The author is Counsel & Delaware State Manager with Stewart Title Guaranty Company, Delaware Division Manager for Asset Preservation.

This paper will discuss aspects of corporate charity. The author will provide background information covering such areas as, i) statutory allowance for charity, ii) historical perspective of court cases, iii) one local Delaware example, iv) discussion of the reasons behind corporate giving, and then v) form of decision making as to the recipients of corporate charity. After discussing background information we will take an in-depth look at Ben & Jerry's, including the recently announced acquisition by Unilever, and conclude with some thoughts on whether a corporation's standing in the community demands they be a socially active part of society.

Taking a look at Delaware corporations we find that corporations are granted general powers¹ and specific powers.² Specifically, as to charitable giving, the Delaware Code allows for such matters by giving specific powers to corporations to allow them to make donations to society:

§ 122. Specific powers.

Every corporation created under this chapter shall have power to: (9) Make donations for the public welfare or for charitable, scientific or educational purposes, and in time of war or other national emergency in aid thereof.³

From the specific language of the specific powers sub-section, one would believe a Delaware corporation has the power to make charitable gifts for such causes. This sub-section is necessary as no corporation has powers unless conferred upon it by charter, and provided by statute under which it is created.⁴

Many corporations, in the absence of explicit statutory authority and in spite of the traditional language of the courts, regularly made contributions to charitable causes.⁵ The traditional language of the courts on the mission of the business corporation was that this entity existed for the benefit of the shareholders.⁶ But the law did not always take so narrow a view of the corporation's powers. On the contrary, at its genesis, the corporation promised service to society.⁷ It seems ironic that the reason for early corporations was for the good of society.

Today, corporate citizenship and philanthropy are well respected by the courts and often demanded or expected by customers.⁸ Under current legal standards, virtually any charitable contributions will be permitted if they help a company's bottom line, promote better relations with customers or employees or are approved by the company's management in the exercise of its reasonable business judgment.⁹

One of the early cases to decide in favor of the shareholders was Dodge v. Ford Motor Company.¹⁰ In this case Ford decided to lower the price of the car and provide higher wages to its employees, as he declared: "'My ambition,' declared Mr. Ford, 'is to employ still more men; to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes. To do this, we are putting the greatest share of our profits back into the business.'"¹¹ This declaration was purely altruistic. I am of the opinion that this case could have turned on the motive, as is the theory of Shelby D. Green, and been decided in favor of Ford, and his philanthropic ideas, had he not proclaimed purely altruistic objectives:

Instead of proclaiming altruistic objectives, had Mr. Ford simply offered the prospect of increased sales of cars in response to a retail price reduction and increased productivity from employees as a result of higher wages as the reasons for his plan, the court might well have sustained it.¹²

Quoting the court:

A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end and does not extend to a change in the end itself, to the reduction of profits or to the nondistribution of profits among stockholders in order to devote them to other purposes.¹³

To further quote from the Dodge court:

The judges are not business experts. It is recognized that plans must often be made for a long future, for expected competition, for a continuing as well as an immediately profitable venture. The experience of the Ford Motor Company is evidence of capable management of its affairs. It may be noticed, incidentally, that it took from the public the money required for the execution of its plan and that the very considerable salaries paid to Mr. Ford and to certain executive officers and employees were not diminished. We are not satisfied that the alleged motives of the directors, in so far as they are reflected in the conduct of the business, menace the interests of shareholders. It is enough to say, perhaps, that the court of equity is at all times open to complaining shareholders having a just grievance.¹⁴

This admittance of not being business experts, that the plans of the company must be made with long term effects in mind, and the motives were not harmful to the shareholders, opens the door for future courts to not interfere with a company's business decisions when the actions are charitable in nature.

