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The Effect of Large Corporate Donors on Non-profit Performance

Journal of Business Ethics volume 172, pages 463–485 (2021)Cite this article

Abstract

Using a dataset of corporate philanthropic gifts of $1 million or more, we examine the influence of corporate donors on the performance of recipient non-profit organizations (NPOs). We find that corporate donors positively influence NPO performance, specifically in the form of higher revenues per employee, program ratios, and fundraising returns. We find little evidence that large foundation or individual donors similarly enhance organizational performance. In additional analysis, we find that large corporate donations matter when the corporation is more likely to have influence over the recipient NPO. These findings suggest that corporate donors provide the monitoring and expertise needed to enhance organizational performance beyond simply providing funding to NPOs. Our results are robust to a two-stage model and propensity score matching to address endogeneity concerns. While prior research has examined the effect of corporate philanthropy on donor organization performance, we contribute to the literature by examining whether corporate philanthropy also improves recipient organization performance.

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Notes

  1. We treat gifts from other grant-making entities as foundation gifts. When donations come from a foundation identified by the Million Dollar List as a corporate foundation (e.g., AT&T Foundation), we consider that donation as coming from the corporation (e.g., AT&T). The Million Dollar list is accessible at www.milliondollarlist.org.

  2. A stream of literature examines NPOs’ manipulation of the program ratio (i.e., Yetman and Yetman 2013) by understating administrative or fundraising expenses. We expect corporate donors to be better able to detect program ratio manipulation, such that corporate philanthropy recipients should be less likely to appear better performing because of a manipulated program ratio. Further, while any manipulation would impact measurement of the ProgramRatio and FundraisingRatio, it does not impact the RevPerEmployee metric.

  3. To further alleviate concerns about a mechanical relationship, we remove any gifts included in the Million Dollar List database from our RevPerEmployee or FundraisingRatio outcome variables measured in year t. Our results are robust to this modification.

  4. Our results are robust to excluding NPOs without fundraising expenses from the analysis.

  5. Of the 1184 NPO-years receiving a large corporate gift, 242 do not receive large gifts from foundations or individuals, 490 receive a large gift from a foundation but not an individual, 42 receive a large gift from an individual but not a foundation, and 410 receive gifts from foundations and individuals.

  6. Multiplying the coefficient estimate of 0.413 in the RevPerEmployee specification by the standard deviation of CorporateDonorAmount (0.064) indicates a 2.7 percent increase in revenue per employee. We then multiply this percentage by the average unlogged revenue per employee in our sample, $389,597, to derive the $10,298 increase for the average NPO. For the FundraisingRatio specification, multiplying the coefficient estimate of 0.068 by the standard deviation of CorporateDonorAmount yields a 0.004 increase in the FundraisingRatio, which represents a 0.5 percent increase for the average NPO with an 86.3 percent fundraising ratio. We then multiply this percent increase by the average fundraising revenue in our sample, $57.8 M, to derive how much more fundraising revenue the average NPO retains.

  7. We attempt to identify whether officers or directors from the corporate donor obtain seats on the NPOs board, but are not able to find sufficient matches using BoardEX to identify corporate officer and director names and data from Guidestar to identify NPO board members. When we regress BoardSize on corporate philanthropy and the controls from our model, excluding BoardSize2, we note that NPOs receiving large corporate gifts have 12.4 percent larger boards, suggesting that NPOs may create additional board seats corporate donors fill to better oversee NPO operations.

  8. For example, assume over the seven-year period that an NPO has received $1 M donations from three different corporate donors. Donor one has donated once in the seven-year period. Donor two has donated three times in the seven-year period. Donor three has donated five times in the seven-year period. In this example, CorporateRepeatTotal will take the value of five (i.e., the number of times the most frequent donor has donated in the seven-year period). A limitation of this approach is that we do not have matched pairs of corporate donors and NPO recipients prior to 2005 to assess relationship durability over an even longer span.

  9. We note that our results are robust to alternatively specifying a fully interacted model.

  10. Once again, we note that our results are robust to alternatively specifying a fully interacted model.

  11. We remove corporate donor recipients from the sample where the underlying information necessary to compute the donor characteristic is not available. Drawing inferences from these tests is difficult because many NPOs receive gifts from multiple corporations during the corporate philanthropy measurement window. Where this occurs, our proxy for each of our cross-sectional tests is an average of the various corporate donors, weighted by the gift amount.

