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Donate Money, but Whose? An Empirical Study of Ultimate Control Rights, Agency Problems, and Corporate Philanthropy in China

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Abstract

Using empirical evidence gathered from Chinese listed companies, this article explores the relationship between micro-governance mechanisms and corporate philanthropy from a corporate governance perspective. In China’s emerging market, ultimate controlling shareholders of state-owned enterprises (SOEs) are reluctant to donate their assets or resources to charitable organizations; in private enterprises (PEs) marked by more deviation in voting and cash flow rights, such donations tend to be more likely. However, the ultimate controllers in PEs refuse to donate assets or resources they control or own, which implies that corporate philanthropy by PEs comes at the cost of others, through assets or resources owned by minority shareholders. Even after devastating natural disasters such as the 2008 Wenchuan Earthquake, the controlling shareholders continue to express reluctance to donate any assets they control. Despite widespread evidence that corporate philanthropy boosts corporate growth and profitability, these ultimate controllers indicate no intention to donate their own money as a means to improve corporate performance.

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Notes

  1. According to agency theory, corporate philanthropy improves the private benefits of CEOs but does not maximize shareholders’ interests (Atkinson and Galaskiewicz 1988). Corporate philanthropy can help managers improve their social status, self-image, and reputation (Galaskiewicz 1997; Haley 1991).

  2. Strategic motivations for political–corporate philanthropy behaviors reflect the goal of maximizing returns on political investments (Sa´nchez 2000). Neiheisel’s (1994) political enterprise model suggests that corporate philanthropy can help companies achieve certain political benefits and thus earn more money. With data from 2,870 PEs in China, Ma and Parish (2006) find that Chinese enterprises obtain political legitimacy and status by donating money to the government.

  3. Graham and Dodd (1934) note that investors can invest less but gain benefits and survive by taking advantage of a pyramid structure. Bebchuk et al. (1999) demonstrate that shareholders can control many companies, with little investment.

  4. Similarly, it may keep managers from donating for their own utility (Atkinson and Galaskiewicz 1988; Galaskiewicz 1997; Haley 1991).

  5. Sa´nchez (2000) notes that corporate philanthropy can help companies build brand cognition and loyalty, as well as attract and retain employees. Hess et al. (2002), Smith (1994), and Vidaver-Cohen and Altman (2000) confirm that corporate philanthropy is a good global market entry strategy. Su and Zhong (2009) find that CSR activities (including donations) relate positively to the degree of industry internalization.

  6. Researchers disagree about the relationship between corporate donations and financial performance. For example, using empirical evidence from listed Fortune 1,000 companies, Seifert et al. (2004) find that corporate donations have no significant impact on corporate performance; Wang et al. (2008), using a cost–benefit analysis framework, indicate an inverted U-shaped relationship between corporate donations and financial performance. These conflicting findings indicate that strategic philanthropy includes institutional motivations that move beyond economic objectives, and the top management of companies also may lack donation knowledge and skills, such that they waste corporate resources.

  7. After the Wenchuan Earthquake on May 12, 2008, consumers were so moved by Wang Laoji’s donations to relief efforts that the soft drink brand ran out of stock in 2 days. In this textbook case, charitable donations enhanced performance and encouraged positive market reactions.

  8. The relatively few A-share listed companies between 2003 and 2005 led the regression analysis to focus on data obtained between 2006 and 2008. The empirical results and conclusions did not change. Space limitations prevent the presentation of these empirical analysis results, but they are available on request.

  9. The regression results of Model I are significant at 10.7 %, close to the 10 % criterion.

  10. La Porta et al. (1999) and Claessens et al. (2000) indicate that deviations of VR and CFR are easy to find in family-controlled enterprises.

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Acknowledgments

This research was in part supported by The National Social Science Fund of China (Grant No.: 14BGL194), Philosophy and Social Science Planning Foundation of Shanghai (Grant No.: 2012BGL003), Innovation Program of Shanghai Municipal Education Commission (Grant No.: 13ZS009), National Natural Science Foundation of China (Grant No.: 71302166, 70802015), and Social Sciences and Humanities Research Council of Canada.

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  1. York University, Toronto, Canada

    Justin Tan

  2. Tianjin University, Tianjin, China

    Justin Tan

  3. Fudan University, Shanghai, China

    Yuejun Tang

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Correspondence to Yuejun Tang.

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Tan, J., Tang, Y. Donate Money, but Whose? An Empirical Study of Ultimate Control Rights, Agency Problems, and Corporate Philanthropy in China. J Bus Ethics 134, 593–610 (2016). https://doi.org/10.1007/s10551-014-2386-2

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