MEASURING THE VALUE OF CORPORATE PHILANTHROPY: SOCIAL IMPACT, BUSINESS BENEFITS, AND INVESTOR RETURNS by Terence Lim, Ph.D. Report Author and Manager, Standards and Measurement, Committee Encouraging Corporate Philanthropy (through the 2008–2009 Goldman Sachs Public Service Program)

How to measure the value and results of corporate philanthropy remains one of corporate giving professionals’ greatest challenges. Social and business benefits are often long-term or intangible, which make systematic measurement complex. And yet: Corporate philanthropy faces increasing pressures to show it is as strategic,cost-effective, and value-enhancing as possible. The industry faces a critical need to assess current practices and measurement trends, clarify the demands practitioners face for impact evidence, and identify the most promising steps forward in order to make progress on these challenges.

This report aims to meet that need, by providing the corporate philanthropic community with a review of recent measurement studies, models, and evidence drawn from complementary business disciplines as well as the social sector. Rather than present an other compendium of narrative accounts and case studies, we endeavor to generalize the most valuable concepts and to recognize the strengths and limitations of various measurement approaches. In conjunction with the annotated references that follow, the analysis herein should provide an excellent starting point for companies wishing to adapt current methodologies in the field to their own corporate giving programs. To realize meaningful benefits, philanthropy cannot be treated as just another "check in the box," but rather must be executed no less professionally, proactively, and strategically than other core business activities. Our hope is that this work will enlighten giving professionals, CEOs, and the investor community to the many mechanisms by which philanthropic investments can be measured and managed to achieve long-term business value and meet critical societal needs.

Introduction

Corporate philanthropy is as vital as ever to business and society but it faces steep pressures to demonstrate that it is also cost effective and aligned with corporate needs. Indeed many corporate giving professionals cite measurement as their primary management challenge. Social and business benefits are often long-term, intangible or both and a systematic measurement of these results can be complex. Social change takes time. The missions and intervention strategies involved are diverse. For these reasons, the field of corporate philanthropy has been unable to determine a shared definition or method of measurement for social impact. Similarly, the financial value of enhancing intangibles such as a company's reputational and human capital cannot be measured directly and may not be converted into tangible bottom line profits in the near term. Corporate givers and grant recipients often useless formal anecdotal methods to convey impact. While stories may vitalize and publicize a program's successes, it is more systematic measurement that brings rigor and discipline to the field. Data-based evidence quantifies the positive effects of corporate philanthropy thus making a more persuasive case for why companies should engage in philanthropic causes. If corporate philanthropy is to make progress in meeting these challenges, the industry must meaningfully assess current practices and measurement trends, clarify precisely what is needed in terms of impact evidence and then identify the most promising and practical steps forward. This report is designed to aid that critical agenda. Interviews with senior corporate management and giving professionals revealed a set of common questions they often face. These questions fall naturally into a hierarchy of three conversations:

CONVERSATION ONE: Between grant recipients and their corporate funder's Chief Giving Officer (CGO). The funder wants to know

How to assess whether grantees are achieving the intended results and
How to estimate a return on investment ROI numeric for comparing and or aggregating the effectiveness across different grants in achieving social results

CONVERSATION TWO: Between the CGO and Chief Executive Officer (CEO).

When pressing the CEO for significant commitment to philanthropic programs the CGO is often asked to articulate a business case and demonstrate how supporting the philanthropic initiative will be valuable to business.

CONVERSATION THREE: Between the CEO and the investor community.

Investors want assurance that spending on corporate philanthropy enhances or at least does not diminish shareholder value
Concurrently a growing number of investors ask that the companies in which they invest demonstrate greater philanthropic leadership and social responsibility

Indeed investors increasingly esteem companies that demonstrate strong social performance believing that this represents management quality and valuable intangibles. The ability to attract a large base of investors lowers costs of capital and raises share price valuations which in turn should incentivize companies to cultivate sustainable philanthropic programs that meet society's critical needs. The question is: How? Advanced by sophisticated private foundations and governmental agencies, a wide range of impact assessment methodologies already exists in the social sector. This report examine show some of these methodologies maybe applied to the specific needs and motivations of corporate giver's programs and grants. A wide review of academic and industry literature on the link between corporate social performance and financial performance reinforces the idea that philanthropic initiatives create long-term financial value by enhancing a company's employee engagement customer loyalty reputational capital and market opportunities. But these benefits accrue as intangible assets rather than as short-term cash flows and thus are more complex to measure. Moreover the mechanisms involved have not yet been well researched and understood. Consequently some companies pay little attention to assessing philanthropy's financial returns. Their engagement is primarily motivated by wanting to meet community obligations and do the right thing. By analyzing complementary disciplines such as human resources, marketing, risk management and capital budgeting, corporate philanthropy can improve its measurement methods and identify long term financial benefits. The next three parts of this report present in greater detail the conversations summarized above along with our analyses thereof. The last section presents conclusions as well as recommendations for how industry members might best proceed. An extensive glossary references and annotated bibliography follow.

CONVERSATION ONE: Between grant recipients and the Chief Giving Officer (CGO)

The nonprofit sector employs abroad range of frameworks tools and methodologies to measure the social impact of programs and grants. Many of these approaches have evolved through application by sophisticated private foundations and government agencies, reflecting these organizations own unique preferences priorities and social values. Companies are encouraged to assess whether these approaches can be applied to corporate giving programs. Corporate givers generally demonstrate two types of philanthropic motivation. The first is a response to community obligations and may characterize an employee or community directed grant or volunteer program not necessarily aligned with any strategic giving objective. The second motivation seeks to define and differentiate the company through large visible signature programs that tackle critical issues perhaps even on a global scale. These programs typically involve the approval and engagement of senior executives multi-year partnerships with nonprofit organizations and in addition to cash, non-cash contributions such as in-kind products and access to company expertise, training and connections. When evaluating grant requests or designing signature programs corporate funders seek to engage nonprofit partners in developing more systematic ways to assess whether the intended results are being achieved and how effectiveness across multiple grants can be aggregated and compared.

Financial statements are expressed in common and objective monetary units but social results are much more varied, subjective and abstract. A review of measurement methodologies did not turn up a silver bullet or single numeric and learning from data against which performance can be and evidence over time universally gauged. Rather this reading reinforced the notion that to an extent measurement is its own reward. It encourages improvement management and the explicit formulation of assumptions and expectations. Measurement should be viewed as a process whereby the greatest value is achieved through organizations building up and learning from data and evidence overtime.

Question 1: How to assess whether grantees are achieving intended results.

The most basic forms of performance metrics comprise two categories: These are activities such as the number of staff trained or amount of goods purchased and outputs such as the number of clients served products distributed and areas reached. With respect to giving programs comprising primarily short term one-off grants driven by community obligations, simply identifying activities and measuring output maybe all that is feasible. However output and activity metrics alone cannot indicate that positive societal changes are being achieved or if unintended harm is being caused. In the case of program initiatives such as signature projects companies share a strong connection with the cause and are concerned about the social outcomes of their efforts. Managers of these programs and their nonprofit partners must articulate the process by which changes and results are expected to occur. They should outline clearly how success is defined and track whether and how the programs are affecting their beneficiaries. Jeffrey Brach, Thomas Tierney and Nan Stone (2008) of The Bridgespan Group address how nonprofit organizations can meet the mounting pressures they face from funders to demonstrate the effectiveness of their programs. They recount cases of several successful nonprofits journey from aspirations to impact and suggest that nonprofit and program leaders rigorously answer the following interdependent questions

What are the results for which we will hold ourselves accountable
How will we achieve them
What will they really cost
How do we build the organization we need to deliver these results.

The classic article by John Sawhill and David Williamson (2001) of The Nature Conservancy provides another constructive account of the journey of a nonprofit organization toward developing its model for assessing mission success. For decades, The Nature Conservancy had measured advancement toward its goal conserving biodiversity by protecting the land and water that rare species need to survive by adding up the value of all charitable donations received and land acreage acquired. These indicators, known as bucks and acres, "enjoyed strong organizational support and quite frankly made us look good" according to Sawhill and Williamson, but there lurked a nagging question as to whether these input and output metrics represented actual progress. The Conservancy decided then to develop a new measurement system the centerpiece of which was a list of 98 leading indicators of state program performance. However when the Conservancy tried to implement a pilot test it collapsed under its own weight. Field staff and managers complained about the laborious record keeping and glut of information; moreover, they had no way of judging which measures were most important and felt that the system was biased against smaller resource poor programs. Lessons the Conservancy took away from this experience include

Links among the mission programs and measures must be clearly defined and articulated in order to narrow the number of required indicators.
The measures should be easily collectible and communicable.
The measures should be strategically designed and applicable across the organization at all levels while also encouraging of operating units to focus on high level strategies.
Above all the measures must address progress toward the mission and illustrate whether and how the organization's actions make a difference.