There are some more recent cases where the court has allowed charitable contributions and the courts use language, which would lead one to think judges, have heart. Shelby D. Green refers to these in his article.¹⁵ One example would be A P. Smith v. Barlow¹⁶ where the court stated:

Just as the conditions prevailing when corporations were originally created required that they serve public as well as private interests, modern conditions require that corporations acknowledge and discharge social as well as private responsibilities as members of the communities within which they operate.¹⁷

The court went on to say:

In the light of all of the foregoing we have no hesitancy in sustaining the validity of the donation by the plaintiff. There is no suggestion that it was made indiscriminately or to a pet charity of the corporate directors in furtherance of personal rather than corporate ends. On the contrary, it was made to a preeminent institution of higher learning, was modest in amount and well within the limitations imposed by the statutory enactments, and was voluntarily made in the reasonable belief that it would aid the public welfare and advance the interests of the plaintiff as a private corporation and as part of the community in which it operates. We find that it was a lawful exercise of the corporation's implied and incidental powers under common-law principles and that it came within the express authority of the pertinent state legislation. As has been indicated, there is now widespread belief throughout the nation that free and vigorous non-governmental institutions of learning are vital to our democracy and the system of free enterprise and that withdrawal of corporate authority to make such contributions within reasonable limits would seriously threaten their continuance. Corporations have come to recognize this and with their enlightenment have sought in varying measures, as has the plaintiff by its contribution, to insure and strengthen the society which gives them existence and the means of aiding themselves and their fellow citizens. Clearly then, the appellants, as individual stockholders whose private interests rest entirely upon the well-being of the plaintiff corporation, ought not be permitted to close their eyes to present-day realities and thwart the long-visioned corporate action in recognizing and voluntarily discharging its high obligations as a constituent of our modern social structure.¹⁸

 

The court went further and discussed the charitable giving in the historical context:

When the wealth of the nation was primarily in the hands of individuals they discharged their responsibilities as citizens by donating freely for charitable purposes. With the transfer of most of the wealth to corporate hands and the imposition of heavy burdens of individual taxation, they have been unable to keep pace with increased philanthropic needs. They have therefore, with justification, turned to corporations to assume the modern obligations of good citizenship in the same manner as humans do. Congress and state legislatures have enacted laws which encourage corporate contributions, and much has recently been written to indicate the crying need and adequate legal basis therefor.¹⁹

It seems clear to us that the public policy supporting the statutory enactments under consideration is far greater and the alteration of pre-existing rights of stockholders much lesser than in the cited cases sustaining various exercises of the reserve power. In encouraging and expressly authorizing reasonable charitable contributions by corporations, our State has not only joined with other states in advancing the national interest but has also specially furthered the interests of its own people who must bear the burdens of taxation resulting from increased state and federal aid upon default in voluntary giving.²⁰

Another example would be in Union Pac. R.R. Co. v. Trustees, Inc.²¹ where the court stated:

To illustrate a type of corporate power that we would consider implied, that within the first decade of its existence, on the occasion of the San Francisco earthquake, … the Union Pacific, without charge, shipped in 1,600 carloads of food and material and gave $200,000 cash to, and evacuated a quarter of a million persons from the stricken area gratis.²²

This later type of charity has been seen recently when Miller Brewing Company bottled water (instead of beer) and distributed the water to a remote, rural area that was devastated by flood.²³ While the author was not able to determine the costs involved, it is highly likely (based on prior documented cases) that Miller spent more money on advertising their good deed than the costs associated with the water bottling. We will discuss this again under our sub-topic of reasons why corporations are charitable.

Both A.P. Smith and Union Pac. R.R. Co. cases were quoted in Theodora Holding Corporation v. Henderson.²⁴ This is a Delaware case, dealing with a number of corporate issues, where we will only concentrate on the issue of charitable gifts. In this case one of the defendants made a sizeable gift: "The next matter to be considered is the propriety of the December 1967 gift made by Alexander Dawson, Inc. to the Alexander Dawson Foundation of shares of stock of the corporate defendant having a value in excess of $525,000…"²⁵ The court relied on this being within the Internal Revenue Code guidelines and within the Delaware Code: "Title 8 Del.C. § 122 provides as follows:

