In July 2002, Williams Co., a
Tulsa-based energy services company, faced bankruptcy. Williams had followed
Enron into exotic and new businesses, only to see its earnings–and its
reputation–collapse as once-promising revenue segments dried up and allegations
of market manipulation arose. Although impaled in the national press, Williams
caught a break in its hometown. To show their support, Tulsa residents donned
Williams’ caps and T-shirts, baked pies for Williams’ 3,000 Tulsa-based
employees and, more significantly, bought the company’s stock.
Williams had consistently invested in the community since the
1920s, during fat and lean times, and Tulsa residents repaid the favor when
Williams needed it most. Its track record of community citizenship acted like an
insurance policy when this crisis hit; local residents drew upon the
psychological goodwill generated over years of investment, and helped the
company by providing a morale boost to employees and a strong vote of confidence
in Williams’ underlying reputation.
Any company can capture this insurance-like benefit through
effective philanthropy programs. However, corporate leaders have to make sure
they buy both the right type and amount of insurance by finding the best
beneficiaries of corporate giving and determining the appropriate level of
community investment. Insurance is based on a simple, intuitive principle: buy
enough to cover the real costs of potential damages at a price that reflects the
risk of loss. Executives should begin by asking what can go wrong, and what do
we stand to lose?
Risk of Loss. Decision
makers need to think about their company’s exposure to potential negative events
and the resulting losses stakeholders would likely incur. Stakeholder losses
become company losses when affected groups punish the company by devaluing
intangible assets–reduced customer reputation, employee loyalty, reduced trust
among suppliers or investors, less legitimacy with government regulators.
Executives need to identify their stakeholders and the type of negative,
company-generated events that would harm interests dear to these groups.
Philanthropy’s insurance value assumes that firms already
eliminate or mitigate known risks; philanthropy provides little protection when
the company appears negligent. However, community investments will provide
protection–in the form of goodwill–against pure risks, those that cannot be
foreseen, eliminated or mitigated.
Potential Damages. The
goodwill engendered by philanthropy helps protect intangible assets such as
employee loyalty, supplier and investor trust and community legitimacy. A
beginning measure of companywide intangible assets is the company’s
market-to-book ratio. Decision makers should focus on more precise measures of
intangible assets, however, to determine the appropriate level of philanthropic
giving: brand equity, differential employee productivity versus competitors
(loyalty), the number of supplier inclusive development projects or alliances
(trust), or freedom from government oversight (legitimacy).
The individual and combined value of these intangible assets
creates a company’s loss profile. Goodwill must be built up among the relevant
interest groups in proportion to their contribution to intangible asset value.
For example, if brand equity represents a large portion of intangible assets,
then philanthropic activities aimed at customer goodwill should loom large in
giving.
|