The Conservancy settled on two impact measures that it believed could serve as surrogates for mission success: biodiversity health and threat abatement. The first was straightforward and could be assessed through regular evaluation of the organisms the Conservancy was trying to protect using existing scientific surveys as a point of comparison/ The second measure, which had to account for the inconsistent nature of biodiversity health and threats, assessed the extent to which the Conservancy identified and devised strategies to abate critical threats at each site. Grantees, nonprofit partners and corporate philanthropic programs are more likely to be successful if they address these questions at the outset. Developing a theory of change and explaining how the program will achieve its intended impact are critical components of this preparatory work. To consider a specific example: The use of bed nets helps reduce the transmission of malaria in endemic communities and Figure 1 illustrates a theory of change often also called a logic model for bed net distribution programs commonly applied in malaria prevention work

Figure 1 Logic Model of Bed net Distribution Program for Malaria Prevention Source. Adapted from McLaughlin C Levy J Noonan K Ros que ta K February 2009

To further clarify the language of measurement outcomes are those benefits or changes realized as a direct result of a program's activities and other outputs, while impact refers to long term results and ultimate social value. Ideally one could measure along the entire chain of results from initial activities through intermediate outcomes to final impact and prove that the program directly resulted in the changes observed. In practice, however, the rigorous evaluation of impact is complicated twofold. First it often takes along time before final impact can be observed and this involves a lengthy measurement process. Second one must establish statistically validated causality between services and observed impact in order to prove without doubt that the program in question is responsible. To gauge a grant s success corporate funders may use other assessment approaches that may be less precise but more timely and practical. Ranked from most to least precise common measurement approaches can be grouped into three categories.

Formal impact evaluations: Commissioning formal program studies is often the only way to measure and prove the impact arising from a grant Many such impact studies are expensive and rigid requiring significant data and a control group, i.e. of participants who do not receive the program s treatments to be statistically reliable
Outcomes measurement systems: Measuring intermediate outcome metrics maybe a practical alternative to formal impact evaluations. Monitoring near term outcomes can identify opportunities for mid-stream improvements. Applying the models and results of other already existing studies can project impact. Definitive causation and attribution are not formally proved but evidence from other similar treatments maybe sufficient to establish that a reasonable link exists between the measured outcomes and ultimate impact.
Assessment of the organization's impact achievement potential: With respect to some grants corporate funders may choose not to be involved in the design or management of the program or measurement process relying instead entirely on the grantee organization's own metrics data and standards.

In the social sector, evaluation experts have proposed standardized criteria for assessing an organization's potential for achieving measurable and improvable impact. Such assessment can increase confidence among funders that a nonprofit is effecting positive change according to its claims. High performing characteristics include capable leadership, clear objectives, diligent quality-data collection and analysis and the informed adjustment of processes to improve.

Figure 2 Characteristics of Three Measurement Approaches. Measurement Approach. Formal Impact Evaluation. Outcomes Measurement. Impact-Achievement Potential Assessment.

What outcome metrics are measured? Long-term impact as well as intermediate outcomes. Intermediate outcomes. Outcome and/or output metrics, which rely upon the grantee organization’s own theory of change and measurement standards (funder assesses the organization’s potential to achieve impact according to its claims).

How are outcome metrics designed and tracked? Draws from knowledge and experience of third-party domain-area experts engaged to collect (and/or supervise the collection of) data and then to conduct evaluation analysis. The corporate funder Self-reported by grantee participates in designing organization. the program and its measurement process, partnering with grantee organizations. Domain- area experts may be consulted. Data is collected and analyzed in- house by the grantee with the corporate partner’s technological and/or management assistance.

How is impact measured? Long-term impact results are measured and attributed. May be estimated by applying a model based on assumptions or other evidence about the expected effectiveness of the intervention. Estimates or actual measures of impact may be available from grantee’s measurement process.

What serves as the counter- factual comparison? (i.e., evidence of what would occur if not for the program) Typically, a comparison group is tracked, often using rigorous experimental design techniques such as Randomized Control Trials (RCTs). Externally collected national or regional datasets can be used to calculate comparison benchmarks with similar characteristics as the target groups. Grantee organization’s own research may provide comparable measures and demographics from external publications to proxy as benchmarks.

To which programs should the approach be applied? 1. Reasonably mature programs that represent an innovative solution and wherein the funder and/or grantee seeks to prove to other funders or NGOs that it should be scaled-up. 1. Programs wherein the funder is involved in the program’s design and management and shares responsibility for its success. 1. Start-up programs in their early stages of maturity and stability. 2. Programs wherein the cost and risk of failure is high (e.g., those with highly vulnerable beneficiaries). 9 2. Programs wherein funders and grantees desire frequent and early indicators in order to make real-time adjustments to interventions and strategy. 2. Programs wherein the funder is not involved in the program’s design or management.

Choosing which approach or combination of approaches to adopt depends partly on how much confidence funders require in measurement precision and data quality.

The rigor of formal evaluation places the greatest demand on the quality of underlying data. It also requires the most time If grant makers need to make timely decisions it maybe more practical to choose and measure a proximate set of nearer term outcome indicators believed to be predictors of ultimate impact.
Programs that are not yet mature or stable may not be ready for formal evaluation as their theory and implementation are still evolving. In evaluations treatments cannot be changed without invalidating the test while control group participants cannot receive the program s services.
Other evidence such as the social science literature may already prove that similar types of interventions work well in certain contexts. Regarding programs designed largely around evidence based processes outcomes measurement and or impact potential assessment can reasonably demonstrate that they are on track.
Existing national and regional datasets can be identified to construct reasonable comparison benchmarks in lieu of formal control groups. For example, an extensive collection of regional and worldwide statistics on the prevalence of obesity by age, gender, ethnicity and other population characteristics already exists and therefore can inform an assessment of programs addressing the obesity issue.
For programs wherein the corporate funder is actively involved in design and management, it is worthwhile to implement outcomes measurement systems, or conduct a formal impact evaluation study when the program becomes more mature.
If the risk and costs of failure are high such as when beneficiaries are very vulnerable and the program untested a formal evaluation may make sense to ensure the program is not causing unintended harm.
When a program is innovative and stable and the funder is seeking to attract other funders or Non-Governmental Organizations (NGOs) in order to replicate or expand it it maybe time to generate independent proof and attribution as well as to measure the program s broader effects through formal evaluation.

Figure 3 suggests a decision making map whereby program managers may choose the best measurement approach for them. Here the choice can be seen as depending on the motivation forgiving and on the confidence needed in the precision of results and quality of data.

Figure 3 Measurement Approaches and Motivation for Grant.

Impact evaluation

Formal impact evaluations seek to measure evaluation points along the result chain and prove whether the program under review has been effectual. Independent evaluators who possess domain and analytical expertise are usually engaged as they bring unbiased knowledge and credibility to the analysis. An evaluator designs the methodology forgathering and analyzing data taking into consideration factors such as sample sizes potential biases and how to establish a control group. Once implemented, the program collects data until a sufficient sample size has accumulated. Then sophisticated statistical tools analyze the data for evidence of attribution. Finally an evaluation report is drawn up and presented to stakeholders. The detailed quantitative analysis contained there in is designed to satisfy a high burden of statistical proof proof of positive impact in the treatment group and that is not found in the control group.

Because formal evaluations employ the highest level of precision and rigor as well as the engagement of a credible external evaluator, they can be relatively lengthy, costly and/or complex. Planning and budgeting in advance is imperative. At the same time, formal evaluations are inherently retrospective, to an extent; after all results cannot be reasonably anticipated until a program is underway and often not confirmed until completion or long thereafter. Evaluations can be disagreeably rigid in many situations because there is little room if any for mid course methodology adjustment which could invalidate the data already collected.

Formal evaluations remain a staple of the social sector when program effectiveness must be demonstrated meticulously. Requiring program stability and a high quality of data formal evaluations are more suited to mature programs. Funders and grantees should discuss at the outset whether the evaluation's potential benefits will justify the expenditure of resources involved. Programs that strategically and innovatively address a social issue are good candidates for independent evaluations, because the evaluation can prove attribution and credibly demonstrate to additional funders or NGOs that the programs are worth replicating or expanding. Also good candidates are programs whose cost and risk of failure are high, such as when the targeted beneficiaries are extremely vulnerable. In such cases negative results that discourage continuing the program are of equal or even greater informational value than positive ones.

Outcomes measurement

Outcomes measurement approaches track intermediate changes that are linked to ultimate impact. One example of the social sector's progress with this approach is United Way of America, which emphasizes the importance of outcomes and provides its own local chapters with advice summarized in a guidebook entitled "Measuring Program Outcomes: A Practical Approach and Focusing on Outcome". Another approach has been jointly developed by The Urban Institute and The Center for What Works (December 2006) to assist nonprofit organizations in developing new outcomes monitoring processes and or improving their existing systems. This approach consists of a general framework for identifying common outcome indicators and sector specific metrics applicable to fourteen program areas. Although outcomes measurement encourages a focus on results, this approach alone cannot declare definitively whether a program is actually effecting change. Outcomes measurement may involve before and after measurement techniques but not the randomized designs or control groups needed as counterfactual comparisons for formal proofs. Still whether the program is achieving its intended results can be determined to an extent according to the following logic:

Existing national and regional datasets can serve as reasonable comparison benchmarks.
Related evaluation studies or social science research offer corroborating evidence.
There already exists a considerable amount of confidence in the quality of the program's theory of change.
The measured data align with judgments suggested by close knowledge of the grantee and interactions with the program s beneficiaries.