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Acknowledgements

We thank the editor and two anonymous reviewers for their useful feedback. We appreciate constructive comments from Leslie Eldenburg, Linda Parsons (discussant), Dan Neely, participants at the 2019 AAA GNP mid-year meeting, and workshop participants at the University of Connecticut and Claremont McKenna College. We thank Anthony Deras and Leon Ren for their research assistance. We also thank two anonymous non-profit executives and a corporate giving officer for agreeing to interviews.

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Authors and Affiliations

  1. Robert Day School of Economics & Finance, Claremont McKenna College, Claremont, CA, 91711, USA

    Andrew R. Finley

  2. LeBow College of Business, Drexel University, 3220 Market St, Room 934, Philadelphia, PA, 19104, USA

    Curtis Hall

  3. College of Business, Florida International University, Miami, FL, 33199, USA

    Erica Harris

  4. Neeley School of Business, Texas Christian University, Fort Worth, TX, 76129, USA

    Stephen J. Lusch

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  1. Andrew R. Finley
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Appendix: Variable Definitions

Appendix: Variable Definitions

Performance metrics
 RevenuePerEmployee Natural log of the ratio of total revenues to total employees at year end
 ProgramRatio Program expenses divided by total expenses
 FundraisingRatio Revenue from donations less fundraising expenses, scaled by revenue from donations
Test variables
 CorporateDonorInd Indicator variable equal to one if the NPO received a corporate gift of $1 million or more from t − 3 to t − 1, and zero otherwise
 CorporateDonorAmount Sum of all corporate gifts of $1 million or more to the NPO from t − 3 to t − 1, scaled by total private donations from t − 3 to t − 1
 FoundationDonorInd Indicator variable equal to one if the NPO received a gift from a foundation of $1 million or more from t − 3 to t − 1, and zero otherwise
 FoundationDonorAmount Sum of all foundation gifts of $1 million or more to the NPO from t − 3 to t − 1, scaled by total private donations from t − 3 to t − 1
 IndividualDonorInd Indicator variable equal to one if the NPO received a gift from an individual of $1 million or more from t − 3 to t − 1, and zero otherwise
 IndividualDonorAmount Sum of all individual gifts of $1 million or more to the NPO from t − 3 to t − 1, scaled by total private donations from t − 3 to t − 1
 CorporateRepeatTotal Number of years over the last seven-year period the most frequent corporate donor has contributed at least $1 million to the NPO
 RepeatDonor Indicator variable equal to one for NPOs that receive multiple large donations from a specific corporation over the last seven years, and zero otherwise
Control and other variables
 GovernanceIndex Average of four governance sub-indices (governing body, governing policies, compensation policies, accounting and transparency, where each sub-index is defined as the ratio of the sum of the indicator variables as a proportion of the total number of possible responses for each NPO-year observation where each response is weighted by its annual cross-sectional standard deviation (see Newton (2015) for additional detail on construction of this variable)
 Employees Natural log of the number of employees at the NPO at year end
 Size Natural log of total assets of the NPO at year end
 ZeroFundraising Indicator variable coded as one if the NPO does not report any fundraising expenses with simultaneous non-zero donations during the year, and zero otherwise
 GovGrants Total donations from government grants scaled by total revenue
 Liquidity Sum of cash, savings and temporary cash investments, accounts and pledge receivables, divided by total expenses
 Leverage Total liabilities divided by total assets
 TangibleAssets Land and buildings divided by total assets
 BoardSize Natural log of the number of members on the board of directors
 DonationGrowth Change in the ratio of private donations to total revenues from t − 2 to t − 1
 Commercial Indicator variable equal to one if the ratio of program revenues to program revenues and private donations exceeds 90%, and zero otherwise
 LogFundraisingExpenses Natural log of one plus fundraising expenses
 LogGovGrants Natural log of one plus government grants
 LogProgramRevenue Natural log of one plus program services revenue
LogPrivateDonations Natural log of one plus private donations
 Age Number of years since formation

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Finley, A.R., Hall, C., Harris, E. et al. The Effect of Large Corporate Donors on Non-profit Performance. J Bus Ethics 172, 463–485 (2021). https://doi.org/10.1007/s10551-020-04516-2

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  • DOI: https://doi.org/10.1007/s10551-020-04516-2

Keywords

  • Non-profit organizations
  • Corporate philanthropy
  • Governance
  • Organizational performance