundation's statistical year 1985/86 and the lowest of the top 400 corporate donors gave just 16,000 (Charity Statistics 1985/86). The average amount given by the respondent companies was about 39,000, of which just under half was given under deed of covenant. In companies which give a relatively large amount each year, the total to be distributed is usually set by the board of directors, mostly on an annual basis when the overall corporate budget is finalised. The factors impinging on the determination of the donations budget were not investigated, but it is interesting that 30 companies admitted to comparing their total with the sums given by other companies. SaxonHarrold (1986) similarly found that the companies she visited tend to compare their relative positions, particularly with companies engaged in similar commercial activities. In companies giving small sums, the total may be decided by one or more persons, perhaps the chairman and secretary, or it may not be formally determined at all. The distribution of funds to charities is usually left to individual senior personnel in the case of small donors, often the chairman or managing director. Individual members of staff may also have responsibilities in large donor companies, particularly for responding to local appeals or for screening applications. However, larger amounts will probably be considered by a committee meeting on a regular basis, usually at least quarterly. It is striking just how senior the personnel determining the distribution of

CorporatePhilanthropy in the UnitedKingdom

donations tend to be - if it is a committee, it is often a board committee - yet the amounts, by the normal operating standards of large companies, are trivial. Perhaps it reflects senior management interest in corporate charitable activity or even fears about the risk of supporting the 'wrong' kind of cause. In order to guide their giving, some companies have formal policies, many of which have been published in a guide to company giving (Norton, 1984). Some are rather vague and Shenfield (1969) suggested that they may not be adhered to in practice. The survey brought forth a wealth of fascinating details, amongst which a reasonably consistent theme was the preference for there to be a geographical or industrial association between company and charity. This, of course, might lead to past and former employees being among the beneficiaries, which some respondents mentioned as desirable. Some companies also like to support charities in which their employees are actively involved. Experience suggests that most companies respond to appeals received rather than initiate donations. The 92 companies answering the relevant question in the questionnaire gave to an average of 86 charitable causes each, which is remarkably close to the average of 80 gifts reported in a Canadian survey (Michalos, 1981). The average donation given per charity was about 500, although this figure probably disguises large variations both by company and by charity. 78 of the companies had just supported for the first time an average of twenty charitable causes; since these 78 companies supported an average of 65 causes each, this meant that almost one third of causes were being aided for the first time. This seems to suggest a healthy degree of flexibility, although no evidence was gathered on the relative size of such donations or the total number of solicitations received. Having made donations, it might be thought that companies would be keen to publicise their charitable activity to demonstrate their social responsibility and improve their public image. However, this does not seem to be the case. For instance, a representative of Shell U.K. Ltd. stated that his company, which is a relatively large giver, was not interested in publicity for its own sake and often would prefer little or none (Dugdale, 1981). In answer to the questionnaire, the large majority of

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respondents stated that their companies did not publish data on d~onations other than in the directors' report, which is i:equired by statute. Six mentioned " public acknowledgement by the charity concerned and five each referred to press releases and notification to employees but, as Lessem (1979) also found in his research, the use of company newspapers and press releases to report corporate social activity tends to be rather sporadic. Furthermore, respondents were in the ratio of 3:1 in believing that not even the aggregate figure presently required would be disclosed if no longer mandated by law. (Five of those who would voluntarily disclose would do so, they wrote, to demonstrate social responsibility.) Thus, there seems to be litde concern on the part of companies to publicise their charitable giving in a systematic manner. Not only do companies apply few resources to disclosing information on their donations programmes, they seem to expend little effort in evaluating their effectiveness for themselves. According to some results from a research project on charity accounting, they do little monitoring of the use to which their donations have been put (Bird & Morgan-Jones, 1981). Saxon-Harrold (1986) found that, even among relatively large givers, only half requested a report of progress. Some commentators would feel that this is symptomatic of a rather unprofessional approach to giving.

Conclusion

Corporate charitable giving, and interest in it, appear to be on the increase in the United Kingdom, but from a comparatively low base. The purpose of this paper has been to provide an overview of the current situation. How affairs will progress, particularly in the context of a more supportive fiscal framework, remains to be seen, but it is to be hoped that any increase in the quantity of giving is accompanied by the appropriate quality of giving.

Notes

Grateful thanks are due to the Research Board of the Institute of Chartered Accountants in England and Wales for the provision of research funds, and to Professor R. H.