Outcomes measurement may generate information on a quarterly or more frequent basis thus providing funders and grantees with almost real time information about the project's progress. Used as part of performance management, this approach allows grantees to make mid- stream improvements to their intervention based on the latest data. Often results are managed in a kind of dashboard, e.g. an array of charts depicting the project's performance according to a variety of metrics over time and relative to targets. Giving even more structure to the process some performance management systems integrate quality control concepts already established by business management: these include the company wide experience "Balanced Scorecard" and "Six Sigma" in devising metrics principles. Corporate givers are especially apt to assist nonprofits in outcomes measurement because they can draw on drawing appropriate company wide experience in devising metrics, collecting data in a disciplined manner and drawing appropriate conclusions to recommend action.

The specific logic model and performance metrics that should be implemented in an outcomes measurement approach are best developed jointly by the program's funder and grantees. The grantee organization knows its own infrastructure and local conditions and this knowledge is complemented by domain expertise and familiarity with the broader social sector. For the benefit of certain causes and strategies already well researched and evaluated NGOs research organizations and funders have collaborated to endorse a set of common core outcomes and impact metrics. Including the grantee in the process of devising a measurement framework contributes to a greater sense of partnership and leverages grantee domain expertise; sometimes grantees even take the lead in defining data collection and measurement design. Allowing the grantee this flexibility reduces the burden of responding to different funders who ask frequently for the same basic information. Moreover a partnership approach gives grantees a greater sense of ownership and makes their decision makers more likely to act on results. Throughout program implementation, the logic model maybe re-examined and modified based on the latest data available. According to the W K Kellogg Foundation: "The process of developing a model is an iterative one. ... Gaps in activities expected outcomes and theoretical assumptions can be identified resulting in changes being made." As Sonal Shah, director of the White House Office of Social Innovation and Civic Participation, has said: "Just like business which sometimes needs to course correct nonprofits and social business should be able to course correct and make changes. They should only be considered a failure if they fail to correct the problem".

Outcomes measurement tracks the social changes a program targets but the tracked metrics appear early along the results chain. To estimate ultimate impact, one can apply a model drawn from external evidence and adjusted to current local conditions pertaining to ultimate effectiveness. This external evidence includes quantitative data from prior studies and consultations with sector experts.

To expand on the earlier example of bed net distribution for malaria prevention, Figure 4 outline show an estimate of impact results (e.g. number of child lives saved can be calculated by tracking a key outcome indicator). This indicator might be the additional number of children that now use bednets. Evaluators then make informed assumptions about the relevant demographics and anticipated effectiveness of treatment based on prior observations and studies adjusted for local conditions.

Figure 4 Example of a Model for Estimating the Impact of Bed net Distribution Measure Estimate Estimate Estimate Estimate intermediate affected real world tool impact outcomes population conditions effectiveness. Change in x Predicted x Influence of x Protective Number of coverage number of human effect under child lives additional deaths and behavior ideal saved of children illnesses in conditions that use community bed nets from malaria e g 80 of x e g 13 5 1000 x e g bed nets x e g bed nets e g 3 5 1000 population rural children are used are 50 rural children use bed nets die each correctly effective saved after program year only 65 of when used the time correctly. Source: Adapted from McLaughlin C Levy J Noonan K Rosqueta K February 2009.

Assessing impact achievement potential.

For grants in which the corporate funder is not involved in program design or management the funder may choose to rely on the grantees own measurement process standards and data. The funder typically asks grant ees to self report regularly on the following information:

What results they are committed to achieve;
What measurable evidence will be provided to verify success;
What baseline results will serve as a point of comparison for the new data; and
How the grantee will track results and adjust methodology mid-course.

When results are self-reported, assessing impact achievement potential in a way that also measures general organization capabilities can increase funders confidence that the organization is achieving the outcomes it claims. As an example of standardized ratings criteria for assessing impact potential, the Alliance for Effective Social Investing has developed and proposed the Outcome Potential Assessment framework. Their framework assumes that regardless of what the nonprofit intends to achieve there are certain organizational characteristics that tell an investor whether the organization is likely to accomplish its goals. For instance, if an organization does not have a theory of change, or does not diligently collect quality data supporting its effectiveness, or does not use the data it does collect to improve the organization is unlikely to succeed. Using this framework, nonprofit organizations are rated according to their diligence and acumen in collecting interpreting and using data to improve services at the organizational level. Comparisons should be confined to organizations working toward comparable outcomes with similar populations. Charity Navigator, the largest charity evaluator in the country, is looking to adopt such an assessment framework so that its final ratings will not just evaluate a charity's financial performance but also take into account its potential to achieve intended outcomes. High impact potential organizations must invest in tools, training and operational resources needed for measurement. Corporate funders may rely on grantees own measurement processes but should also bear in mind that a quality measurement process is vital to achieving impact value and should always be budgeted at the source.

Methodology for the Alliance for Effective Social Investing's Social Value Assessment Tool. To determine an organization s capacity and potential to deliver high social value, the Alliance for Effective Social Investing (2009) proposes that analysts use a Social Value Assessment Tool which comprises 26 questions and scores organizations against six indicators:

Diligence in collecting data;
Possession of a clear set of outcomes and a logic model that together describe how the organization intends to achieve the desired outcomes;
Relation of efforts outputs to outcomes to determine whether the organization's intervention is indeed producing the observed outcomes;
Flexibility in adjusting the service approach given the latest data and changing circumstances;
Substantiation of the value of the program through data collection and analysis;
Capacity to deliver program services as they were designed.

Source: Alliance for Effective Social Investing (2009).

Summary

Activities and output metrics and targets are the most basic set of trackable performance measures/ In programs comprising short-term, one-off grants, activities and output metrics might very well be the only trackable measures. By themselves, however, output metrics offer little indication that social change is being achieved or unintended harm caused. The three measurement approaches outlined above summarize options for assessing the success of programs where in corporate givers are concerned about achieving social impact. Formal evaluations (approach 1) are the only way to prove rigorously that an impact is the result of an organization's efforts and therefore validates a logic model. Outcomes measurement (approach 2) focuses on nearer term changes that allow real-time adjustments to the intervention strategy and logic model in place, and provide indications that the program itself is causing the desired outcomes. Impact achievement potential assessment (approach 3_ helps to determine whether an organization has high-performing characteristics that will increase the likelihood that self-reported outcomes are being deliberately achieved. These three approaches are not necessarily exclusive; they can be combined. For example a young program may still be evolving strategically; its processes may not yet be stable enough to withstand outcomes measurement or formal impact assessment. The organization's potential for achieving impact should still be assessed, however, and as the program matures, it may become worthwhile to develop processes by which more precise measurement of actual impact may be applied as well.

Question 2: How to measure the return on social investment

from grants and giving programs.

Return on investment (ROI) is a highly favored business concept. Given a standardized ratio of financial benefits to costs, decision makers can gauge how well a project is performing overall, compare the project's efficiency to alternatives and even aggregate ROIs across multiple projects.

There has also been enthusiasm particularly among sophisticated private foundations for applying ROI techniques to measure the social efficiency of philanthropic programs. In a study commissioned by the Bill Melinda Gates Foundation, Melinda Tuan (2008) performed a critical review of eight selected approaches for integrating cost into the measurement of social value creation, and noted that all of these different methodologies essentially reflected one concept: expected return. Expected Return = (Outcome or Benefit) times Probability of Success divided by Cost.

A major difference among methodologies is whether benefits are monetized. Methodologies in which benefits are monetized are classically described as cost-benefit analysis. Methodologies in which benefits are not monetized are called cost-effectiveness analysis. Measurement ratios based on cost-effectiveness are easier to implement and require fewer data assumptions because they sidestep the challenge of having to convert different aspects of program benefits into common monetary units. However they can only account for one area of program impact at a time since impact for different program causes may be measured only in their programs' respective natural units (e.g. lives saved as in the bednet/malaria example).

As for comparing and aggregating impact across multiple grants: A key challenge here is that diverse grants in dissimilar program areas seek different outcomes. Corporate givers who choose to focus high value grants to just one cause issue are likely to be able to quantify impact in a common natural unit and achieve measurable impact linked back to these grants. For programs such as these, cost-effectiveness analysis is most appropriate. By contrast, cost-benefit analyses assume that grant benefits can be monetized and therefore the analysis is potentially applicable to aggregating the value of grants applied to many different issues. But cost-benefit analysis makes greater demands on data, funders' assumptions and value judgments. Funders must collect the data needed to estimate monetary benefits arising from the program and, additionally, make many subjective judgments about the relative worth of the different social outcomes achieved by different program types. When corporate funders would prefer not to engage on this level (e.g. because they do not have the expertise to collect and calculate the necessary data or make the essential value judgments, or both) the only practical alternative maybe to aggregate common output units such as number of activities organized, products distributed or beneficiaries served.