"Every corporation created under this chapter shall have power to -- (9) Make donations for the public welfare or for charitable, scientific or educational purposes, and in time of war or other national emergency in aid thereof."²⁶ The court found the charitable act to be an obligation: "The recognized obligation of corporations towards philanthropic, educational and artistic causes is reflected in the statutory law of all of the states, other than the states of Arizona and Idaho."²⁷

The court concluded with a commentary on the social advantages in the world of that day for the corporation to make such donations:

I conclude that the test to be applied in passing on the validity of a gift such as the one here in issue is that of reasonableness … It is accordingly obvious, in my opinion, that the relatively small loss of immediate income otherwise payable to plaintiff and the corporate defendant's other stockholders, had it not been for the gift in question, is far out-weighed by the overall benefits flowing from the placing of such gift in channels where it serves to benefit those in need of philanthropic or educational support, thus providing justification for large private holdings, thereby benefiting plaintiff in the long run. Finally, the fact that the interests of the Alexander Dawson Foundation appear to be increasingly directed towards the rehabilitation and education of deprived but deserving young people is peculiarly appropriate in an age when a large segment of youth is alienated even from parents who are not entirely satisfied with our present social and economic system.²⁸

It would appear that the Business Judgment Rule would protect many managers in their corporate philanthropic ventures if their actions can be justified under the Business Judgment Rule. In many states other than Delaware the charitable actions could be protected under state constituency laws.²⁹ With the recent enactment of state constituency laws, the idea of local communities, and presumably nonprofits, as stakeholders deserving of organizational attention and resources, has been codified at the level of individual statutes.³⁰

Locally, in the Delaware corporate community, MBNA Corporation ("MBNA") is very active in its community efforts. MBNA focuses much of it community effort on education.³¹ The MBNA Education Foundation was established to improve the quality and availability of education, especially to economically disadvantaged young people, and to provide financial support for innovative academic programs.³²

MBNA continues to increase there funding of the MBNA Education Foundation by doubling the Foundation's original funding to $60 million in 1998.³³ MBNA also encourages employees to donate personal time with over 250,000 hours of personal time devoted to charitable and educational causes in 1999.³⁴

The MBNA Education Foundation is only three years old but according to MBNA it has had a major impact on students, teachers and the community; and MBNA will continue to improve because of this:

Though it was established just three years ago, the Foundation is already having a profound impact. Students and teachers are benefiting from educational opportunities and programs that were unavailable to them before.

As the Foundation continues its work, its impact in the community will widen with the happy result of significantly improving the quality of future people of MBNA.³⁵

This author is of the opinion that it could be said there are almost as many reasons why corporations give to charity as there are corporations giving to charity. No one reason stands out as a primary reason for giving, with the amount and attitude towards giving varying with each giver.

"Cause-related marketing," conceived by American Express in 1983 when it (very publicly) promised to make a penny contribution to the Statute of Liberty restoration for every use of an American Express credit card, was embraced by man other American companies to the point that, for some, the marketing of the giving campaign to the public cost many times the amount actually given as a corporate charitable contribution.³⁶

Often this cause-related marketing results in expenditures by the corporation to promote to others what they are doing, to both encourage others and draw praise to themselves; and, importantly sometimes results in substantial new business.³⁷

One of the most calculating uses of corporate philanthropy was found in the tobacco industry, where Ross Johnson, then CEO of RJR Nabisco, used a number of techniques to cosset his board of directors and ensure their personal loyalty to him. " 'One of the most important jobs a CEO has is the care and feeding of the directors,' Johnson said."³⁸ When he needed a critical vote from Paul Sticht, a former RJR executive serving on the company's board, Johnson offered Sticht a generous consulting contract and also arranged a $6 million donation from RJR to the J. Paul Sticht Center on Aging at the Bowman Gray School of Medicine.³⁹ "Sticht soon came around," observers noted.⁴⁰ At one point, Johnson arranged for the RJR Nabisco Foundation to make a "fat donation" to a small Florida college where one of his directors' wives was a trustee (both Johnson and his wife received honorary degrees).⁴¹

The RJR charitable contributions are not, in this author's view, given in the spirit of "giving." Not surprisingly, when Johnson ultimately launched a leveraged buyout for the company in 1988, many of these directors supported Johnson in the face of national outrage at the gluttonous terms Johnson had crafted for himself.⁴² Though Johnson lost his attempt to take over RJR, this shows that some giving is done with devious ulterior motives in mind.