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Gullick, J. M.: 1981, Ranking and Spicer's Company Law, 12th Edition (H.F.L./Chart Foulks Lynch, London). Hadden, T.: 1977, Company Law and Capitalism, 2nd Edition (Weidenfeld and Nicolson, London). Johnson, O.: 1966, 'Corporate Philanthropy: An Analysis of Corporate Contributions', Journal ofBusiness 39, 489-504. Knox, J. and M. Ashworth: 1985, An Introduction to Corporate Philanthropy (British Institute of Management, Corby). Lessem, R: 1979, 'Corporate Social Reporting in Action', Journal of GeneraIManagement 4 (Spring), 27-41. Levy, F. K. and G. M. Shatto: 1978, 'The Evaluation of Corporate Contributions', PublicChoice 33 (1), 19-28. McQuillan, J.: 1981, 'Company Charitable Giving with Particular Emphasis on Corporate Funding of the Arts', in Charity Statistics 1980/81 (Charities Aid Foundation, Tonbridge). Mauksch, M.: 1982, Corporate Voluntary Contributions in Europe, Conference Board Report No 832 (Conference Board, New York). Michalos, B. L.: 1981, 'Canadian Corporate Contributions: Trends and Policies', SocialIndicatorsResearch 9, 127-153. Moyle, J. and D. J, Reid: 1975, 'Private Non-Profit-Making Bodies Serving Persons', EconomicTrends (May), 78--85. Norton, M, (ed.): 1984, A Guide to Company Giving (Directory of Social Change, London). Report of the Company Law Committee: 1962, Cmnd 1749, Chairman: Lord Jenkins (H.M.S.O.,London). Saxon-Harrold, S.; 1986, 'Corporate Policies Towards Voluntary Donations -- Some Research', in Charity Statistics 1985/86 (Charities Aid Foundation, Tonbridge). Schwartz, R. A.: 1968, 'Corporate Philanthropic Contributions',Journal of Finance 22, 479--497. Scaly, L S.: 1978, Cases and Materials in Company Law, 2nd Edition (Butterworths, London). Shenfield, B.: 1969, Company Giving, P~E.P.Broadsheet No. 511 (Political and Economic Planning, London). Stead, B. A.: 1985, 'Corporate Giving: A Look at the Arts', Journal ofBusinessEthics 4, 215--222. The Times I000 1981/82: (Times Books, London). United Kingdom National Accounts (The C.S.O. Blue Book): 1986 (H.M.S.O.,London).

Macve of the University College of Wales, Aberystwyth for valuable help and advice. Errors and opinions remain the responsibility of the author. Thanks are also expressed to company personnel who completed and returned copies of the questionnaire. 2 The original threshold level was 50, but was raised to 200 by the Companies (Directors' Report) (Political and Charitable Contributions) Regulations 1980 (S. I. 1980 No. 1055). 3 For many years, an effective covenant had to be for a period capable of exceeding six years, but the requirement was reduced to three years by the Finance Act 1980.

References
Barker, M.: 1981, CompanySectorAppropriation Account:Sources and Methods, C. S. O. Occasional Paper (Central Statistical Office, London). Barratt, P. C., S. L. Fates and K. H. N. Meek: 1980, Corporate Donations and Sponsorship as Sources of Incomefor the Arts (Charities Aid Foundation, Tonbridge). Bird, P. and P. Morgan-Jones: 1981, Financial Reporting by Charities (Institute of Chartered Accountants in England and Wales, London). Boyle, A. J. and R. Sykes (eds): 1977, Gore-Browne on Companies, 43rd Edition (Jordan, Bristol). Charity Statistics 1985/86:1986 (Charities Aid Foundation, Tonbridge). Cowton, C.J.: 1983, 'Political and Charitable Contributions', in D. J. Tonkin and L. C. L Skerratt (eds.), Financial Reporting 1983-84: A Survey of U.K. Published Accounts (Institute of Chartered Accountants in England and Wales, London). Cowton, C. J.: 1986, A Study of the Disclosure of Charitable Donations by Companies in the United Kingdom (Institute of Chartered Accountants in England and Wales, London). Dugdale, B.: 1981, 'Shell U.K. Ltd.', in M. Norton (ed.), Raising Moneyfrom Industry (Directory of Social Change, London). Ermann, M. D.: 1978, 'The Operative Goals of Corporate Philanthropy: Contributions to the Public Broadcasting Service, 1972-1976', SocialProblems 25, 504-514. Fry, L. M., G. D. Keim and R. E. Meiners: 1982, 'Corporate Contributions: Altruistic or For-Profit?', Academy of Management Review 25, 94-- 106.

Templeton College,
The Oxford Centre for Management Studies, Kennington, Oxford OX1 5NY, U.K.