Figure 5 summarizes this decision framework for guiding the choice of measurement approach. The choice of ROI analysis, if any, to consider depends on the relative focus of the giving programs in question as well as on the expertise of the funders to calculate and use monetized benefits. The options themselves are discussed in more detail below.

Figure 5. Approaches for Comparing and Aggregating Social Impact Results Across Corporate Grants.

Cost-effectiveness analysis.

Cost-effectiveness analysis features the calculation of a ratio of costs (i.e. total contributions to the program) to a non-monetary benefit or outcome. In other words it indicates a project's bang-for-the-buck. Program impact is measured in natural units such as number of children graduated or beneficiaries' life-years saved. This comparative analysis requires programs to pursue the same domain area and hence will be more applicable to corporate giving programs that focus fewer high value grants on a single program area. One cost-effectiveness approach to calculating ROI is that of the Center for High Impact Philanthropy at the University of Pennsylvania The Center has been developing its cost per impact methodology since 2006. The purpose of its analysis is to provide philanthropists with an answer to the question: "How much does change cost?: The example below features a project by the Children s Literacy Initiative (CLI) to train pre-kindergarten through third-grade teachers in effective literacy teaching techniques.

Methodology for University of Pennsylvania Center for High Impact Philanthropy's Cost per Impact.

Step 1. Project future cost or take actual cost from previous implementations. Example: Based on prior experience CLI estimated that teachers would need three years of training to effect sufficient change and lasting impact. The estimated cost to train twenty teachers for three years is 1000000
Step 2. Obtain empirical results from past implementations of the model and use those to project the impact of current implementation. Example: Based on national studies and prior experience, the Center and CLI estimated an average kindergarten teacher's tenure to be fourteen years. Since three of those years would be given over to training the average teacher, tenure post-training would be eleven years (14 minus 3). In an evaluation performed in White Plains NY, 49 of kindergarten students met literacy benchmarks before the CLI training was provided to teachers. Post training. the proportion increased 32 percentage points to 81. Based on an average class size of 25, 25 x 20 teachers = 500 students who would be touched by the project each year. Given an average teacher tenure of eleven years, 500 students per year x 11 years = 5,500 students touched. The incremental number of students meeting benchmarks would then be 32% x 5,500 students = 1,760 students.
Step 3. Divide cost obtained in Step 1 by results obtained in Step 2 to produce cost per impact. Example: Dividing the cost of 1,000,000 by the 1 760 additional students meeting literacy benchmarks yields a cost per incremental student or cost per impact of $568.18. As discussed one advantage of quantification is that it allows comparison with other projects. Hence a grantor could use the above cost per impact figure to determine which grantee would provide the most bang for the buck. Alternatively, a grantor could use this figure as a benchmarking tool to identify effective trends and then work with his or her own grantee to improve their own ratio overtime. Source: Rhodes H J, Noonan K, Rosqueta K (December 2008).

Cost-benefit analysis.

Cost-benefit analysis is advantageous in that it allows comparison of the social value of diverse programs, much as one can compare the financial ROIs of different companies. Benefits need not come from the same cause and type of outcome but can capture a range of individual and societal benefits across different program areas. However two recent reviews by Melinda Tuan (2008) and Lynn Karoly (2008) have noted that the methods for valuing cost benefits are not yet mature or standardized. Attributing common dollar values to non-monetary results requires subjective value judgments. It is also difficult to achieve consistency in assumptions or applied methodologies such as (1) the timeframe over which benefits are recognized, (2) the discount rate used to reflect the declining value of money overtime periods distant in the future, (3) the methods used to project future outcomes based on early outcomes, and (4) the range of social benefits to be captured. Proponents of cost benefit concepts like the Social Return on Investment (SROI) acknowledge these challenges but also note that the very virtue of cost benefit analysis lies in human assessors who are brutally open about such subjective valuations and submit assumptions to sensitivity analysis and intuitive assessment. This process can help clarify the extent to which certain projections or judgments are overly optimistic or incomplete. To consider an example, The Robin Hood Foundation has developed a benefit-cost ratio methodology to capture collective benefit estimates of its anti-poverty grants in four areas: jobs and economic security, education, early childhood, and youth and survival. The benefit-cost ratio seeks to translate the outcome of diverse programs into a single monetized value. The example below features a grant to an organization called Helpful Housing, which provides housing to the economically disadvantaged. Since part of the project involves providing supportive services such as medical care, mental health counseling and employment training, the calculation also accounts for those benefits.

Methodology for Robin Hood Foundation Benefit-Cost Ratio.

Step 1. Estimate the program s direct impact. The most direct and tangible benefit provided by Helpful Housing is housing. Therefore to calculate its value: Example: Based on data from the Federal Housing and Urban Development Department, Robin Hood found the fair market prices for New York City apartments to be approximately 11,700 per year. Helpful Housing provided 672 housing units over the last yea.r It is believed that the people served by Helpful Housing would have remained homeless if Helpful Housing did not exist. Thus the full market value of the housing provided would represent a net gain to residents of 672 housing units times 11,700 average per year equals 0.78 million. Helpful Housing also provided housing only (i.e. without supportive services) in the form of two bedroom apartments valued at 13,600 per year to 75 low-income families. Residents are required to contribute only 30% ($2,400) of their annual income toward rent. Robin Hood estimates that 10 of these families would have found housing anyway even in the absence of Helpful Housing's assistance. So 75 families times (13,600 minus 2,400) times 0.9 (to account for those families that found housing only as a result of Helpful Housing's assistance) equals $760,000.
Step 2 Estimate the additional impact of the program, i.e. benefits from supportive services like medical care, mental healthcare, employment training, etc. It is common for health improvements made by health and human service projects to be expressed as Quality Adjusted Life Years (QALYs) which measure the number of years of life added by an intervention, adjusted for the quality of life in those additional years. By definition, an extra year in perfect health would be assigned a QALY value of 1 while an extra year added in less than perfect health would be assigned a QALY value of between 0 and 1 based on the extent of the disability. A commonly accepted guideline proposed by Robin Hood and used here is to assume each QALY to be worth $100,000. Example: Referrals to Medical Care. Helpful Housing provided medical referrals to 672 residents. However it is estimated that 30 of those residents would have sought medical care anyway. External consultants estimate that each medical referral is worth a QALY of 0.07. 672 residents times 100,000 per QALY times 0.07 QALY times 0.7 (to account for the referral) times 0.7 (to account for only those residents who would not have sought medical care were it not for Helpful Housing) equals #2.3 million per year. Similar methodologies were used to calculate other additional annual benefits such as Mental HealthCare ($1.9 million), Employment Training ($800,000), Quality of Life Issues ($0.3 million), Case Management ($2.9 million), Reduced Hospitalizations and Medical Emergencies ($1.9 million).
Step 3. Calculate lifetime impact and discount to present value. Where the benefit is annual and occurs throughout the lifetime of the individual, calculate the cumulative impact over the individual's lifetime and discount to present value. Example: Robin Hood estimates the average age of residents at Helpful Housing to be 40 years old and calculates employment-related returns to age 55 and health-related returns to age 65. It is assumed that the real growth rate is 3% and the discount rate is 5%. Total Present Value = $31 million.
Step 4. Estimate the proportion of the program's successes truly attributable to Robin Hood's grant, aka the Robin Hood factor. This calculation typically begins with a figure based on the percentage of a grantee's program cost covered by Robin Hood's grant. This approximate starting point is adjusted up or down depending on other factors that lead Robin Hood to believe the grant exerts disproportionate positive or negative influence on group outcomes. Example: Robin Hood's grant was for $450,000. the program cost $12 million in total. That yields a Robin Hood factor of $450 000 divided by 12 million equals 4%.

= Step 5. Calculate the Robin Hood benefit. Sum all benefits and scaleby the Robin Hood factor. Example: 31 million times 4% equals $2.89 million.

Step 6. Calculate the benefit cost ratio. Divide the Robin Hood benefit by the cost of the program. Example: $2.89 million divided by 450,000 equals 3:1. Grantors may use this benefit cost ratio as one important piece of information with which to rank grants (i.e. compare the impact of similar and dissimilar programs) and as part of their diagnostic toolkit with the goal of improving grantees' performance, thereby raising the projects benefit-cost ratio overtime. However the ratio should not be the only criterion for making grant decisions nor should it be used as a report card.

Source: Weinstein M (2009)

To translate diverse outcomes into a single monetized measure of poverty fighting, Robin Hood's program officers rely on social science research estimates from academic consultants. close knowledge of their grantees and an injection of reasonable assumptions. Over time, they expect continually to improve their metrics and reduce guesswork. Additionally Michael Weinstein (2009), Chief Program Officer of The Robin Hood Foundation, described how the Foundation has addressed a number of other implementation challenges. While benefit-cost ratios provide Robin Hood with a systematic and transparent tool for comparing impact across different program types on its mission, their adoption should not be undertaken except by experts knowledgeable of its careful usage.