Another selfish reason for charitable contributions, though not as devious as Johnson of RJR, has to do with building the CEO's worth in the marketplace, or, "Image is everything."⁴³ CEO's who are generally successful in increasing their corporations' charitable contributions, and specifically successful in directing corporate charitable contributions toward organizations whose goals are favored among their social and business peers, are perceived by those peers as being more successful in business, and hence more valued colleagues, than other CEO's who are less influential in stimulating corporate charitable gifts.⁴⁴ In economic terms, stimulating corporate charitable activity enhances one's value in the market for managerial labor.⁴⁵

Contrast the selfish reasons with that of the National Bank of Alaska. From a letter written from Edward B. Rasmuson, Chairman, National Bank of Alaska, to Jonathan G. Katz, Secretary, SEC (Dec. 15, 1997), Rasmuson contends that:

We are not in the business of publicizing our donations or seeking recognition. We believe that philanthropy is good business. We believe that our company management is in the best position to access which contributions to make and we expend a significant number of dollars each year in support of staff whose job is to review the many we requests for support we receive.⁴⁶

This is a great example of a non-selfish corporate attitude.

One very recent act of giving by Miller could have been for a couple of reasons.⁴⁷ Certainly they have the capabilities of changing their bottling operation from beer bottling to water bottling, and as such could provide a much-needed service to an area devastated by Mother Nature's flooding. Other than the pure hearted ability to help people in need, the ulterior motive may have been so they could have 'bragged' about their good nature in hopes of raising the consumers' awareness in their company. I would offer that this ulterior motive had to be part of their plan, otherwise there would be no need for advertising such kindness. A kinder rational for the advertisements could be read into Shelby Green's conclusions:

From an analysis of the judicial cases and actual charitable practices of some of the largest corporate contributors, two positions seem valid: 1) any gift can be couched in such terms as to promise the kinds of intangible, long-run benefits held by the courts as legally sufficient and 2) any charitable contributions to generally social causes thus benefits the corporation.

To achieve these benefits, the philanthropic object need not be related to the corporation. Instead, the corporation's only burden is to publish its efforts. In other words, it is simply the act of giving, when known, which generates favorable attitudes among employees, customers and the electorate.⁴⁸

No matter what the reason for corporate giving, if one believes that image translates to sales and costs, firm profits are affected by corporate contributions.⁴⁹ This would support the often-quoted phrase: "Image is everything."⁵⁰

Corporate charity "…has been institutionalized in the last fifteen years, complete with grant-giving guidelines, standardized application procedures…"⁵¹ This is clearly evident to someone reading the MBNA 1999 Annual Report,⁵² or Ben & Jerry's Foundation funding priorities.⁵³ Ben & Jerry's has an elaborate application process with many requirements to be followed by the applicant. They even go so far as to ask applicants to be environmentally social conscious when they apply:

Ben & Jerry's Foundation separates and recycles the large volume of applications received each year. We ask that you assist us in this process in several ways:

To conserve resources, please consider using recycled paper and double-side copy your application. Please avoid using plastic covers, sheet protectors, and glossy photos. On behalf of the earth and her natural resources, we thank you for your cooperation. Important! Please do not send additional backup materials, videos or cassettes with your Letter of Interest as they will not be reviewed and cannot be returned.⁵⁴

Ben & Jerry's Homemade, Inc. ("Ben & Jerry's"), a Burlington, Vermont based ice cream company, has long been known for their social stances, having formalized their basic business philosophy in 1988.⁵⁵ Just 10 years after forming Ben & Jerry's, co-founders Jerry Greenfield and Ben Cohen and other members of the Board of Directors, adopted the following Statement of Mission:

BEN & JERRY'S STATEMENT OF MISSION

BEN & JERRY'S IS DEDICATED TO the creation & demonstration of a new corporate concept of linked prosperity. Our mission consists of three interrelated parts.

