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Framework Guides Managers in Structuring Charitable Activities

3/11/2004 --

The right organizational governance structure for community involvement can help firms maximize strategic benefits.

ANN ARBOR, Mich. – Companies have a great deal to gain from engaging in activities that benefit the community, such as making charitable donations, organizing employee volunteer programs, giving direct relief to the needy and partnering with nonprofit groups.

Many community initiatives require significant amounts of firm resources and are directly related to the firm's core competencies while others require little participation. Once a company has settled on a specific type of community support, however, it must decide how best to organize and manage that activity.

"When structuring their programs, firms should consider the resources and capabilities they are devoting to the project and the potential for that activity to provide a competitive advantage in the marketplace," says David Hess, assistant professor of business law at the University of Michigan Business School. "Certain community-involvement programs are best done by the firm or through a partnership to achieve the greatest strategic benefit for the company. Other programs can be done through outsourcing to achieve the same benefit to the firm and the community but at a lower cost."

Organizational governance decisions, he says, will be influenced by differences in the strategic goals and potential benefits of various social initiatives, as well as by the costs of the governance mechanism and opportunism (monitoring the behavior of a nonprofit group or charity and enforcing or renegotiating the donee contract).

Hess says that depending on the community activity's relation to the firm's core competencies and contribution to competitive advantage, the company may choose among markets, hierarchies or intermediate forms of governance for the activity. This choice is important because it may affect the strategic benefits the firm receives.

Simply making donations of cash or products to charities is a market form of governance, whereas organizing and conducting community-involvement projects within the firm represents a hierarchical form. As an intermediate choice, the company may opt for a joint venture or strategic alliance with another organization, such as a community nonprofit group.

Hess presents a quadrant-style framework to guide managers in selecting the organizational governance form that enables their firms to achieve the greatest strategic benefits from social initiatives. These benefits may include creating both a "safety net" for reputation damage and an "opportunity platform" to improve corporate reputation, as well as promoting a corporate culture that can lead to improved performance.

Companies also can benefit by spanning boundaries to gain greater understanding of stakeholder concerns and expectations and by integrating community involvement programs into their long-term development strategies for products and services.

As an example, a firm that does not utilize its specialized resources or knowledge base in a community involvement program and receives no significant strategic benefit, may decide that the added costs of bringing the activity within its boundaries are not justified. In this case, the firm is better off "buying" the activity (market form) by providing donations to a nonprofit organization rather than "making" it by attempting to provide the service directly.

In contrast, if a firm relies on its core competencies for a community program and the initiative provides a potential for competitive advantage, the firm is in the best position to capture the benefits by conducting the activity itself (hierarchical form) rather than outsourcing it.

In cases where resources that provide a competitive advantage are embedded in the relationship between two or more firms or in a firm's alliance with a community group, the preferred choice of governance may be a partnership or joint venture (intermediate form). This cooperative approach enables two organizations to create greater benefits for each other and the community than either would be able to provide alone.

"As firms become involved in projects through corporate social initiatives that require significant commitments of resources, the issue of governance becomes more important, especially with the blurring of lines between what may be considered corporate philanthropy or community involvement and what is done solely for strategic benefits," Hess says.

For more information, contact:
Bernie DeGroat
Phone: (734) 936-1015 or 647-1847