Estimating leverage effects.

So far this report has discussed measuring the direct social impact arising from a funder's contribution to a giving program. A funder can also leverage its reputation and/or other non-monetary capabilities to support a program, thereby multiplying the social impact achieved from both their and other funders' monetary donations. These leveraging effects should be considered part of the total merit of a grant or program:

Attracting other funders. A funder seen to have expertise in a certain domain could highlight the severity of a social cause by endorsing it and attracting other funders to the same cause. For example, a major pharmaceutical company with a reputation for innovative research might become the first to make significant philanthropic commitments to, and educate other funders about the AIDS pandemic in Africa. Evaluating the results achieved by pilot strategies also helps to communicate the credibility and viability of these programs and draw additional support.
Capacity building. Grantors can also create social value indirectly by improving the performance of high potential granees, maybe by building their operational or leadership structures. Companies can multiply the positive effects by contributing internal expertise technological assistance and access to training opportunities and other non-cash relationships. For example, enhancing performance measurement systems provides practical real-time data that supports learning and allows nonprofits to adjust their services efficiently, thereby maximizing the impact of not just one particular project but of projects across the entire organization.

Leading users of ROI methodologies consider such leverage effects in their calculations. The Hewlett Foundation estimates the portion of success with which the Foundation could be credited based on a combination of dollar amount invested and the influence of those dollars. The Robin Hood Foundation also estimates similar measures (the Robin Hood factor) as the proportion of program success truly attributable to the giver's intervention. This figure is often based in part, but only in part, on the ratio of the grant to the grantee's total program cost.

Estimating credit for leverage effects requires a combination of subjective judgments and quantitative data. One approach is to reduce this analysis to that of assessing the most likely alternative scenario had the catalytic funder not intervened. Once all subjective and observational inputs have contributed to this hypothetical scenario, the subsequent calculation of leverage effect is straightforward.

Suppose a corporate funder provides a catalytic gift of 2 million towards a health program. The gift raises the program's profile and attracts another 3 million in gifts from other funders for a total budget of 5 million. This number generates an impact equivalent to 100 QALYs. The corporate funder through consultations with the grantee and members of the social sector believes that without its gift only 2 million (2/5 th's of the actual amount) would have been raised. In this scenario, only 40% or 2/5 th's of the actual 100 QALYs would have been achieved. Therefore the total impact for which the funder could take credit is the difference 100 - 40 = 60 QALYs. This number, 60, comprises 40 QALYs from direct funding in proportion to the 2 million grant being 2/5 th's of the total budget and a balance of 20 QALYs credited to the leverage effect.

Consider another example: Suppose a health program with a total budget of 5 million from other funders (i.e. excluding the funder whose leverage is to be measured) delivers 100 QALYs in program impact. Now, the leveraging funder can make a capacity-building grant of 1 million which increases the program's effectiveness such that its impact rises to 150 QALYs. The leveraging funder also estimates, based on consultation with the grantee and other social sector experts, that there would have been only an 80% chance of another capable funder stepping in with a similarly effective capacity building investment. Thus the most likely and beneficial alternative scenario is 80% x 150 + (100% - 80%) x 100 = 140 QALYs. The leveraging funder's capacity building grant can therefore be viewed as achieving 10 QA LYs in leverage effects, in addition to 23.3 QALYs of direct proportionate impact, because 1 million represents 1/6 th's of the total program cost which delivered 140 total QALYs in the best likely alternative.

Summary

The attractiveness of these ROI methods for calculating corporate philanthropy's social returns is in bringing businesslike quantitative frameworks to evaluating and comparing the effectiveness of diverse social programs, and aggregating their social impact. However these sophisticated methodologies place heavy demands on data collection assumptions and value judgments underlying the analysis. Funders must assemble data and calculations on the program's monetary benefits and make subjective judgments on the relative value of different types of social changes. Corporate funders need to be knowledgeable and thoughtful about these limitations and typically should not rely solely on ROI when evaluating grants. Proponents of these methods note that the benefits of ROI analysis lie more in encouraging funders to lay bare the assumptions and trade-offs that may already be involved in their grant making decisions.

Corporate funders who focus their giving on a small number of program areas can define and measure impact using the same natural unit. These results can be analyzed more easily with cost-effectiveness approaches, which sidestep the larger uncertainties associated with cost-benefit analysis and reducing benefits across different program areas to a common monetary unit.

Some ROI models also seek to take into account the leverage benefits the funder may generate if its grant has a catalytic or capacity building effect. Corporate givers are increasingly committing to capacity building initiatives recognizing that the internal expertise training opportunities product and other company resources generate benefits beyond cash grants. Estimating leverage value inevitably requires subjective input. One method for improving a value estimation of leverage is to try to assess and judge what would have resulted from the best likely alternative scenario.

For example, The Foundation Center and McKinsey Company have undertaken a project an online database of Tools and Resources for Assessing Social Impact (TRASI) identifying 150 different approaches currently used to measure the social impact of programs.

CONVERSATION TWO. Between the Chief Giving Officer (CGO) and

Chief Executive Officer (CEO).

According to research by McKinsey and CECP (2008), 86 of surveyed CEOs consider both business and social concerns when funding corporate philanthropy programs, and 55 believe business concerns should be given equal or greater weight than social ones. When advocating significant commitments to philanthropic initiatives, CGOs are often asked to make a business case for those initiatives, to present a persuasive picture of how they create long-term financial value for their companies in addition to using the social impact assessment frameworks described above to communicate societal accomplishments

Question 3. How to measure business benefits and make a business case.

CEOs surveyed by McKinsey and CECP (2008) cited frequently that corporate philanthropy's business goal should be enhancing the company's reputation or brand, followed by addressing employee concerns such as refining leadership capabilities and building retention and recruitment. The study also reported that efficient philanthropists, defined as respondents who felt their companies were effective in achieving both business and social goals, tended more than other respondents to view the goal of their philanthropic programs as creating business innovation and building new market knowledge.

These findings, combined with a review of the scholarly literature, suggest four strategic pathways by which philanthropic initiatives can contribute to business value:

Enhance employee engagement. Companies engage employees through group volunteer programs and awareness of their philanthropic initiatives which raise employee motivation productivity and a sense of identification with the organization.
Build customer loyalty. Especially in consumer oriented industries, a company's commitment to communities and certain philanthropic causes enhances brand perception customer loyalty repeat business and word of mouth promotion.
Manage downside risks to the company's reputation. Philanthropic initiatives provide companies with a fresh opportunity to prioritize and address stakeholder risks (i.e. ways in which the company may not be meeting public expectations)
Contribute to business innovation and growth opportunities. Philanthropy also provides access to new relationships and opportunities, whereby the company can find test and demonstrate new ideas technologies and products.

Employee engagement

Today's competitive business environment emphasizes quality and innovation. Accordingly CEOs recognize that human capital is a more critical asset than physical capital in creating substantial value for the firm and its shareholders. A highly engaged workforce is more likely to exert extra effort and have lower turnover rates. Some studies even show a link between individual employee motivation and company wide financial performance. Compensation is a motivator only up to a point, beyond which employees are motivated by non-pecuniary factors like self-esteem and recognition. The accepted wisdom seems to be that a paycheck may keep someone on the job physically but not emotionally. Psychological studies have shown that calling attention to extrinsic (especially monetary) rationales for behavior can diminish performance and intrinsic motivation. Perceiving that they had to be externally and financially induced to carry out a task, employees come to believe that there must not have been any other motivation for performing it. This finding highlights the importance for companies to focus not merely on monetary and other extrinsic rewards alone.

Economists have documented that companies with motivated employees, a category that overlaps considerably with Fortune Magazine's 100 Best Companies to Work for in America, enjoy better financial performance. The Best Companies list was first published in a book by Levering, Koskowitz and Katz in March 1984 and was updated in February 1993. Beginning in 1998, it has been featured in Fortune each January. Two-thirds of the total score comes from employee responses to an anonymous 57 question survey created by the Great Place to Work Institute in San Francisco. The survey provides an extensive evaluation of the level of trust employees have in their management, the level of pride in their work and company, and camaraderie within the workplace. The remaining one third of the score comes from the Institute's evaluation of factors such as a company's demographic make up, pay and benefits packages. Olubunmi Faleye and Emery Trahan (2006), researchers from Northeastern University, examined several dimensions of operating performance and, even after controlling for prior financial performance in their econometric analyses, they found measures of valuation profitability and productivity for the Best Companies to be about 15-20% higher than for the Best Companies' peers. Separately Alex Edmans (2008), a professor of finance at the University of Pennsylvania's Wharton School, found that on average, the Best Companies achieved higher than expected future profits, particularly for earnings far into the future. A portfolio of Best Companies stocks based on only prior released rankings and rebalanced annually outperformed other similar companies by 4% per year over a 22-year period from 1984 through 2005. Edmans suggested that, because the results of an intangible investment like a motivated workforce may not completely manifest intangible benefits for several years, the market appears not yet to have fully accounted for the link between employee satisfaction and company value.