UNDERLYING THE MISSION is the determination to seek new and creative ways of addressing all three parts, while holding a deep respect for individuals inside and outside the company, and for the communities of which they are a part.

Product

To make, distribute and sell the finest quality all natural ice cream and related products in a wide variety of innovative flavors made from Vermont dairy products.

Economic

To operate the Company on a sound financial basis of profitable growth, increasing value for our shareholders, and creating career opportunities and financial rewards for our employees.

Social

To operate the Company in a way that actively recognizes the central role that business plays in the structure of society by initiating innovative ways to improve the quality of life of a broad community - local, national, and international.⁵⁶

It is interested to take a closer look part of this mission statement:

Underlying the mission of Ben & Jerry's is the determination to seek new & creative ways of addressing all three parts, while holding a deep respect for individuals inside and outside the Company and for the communities of which they are a part.⁵⁷ While they are clearly cognizant of the need to produce a good product and increase the bottom line to the shareholder, the overriding objective, which appears essential, is to have respect for the community.

The social consciousness of the founders is clearly evident in the mission statement for the Ben & Jerry's Foundation: "The Mission of the Ben & Jerry's Foundation is to make the world a better place by empowering Ben & Jerry's employees to use available resources to support and encourage organizations that are working towards eliminating the underlying causes of environmental and social problems".⁵⁸

'To make the world a better place' is a bold statement, but it is the belief of the co-founders, and now appears to be that of all of the employees. Ben & Jerry's has strived to integrate into its day-to-day business decisions a concern for the community and to seek ways to lead with its progressive values.⁵⁹ The Company makes cash contributions equal to 7.5% of its pretax profits to philanthropy through The Ben & Jerry's Foundation (the "Foundation"), Community Action Teams, which are employee led groups from each of its five Vermont sites, and through corporate grants.⁶⁰ How much is 7.5% of it pretax profits? For 1999, the 7.5% amounted to approximately $1,120,000.⁶¹

It is possible for a company to be as socially responsible as Ben & Jerry's; but what happens when another company acquires them? Recently it was announced that Ben & Jerry's would be acquired by Unilever,⁶² the multinational conglomerate that makes such products as Wisk detergent, Q-tips and Popsicles, for $326 million.⁶³ This price was $43.60 per share, or nearly 25 percent over Ben & Jerry's closing price Tuesday (one day earlier) of $34.93.⁶⁴

Those at Ben & Jerry's believe the company's 'mission' will survive the acquisition as evidenced in this stock market report:

With this transaction, shareholders will be rewarded for their investment; Ben & Jerry's employees will be protected; the current social mission of Ben & Jerry's will be encouraged and well-funded, which will lead to improved performance in this area; and an opportunity has been offered for Ben & Jerry's to contribute to Unilever's social practices worldwide.

In commenting on the transaction, Ben Cohen and Jerry Greenfield, the co-founders of Ben & Jerry's, said: "Neither of us could have anticipated, twenty years ago, that a major multinational would some day sign on, enthusiastically, to pursue and expand the social mission that continues to be an essential part of Ben & Jerry's and a driving force behind our many successes. But today, Unilever has done just that. While we and others certainly would have preferred to pursue our mission as an independent enterprise, we hope that, as part of Unilever, Ben & Jerry's will continue to expand its role in society."⁶⁵

Unilever gave assurances that Ben & Jerry's charitable giving will continue.⁶⁶ Richard Goldstein, president of Unilever Foods North America, said he hopes the company will continue its social mission.⁶⁷ "Much of the success of the Ben & Jerry's brand is based on its connections to basic human values, and it is our hope and expectation that Ben & Jerry's continues to engage in these critical, global economic and social missions," he said.⁶⁸ As the stockholders made clear, their investment in this ice cream company has less to do with its profitability than how it goes about making its profits.⁶⁹