To raise employees' internal motivation, HR managers endeavor to improve those employees sense of status, prestige, belonging within the work group and organization, and emotional rewards inherent in their work. A number of studies have found that corporate philanthropic initiatives can provide a new channel for fulfilling a number of employees' emotional needs and increasing their sense of identification with a company. These initiatives can also help employee recruitment. According to the 2004 corporate community involvement survey by Deloitte LLP, 72% of employed Americans trying to decide between two jobs offering the same location job description pay and benefits would choose to work for the company that also supports charitable causes. Although it is not easy to validate answers to a hypothetical question, companies are often able to document their success in attracting certain top candidates based on those candidates exposure to the company s philanthropic causes and therefore can claim some legitimate credit for the philanthropy's role in successful recruitment.

A model for measuring the influence of corporate philanthropic initiatives on employee engagement.

When devising philanthropic activities for employees researchers from management and social science disciplines suggest that the key objective companies should target and measure is an increase in an employee's sense of organizational identification Identification is a psychological concept that in this context reflects the extent to which employees feel that their sense of self overlaps with that of their employer An anecdotal measure of identification is the use of we statements by employees who identify strongly with their company i e who have internalized the distinction between we insiders and people outside CB Bhattacharya, Sankar Sen and Daniel Korschun (2008), researchers from Boston University and Baruch College, found that employees who identify strongly with their company view its success as their own and exhibit higher performing job behaviors to ensure that success. Caroline Bartel (2001) from New York University and David Jones (2007) from the University of Vermont reported field evaluations whereby they measured both attitudinal and work behavior changes of employees who participated in the irrespective company s community outreach programs Their research supported the finding that employees involved in philanthropic initiatives showed a statistically significant increase in their sense of identification with the irrespective companies This improvement in employee attitudes towards their companies was in turn correlated to an improvement in job performance.

Through awareness of and participation in their employer s philanthropic activities employees can also fulfill several fundamental emotional needs The studies noted that the range of emotional needs is quite diverse and companies often do not understand them well

Collective self esteem Employees want to feel positive about their company and want others to view the company positively as well
Self development Employees can use philanthropic opportunities both to express a personal sense of community responsibility and to learn specific career advancement skills Several major pharmaceuticals and companies in other industries for example maintain programs 16 in which top professionals apply their skill sets to work with external nonprofit partners sometimes in remote foreign locations and this experience hones those skill sets Pfizer 17 has made available an evaluation of the impact of its Global Health Fellows Program on recipient organizations along with a toolkit that other companies can use to measure their own international corporate volunteering programs
Improving work and personal life integration Employees interpret employers philanthropic behavior as an indication that the employer values personal life as much as the employee does particularly when the philanthropy benefits the employee s own social communities.
Building a bridge to the company Employees who work in satellite locations view philanthropic initiatives as a means for the company to demonstrate a bond among employees regardless of location This is especially important as work forces become increasingly globally dispersed
Creating a reputation shield Corporate philanthropy can help employees combat negative public feedback about a company by giving them material with which to educate external audiences about the company score values and efforts To measure the impact of corporate philanthropy on employee engagement companies can use internal surveys to assess the extent to which the philanthropic program is meeting employee needs and creating a greater sense of identity between employee and employer This assessment should take into account the relative importance that different employee segments attach to different intrinsic needs.

Drawing from the research studies reviewed Figure 6 summarizes the causal relationships between employees emotional needs and job related outcomes Companies able to understand the needs and attitudes of their employees and to design programs that fulfill those needs are often rewarded with greater employee identification and a multitude of other pro company outcomes Figure 6 A Framework for Measuring Employee Engagement and Corporate Philanthropy Source Adapted from Bhatt acharya C B Sen S Kor s chun D 2008 and Bart el C 2001 Positive job related behaviors include objective metrics such as reduced absenteeism lower employee turnover and greater efficiency More subjective outcomes generally assessed in performance reviews include enhanced work effort (i.e. greater dedication to excellence and a willingness to expend extra energy), advocacy (i.e. a greater tendency to make suggestions for improvements and innovation) and co-operative conduct.

Figure 7 Representative Metrics and Survey Instruments from Research Studies in Employee Engagement Employee Attitude References Metrics and Survey Instruments or Job Behavior Collective self L uht an en Survey completed by employees with eight item esteem Crocker 1992 scale to reflect a member s personal evaluation of the group private collective self esteem as well as his or her assessment of how non members evaluate the group public collective self esteem 1 I feelgood about working for X 2 I often regret that Iwork for X 3 Overall I often feel that working for X is not worthwhile 4 In general Iam glad to bean employee of X 5 Overall X is considered a good company by others 6 In general others respect what X stands for 7 Most people consider X on average to be less effective than other companies 8 In general others think that X is not a good company to work for Identifies with Bag ozz i Berg ami Survey completed by employees Survey instrument company 2000 Tr opp is a combination of a visual and verbal report in the Wright 1999 form of aVen n diagram to assess the degree of cognitive overlap in attributes that an individual uses to define him or herself and the organization Employees indicated the pair of overlapping circles that best represented their perceived relationship to the organization from no overlap to complete overlap The Ven n diagram is supplemented with a second item that asked members to report the degree of overlap between their self image and their image of the organization Retention Phillips 2005 Voluntary Turnover Absenteeism Phillips 2005 Days absent per year Efficiency Phillips 2005 Sales per employee Co operative McAllister 1995 Survey completed by managers with ten item scale behaviors to reflect affiliation co operation and assistant co operation behaviors 1 Takes time to listen to other people s problems and worries 2 Rarely takes a personal interest in others 3 Frequently does something extra that won t be rewarded but which makes co operative efforts with others more productive 4 Passes on information that might be useful to others 5 Willingly helps others even at some cost to personal productivity 6 Rarely takes others needs feelings into account when making decisions that affect others 7 Tries not to make things more difficult for others at work.

Figure 7 Representative Metrics and Survey Instruments from Research Studies in Employee Engagement continued Employee Attitude References Metrics and Survey Instruments or Job Behavior 8 Goes out of his her way to help co workers with difficult assignments 9 Offers to help others who have heavy workloads 10 Covers for absent co workers Work effort Van Dyne Survey completed by managers with ten item scale Graham to measure work effort and willingness to expend Dienes ch 1994 energy on the organization s behalf 1 Rarely wastes time while at work 2 Produces as much as is capable of at all times 3 Always comes to work on time 4 Regardless of circumstances produces highest quality work 5 Does not meet all departmental deadlines 6 Is mentally alert and ready to work when he she arrives at work 7 Follows work rules and instructions with extreme care 8 Sometimes wastes departmental resources 9 Keeps work area clean and neat 10 Sometimes misses work for no good reason Advocacy Van Dyne Survey completed by managers with seven item participation Graham scale to assess advocacy participation behaviors Dienes ch 1994 indicative of innovation maintaining high standards and making suggestions for change 1 Uses personal judgment to assess what might be right wrong for the department 2 Encourages management and co workers to keep knowledge and skills current 3 Encourages others to speak up and participate in meetings 4 Does not push co workers to establish higher standards at work 5 Keeps self well informed where his her opinion might matter 6 Helps co workers think for themselves 7 Frequently gives co workers creative suggestions for ways of accomplishing tasks Figure 7 lists the metrics and survey instruments whereby respondents are asked to score on a numerical scale used in representative studies Bart el s 2001 study posed survey questions to employees and their supervisors both before and after the employees participated in the company s community outreach program To form a control group supervisors were also asked to evaluate a group of non participants Comparing differences in pre and post program survey reports Bart el found that participation enhanced the collective self esteem of employees In turn those employees also perceived a statistically stronger level of identification with the company For employees whose organizational identification became stronger their supervisors reported higher interpersonal co operation and work related effort whereas the supervisors reported no statistically significant changes in any work behavior by the control group Bart el also measured and controlled for other factors that might have influenced her results such as employee characteristics like length of tenure prior community outreach experience and job responsibilities To quantify the financial value of improved employee behavior one can estimate a statistical regression model of how much employees organizational identification correlated to productivity value The underlying data supporting such analysis needs to come from linking employee survey results to HR data such as performance reviews and productivity metrics Relative employee performance rankings efficiency attendance retention and other employee attributes then must be translated to relative dollar values 18 To improve the model s statistical validity and to justify this performance proxy other control variables must be accounted for such as job definition location training age and company tenure Given the overlap of this analysis with broader H Revaluations it is sensible to integrate this exercise into HR s systematic procedures Designing and implementing a centralized form of measurement reduces survey fatigue and ensures the consistency and comprehensiveness of surveys data and approach Figure 8 outline show once a general model is built and calibrated financial returns can be estimated by applying the model to employees survey scores Researchers in HR management 19 have noted that many senior company managers maybe more pragmatic about what H Revaluation can measure and do not need to quantify the financial benefit from HR programs they believe it is Figure 8 Model to Estimate the Influential Value of Corporate Philanthropic Initiatives on Employee Productivity Measure increase in level Estimate dollar value of Estimated value of of employees x increase in productivity employee productivity identification with from employees with company greater identification with company e g analysis of pre and post activity surveys e g estimate regression model statistically from study where data from employee surveys have been linked to performance ratings and productivity metrics sufficient to measure that individual employees motivational needs are met and their emotional attitudes towards the organization improved Customer loyalty Marketing managers have long recognized that securing customer loyalty is a valuable goal partly because retaining customers tends to require fewer marketing resources than recruiting new ones Moreover customer loyalty consistently shows high correlation to sales growth and profitability Loyal customers demonstrate several pro company behaviors they tend tore purchase the company s product or service commit a higher share of their category spending to the company and are more likely to recommend the company or brand to new customers 20 Traditional marketing strategies often focus on customer loyalty scores and on improving loyalty by enhancing customers perceptions of the product s quality and value The perception of a company s values through its philanthropic programs also matters of course All else being equal a consumer is more likely to choose a product made by a highly responsible company than one made by a less responsible one Geoffrey Heal 2008 of Columbia Business School recounted the customer research experience of a consumer goods company The company had built a customer loyalty model based on a composite of its customers responses to seven survey instruments whether they 1 ask for the brand 2 re purchase the same brand 3 recommend the brand 4 use other products by the same brand 5 overrule a salesperson pushing another brand 6 will only buy the brand and or 7 switch stores for the brand Passionately loyal customers are defined as those who answer affirmatively to atleast four of those seven questions The company estimated that a one percentage point increase in their brand s Customer Loyalty Index CLI the percentage of all customers who are passionately loyal translated into a nearly 5 increase in sales Furthermore the company s research revealed that its customers emotional motivations were twice as important as product considerations in driving brand loyalty Out of about fifty touch points tested social responsibility was among the top five important factors to consumers in terms of loyalty Accordingly the company learned that it could increase its emotional connection with consumers by tying its brand to the company s commitment to a social cause.

A model for measuring the influence of corporate philanthropy initiatives on customer loyalty Customer loyalty scores are typically measured by surveys that ask consumers to rank their intention store purchase or recommend a product according to a numerical scale Measuring customer intentions rather than actual purchasing behaviors provides companies with a more timely and operable loyalty assessment Researchers may implement different proxies however ranging from a composite survey that measures multiple customer intentions to a single best metric like the Net Promoter Score 21 which is based on customers intention tore purchase Companies periodically validate intentions by following upon customers actual behaviors This more involved validation exercise also allows the company to calibrate how much sales growth can be expected as a result of increased loyalty Because marketing managers have a company's traditionally focused on product or service philanthropic involvement performance as drivers for customer loyalty can lead customers to the attention has long been on customer feel a deeper sense of satisfaction and trust in the brand But identification with the customer awareness of a company s company and develop a philanthropic efforts is an additional more positive evaluation channel by which loyalty can be achieved of the company s Presenting the findings of a telephone abilities survey conducted among a national sample of 1033 adults the 2004 Cone Corporate Citizenship Study reported that eight in ten Americans agree that corporate support of a cause wins their trust Moreover 86 said that if the quality and price of a product are equal they would be likely to switch brands in order to help support a cause Field research studies have shown that a company s philanthropic involvement can lead customers to feel a deeper sense of identification with the company and develop a more positive evaluation of the company s abilities and that this results in product purchases However these studies have also found and emphasized that the pathway from customer awareness of corporate philanthropy to loyalty is less straightforward than hypothetical marketplace polls and surveys suggest Victoria Smith and Peter Langford 2009 from Macquarie University in Australia and CB Bhattacharya and Sankar Sen (2004) from Boston University and Baruch College document that customers perceptions and expectations can be complex when confronted with a company s corporate philanthropic record and suggest that this affects how much philanthropic initiatives actually do translate into increased loyalty and purchases Consumers lack of awareness about philanthropic initiatives is often a major limiting factor in their ability to respond At the sametime disingenuous attempts by the company to sell philanthropy can backfire Philanthropic initiatives are more likely to lead to positive customer behaviors when the cause is perceived to fit well within a company s overall strategy Consumers view companies that base their business strategies around socially responsible principles more positively than companies that attempt social responsibility as an add on action Consumers maybe skeptical when a company with a negative reputation becomes involved in causes closely related to its business Different personality traits result in different responses to corporate philanthropy efforts what works for one consumer segment may not work for another Individuals who personally support the issue central to the company s initiatives are more likely to be persuaded to purchase its products Companies perceived to have distinguished themselves on a corporate responsibility platform generally enjoy a loyal following among a certain segment of customers Consumers generally do not like to be asked to pay a premium for philanthropy nor do they want to sacrifice product quality Perception of a company s capabilities in other areas also modifies how consumers respond to philanthropy Researchers have identified a strong statistical relationship between consumer satisfaction and companies philanthropic record only when companies are perceived to have strong product quality and innovation capabilities and or operate in consumer oriented industries 22 Designing a measurement framework for loyalty should begin with an assessment of the perceptions customers have already developed as a result of a company s corporate philanthropic initiatives and whether these perceptions are contributing to higher loyalty scores Figure 9 suggests such a framework based on the literature reviewed Figure 9 A Framework for Measuring Customer Loyalty and Corporate Philanthropy Source Adapted from Bhatt acharya C B Sen S 2004 and Smith V Langford P 2009 A company s marketing department is likely already to have implemented its own customer loyalty metrics in which case it is sensible to leverage these along with customized deliberate customer research It is imperative that the additional factors affecting loyalty scores e g customer perceptions of product quality and value also betaken into account Figure 10 proposes representative survey instruments that companies may adapt.

Figure 10 Representative Metrics and Survey Instruments from Research Studies in Customer Loyalty Customer References Metrics and Survey Instruments Perceptions Fit between Becker Olsen Survey with four item scale company and Hill 2005 1 There is a low strong fit between the company philanthropic and philanthropic initiative initiatives 2 There is dissimilarity similarity between company and philanthropic initiative 3 There is inconsistency consistency between company and philanthropic initiative 4 The company and philanthropic initiative are complementary not complementary Company s Du Bhatt acharya The company supports this philanthropic initiative motivation is Sen 2007 because it is genuinely concerned about being intrinsic socially socially responsible motivated Company s Du Bhatt acharya The company supports this philanthropic initiative motivation is Sen 2007 because it feels competitive pressures to engage in extrinsic profit such activities motivated Beliefs about Du Bhatt acharya 1 This company brandis a socially responsible company s social Sen 2007 company brand responsibility 2 This company brand has made a real difference through its socially responsible actions Customer Becker Olsen My sense of who Iam i e my personal identity identification with Hill 2005 overlaps with my sense of what this company company represents Customer loyalty Bone Ellen Survey with three item scale assessing customers intention to 1992 intention to purchase re purchase 1 What is the probability that you will use X s services 2 What is the likelihood of you choosing X the next time you contract a service 3 The next time I purchase a service will be with X Customer loyalty Reich held 2003 How likely is it that you would recommend X to a intention to friend or colleague recommend CEOs have a keen interest in quantifying the financial value of loyal customers A statistical model of the expected lifetime value of customer loyalty reflecting the profits likely to arise from re purchases and word of mouth recommendations is a helpful indicator as to the returns from loyalty enhancement Attributions of customer loyalty can be further broken down statistical techniques such as conjoint analysis 23 can be applied to customer surveys to assess how much a customer s perception of corporate philanthropy contributed to his or her loyalty score Figure 11 outline show companies can then estimate financial returns from corporate philanthropy s influence on customer loyalty .