More astonishing than the corporate "giving away" profits is its policy to purchase certain products that favor family farms and sustainable agriculture. He (Ben & Jerry's CEO Perry Odak) said it would continue manufacturing exclusively in Vermont --- and, at least for now, continue paying a premium for milk from the state's dairy farmers and continue using milk only from cows not treated with a controversial growth hormone.⁷⁰ Not only does Ben & Jerry's donate 7.5 percent of its pre-tax profits to charity, it maintains a so-called double bottom line dedicated to earning a profit and promoting social good, such as buying its nuts from sustainable farms in South American rain forests.⁷¹ Ben & Jerry's takes its mission statement seriously.

Ben & Jerry's activities have earned it high marks in the state capitol. Gov. Howard Dean has practically declared the company a symbol of the state it calls home.⁷² "Ben & Jerry's has probably done more to market Vermont than any company in the last 20 years," he said.⁷³

It is interesting to note that MBNA and Ben & Jerry's are both stocks that The Domini Social Equity Fund invest in.⁷⁴ The fund invests in socially responsible companies so that investors can invest their money in stocks which have a sense of social responsibility:

The Domini Social Equity Fund (DSEF) is a no-load mutual fund which seeks to provide its shareholders with long-term total return which corresponds to the total return performance of the Domini 400 Social Index (DSI), an index of 400 companies that pass multiple broad-based social or ethical screens. The DSI includes companies with positive records in community involvement, the environment, employee relations, product related issues, and hiring practices. It strives to avoid companies with significant revenues from alcohol, tobacco, gambling, nuclear power and weapons contracting.

The DSEF addresses both the social and financial needs of today's social investors. The Fund offers you an opportunity to invest in a diversified stock portfolio for long-term total return while being consistent with your sense of social responsibility. Further, the Fund's management votes its shareholder proxies in a manner consistent with its corporate accountability approach.⁷⁵

This paper has discussed different aspects of corporate charity. Providing a brief background of statutory allowance as to Delaware, and a historical perspective of court cases, we conclude that corporations are permitted to be charitable.

Being permissible, we turned our attention to why corporations are charitable. While there is no simple conclusion to this question, we discussed some of the many reasons. Some were downright devious. Those, while the ulterior motive was in some cases despicable, at least resulted in good to the community with many millions of dollars be donated. Many corporations take it upon themselves to do their community duty, and be charitable with no expectations of praise. Still others do good deeds, and then spend more money 'advertising' their good deed than initially given in charity. Again, the community has benefited by their kindness and the company gets as much 'mileage' as possible by trumpeting their good deed to the world. One might summarize that the bottom line to charitable work as: "Image is everything."

As corporations have become more involved in the community and in turn are sought out by charities and causes, they have created an internal method of dealing with such requests. Many have stringent rules to follow when requesting fund grants. Each company handles this in their own way. As with Ben & Jerry's, they have a lengthy procedure that is designed, not to make it difficult, but to be able to properly review the many requests and spread as much around as possible.

That brings us to Unilever's recently announced plans to acquire Ben & Jerry's. This is just the beginning, as this proposed acquisition makes for an interested future study. Will Unilever continue the charitable ways of Ben & Jerry's? They say they will. The corporate executives even acknowledge the charitable ways of Ben & Jerry's is part of the 'value' in the company. It can only be hoped that Unilever continues with Ben & Jerry's past history of charitable work to the community. Ben & Jerry's is a great model for other companies to follow to become a part of the social community and do their part in corporate society, by also being part of, and benefiting, society.

I would like to leave you with the words of the Delaware court in Theodora Holding Corporation, with my own emphasis added, "The recognized obligation of corporations toward philanthropic, educational and artistic causes is reflected in the statutory law of all of the states….," and with the words of the New Jersey court in A.P. Smith, also with my own emphasis added, "In encouraging and expressly authorizing reasonable charitable contributions by corporations, our State has not only joined with other states in advancing the national interest but also furthered the interest of its own people.

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Endnotes