Figure 11 Model to Estimate the Influential Value of Corporate Philanthropic Initiatives on Customer Loyalty Estimate Measure number of Estimate lifetime Estimated value of proportion of x loyal customers x value of loyal customer loyalty customer loyalty derived from customers score attributed to customer loyalty perceptions of scores in surveys e g follow up corporate with customers to philanthropy validate their actual purchase behavior e g statistical and assign dollar analysis such as value to expected conjoint analysis of profitability from customer surveys re purchases and recommendations Managing reputation al risk A strong and positive reputation is invaluable to a company How external stakeholders see a company as good rather than bad reinforces the company with better human capital goodwill legitimacy and a license to operate in the communities it serves and seeks to enter However as Benjamin Franklin once said it takes many good deeds to build a good reputation and only one bad one to lose it Managing downside reputation al risk before a crisis strikes is critical much less can be done after the crisis has occurred Researchers have documented how a record of community based initiatives creates goodwill that can mitigate stake holder sanctions ranging from mild e g casual bad mouthing to severe having one s right to do business revoked when negative events arise Paul Godfrey Craig Merrill and Jared Hansen 2009 of Brigham Young University point out that the severity of such sanctions may depend on both the negative effects of the action and the perceived intentions of the offending company In other words punishments are more severe when bad acts are committed by bad actors Moreover long accumulated goodwill trust and familiarity can moderate the negative reputation al effect of a company blunder as these traits often encourage stakeholders to attribute the negative event to a singular managerial mistake rather than an intentional course To test this idea Godfrey Merrill and Hansen collected and examined stock price reactions for a large sample of companies that experienced negative legal or regulatory actions Such negative events to the extent that they are unanticipated or partially anticipated should generate negative stock price reactions as investors expect negative long accumulated stake holder reactions However goodwill trust and commitment to community initiatives could familiarity can moderate serve as a signal to investors of the goodwill the negative reputation al and positive perception of management effect of a company character enjoyed by the company and blunder which may temper possible sanctions The researchers examined 160 companies that appeared from 1991 to 2002 in a data set maintained by the research firm KL D Analytics The data set contains analysts assessments of the companies social participation in community and diversity initiatives The researchers also reviewed Wall Street Journal articles published between 1992 and 2003 looking for negative events such as the initiation of a lawsuit against any of the companies by a customer third party or competitor or the announcement of regulatory action e g investigation fines penalties etc by a government entity The announcement events were grouped into either integrity based actions such as discrimination claims fraud accusations false claims dishonesty pension or investor obligation claims or bribery allegation and competitive or health safety actions including competition conspiracy anti trust claims patent infringements price fixing accusations consumer medical injury issues product safety problems quality control issues and environmental pollution indiscretions The researchers reported that companies participating in social initiatives preserved greater share value adjusted for market wide price movement around these negative announcements than those who did not participate in social initiatives However the data does not reveal the relative severity of the negative events hence the study was unable to control for the possibility that the missteps done by good companies simply were not as bad as those done by the companies less socially engaged The value effects were strongest surrounding those events categorized as integrity related In a back of the envelope calculation the researchers estimated that companies not engaging in social initiatives lost on average 72 4 million per negative event while socially engaged companies lost only 22 8 million relative to the average market capitalization of 32 6 billion for all companies on the days preceding the events.

A model for measuring the value of corporate philanthropy in terms of managing reputation al risk Many companies already have in place a strategy for managing reputation al risk This strategy typically includes identifying events that may lead to reputation al damage assessing the likelihood and severity of damage and preparing plans to manage these risks 24 The first step in assessing these risks is to identify key stakeholders internal and external such as customers suppliers and regulators understand their expectations vis vis the company s current reputation and develop a master list of risk events A starting point for identifying reputation al threats is a list of stake holder groups and their corresponding threats as analyzed by Charles Fo mb run Naomi Gard berg and Michael Barnett 2000 of New York University and summarized in Figure 12 To quantify stake holder expectations and reputation al risks a company s Enterprise Risk Management or Public Relations department may conduct a reputation assessment often applying one or more of the following techniques 1 analysis of media hits and stories 2 interviews with front line employees 3 consultations with stakeholders and industry executives 4 focus groups and 5 public opinion polls 25 Precise valuation of reputation al insurance against these threats is difficult When litigation community protests and other crises are successfully avoided costs will never be recorded and the resulting impact on profits or share prices goes unobserved However these costs can be real and significant Scenario analysis is a tool commonly used in addressing such problems and estimating the potential cost of these risks Each potential event needs to be assessed in terms of the likelihood that it will occur and the severity of the potential reputation al damage as suggested in Figure 13 Companies can perform a quantitative assessment of the impact of reputation al damage in terms of reduced operating revenue or increased compliance operating or capital costs This may involve simulation techniques to map out numerous scenarios and estimate average frequency and loss severity The company can then prioritize these risks and decide whether and how they can be eliminated reduced or accepted.

Figure 12 Identifying Stake holder Groups and Reputation al Threats Stake holder Threats Examples Community Withdraw license Companies seek to dampen community protests to operate and threats to the legitimacy of their operations Regulators Regulatory action Companies seek to create greater trust and familiarity between themselves and the local community and regulators reducing the likelihood and costs of regulatory actions Customers Misunderstanding Companies want to convey favorable images of themselves and reduce the chance that customers misunderstand their business behavior and ethics Partners Defection Companies want to reduce the risks of disruption to crucial flows of manufacturing inputs products services and resources Employees Rogue behavior Companies want to strengthen the bond between employees and the corporate culture and avoid actions taken by employees in their self interest that can create negative publicity for a company or even bring it down Investors Share value Companies want to assure investors of their future prospects for growth stability of profitability and quality of management Activists Boycotts Companies are more vulnerable to activists if their actions or in actions can be perceived as damaging to social values or communities Media Negative exposure When a crisis arises a company can be vulnerable to negative media exposure both if the company is too quiet or too vocal visible The company can reduce this vulnerability by nurturing a positive corporate image and appropriately familiarizing the public with its business employees and activities Source Adapted from Fo mb run C J Gard berg N A Barnett M L 2000 Figure 13 Quantitative Assessment of Reputation al Risk Events Regulatory Action Example x Risk Cost Types Costs Likelihood Expected Loss Legislative adjustments Lost revenues that change the rules Increased taxes and of the game tariffs Source Adapted from Epstein M J 2008 Figure 7 3.

Positioning corporate philanthropy either internally or externally is not straightforward Companies need to be wary that stakeholders might cynically perceive these initiatives as just empty claims or public relation devices Corporate philanthropy needs to represent and be embedded in a natural extension of the company s values and operations NGOs and nonprofit partners who speak on companies behalf bring more credibility At the sametime the bigger a company s reputation and the larger the gap between perception and reality the more vulnerable the company is to reputation al attacks Innovation and growth opportunities Innovation which is key to sustaining a competitive business advantage often emerges from creative problem solving Rosa beth Moss Kant er 1999 of Harvard Business School has suggested that companies can view community need as a business opportunity to develop ideas demonstrate technologies find and serve new markets and solve longstanding social problems Companies can further their capabilities by applying their best people and core skills to advancement that benefits both business and community Kant er even goes s of aras to suggest thinking about these efforts not simply as charity but as a strategic business investment Jane Nelson and Beth Jenkins 2006 of Harvard University reviewed several examples of companies looking to their philanthropic community investment and employee volunteering programs as sources of innovation for the company its partners and the communities and countries in which it operates Sarah Holmes and Lance Noir 2007 access to a diverse from Cranfield University in the U K range of external partners studied innovation s role in companies becomes increasingly collaborative relationships with nonprofit valuable to companies organizations As drivers of innovation wishing to generate disperse beyond traditional company and be associated with boundaries access to a diverse range of new ideas external partners becomes increasingly valuable to companies wishing to generate and be associated with new ideas Nonprofits offer companies access to a dense network distinct from the companies own corporate sphere as well as afresh view of the modern marketplace NGOs for example lead social movements and can give early warning about shifts in public tastes and values. They may also possess unique technical expertise and influence on public legislation resources that corporate partners are likely to find advantageous when exploring new markets As suggested by a Boston College Center for Corporate Citizenship and McKinsey Company 2009 review of practices among twenty companies philanthropic activities could have a demonstrable impact on corporate growth through several pathways New markets Philanthropic activities expose companies to new markets and increase market share through exposure New products Philanthropic activities can involve the creation of products that meet social needs and increase differentiation New customers Philanthropic activities engage new and existing consumers and contribute to a greater understanding of consumer expectations and behavior New technologies Philanthropic activities can lead to the development of cutting edge technologies and innovative products also applicable to business use patenting and proprietary knowledge The financial impact arising from these philanthropic activities ranges from profits increased directly through sales or indirectly through goodwill or savings related to risk avoidance or operating efficiency gains Models for measuring the value of corporate philanthropy in terms of innovation and growth opportunities There are three standard financial valuation methods that can be applied to measure the value of corporate philanthropy as an opportunity for business innovation and growth I Market based model The market based approach is the most straightforward It relies however on being able either to observe a market price for the project in question or comparisons to the market values of other similar projects or assets For example innovation may result in a new patent which has a market price when put up for sale to other companies

Another example if other similar businesses already have a market price then the project can be valued by applying the same financial multiples e g price to book value or price to earnings ratios of those comparable s II Cash flow model The income or cash flow based approach is often used instead of the market based model because market prices are not readily available particularly for unique projects or projects that cannot easily be isolated and assessed as stand alone entities All future cash flows are estimated and then discounted to arrive at their net present value The three steps comprising the cash flow based approach are 1 Estimate future cash flows including revenues and expenses This captures the enhanced revenues or savings the innovation has effected 2 Determine the time period over which these cash flows are earned 3 Apply an appropriate discount rate which reflects the time value of money and the relative risk or uncertainty of cash flows III Real options analysis model Innovations can also provide companies with the potential to create cash flows that will exist in the future but do not exist now For example a company may develop a new commercial technology as a residual benefit from sustained efforts tackling a social sector objective This technology may not be financially viable today which is why the company does not commercialize it and does not enjoy any current cash flow owing to its existence Nevertheless the technology may have considerable value to the company because it can be developed in the future Financial scholars including A swath Damodar an 2006 have noted that such examples of intangible assets maybe undervalued on a traditional cash flow basis and are best valued using the real options approach Charles Fo mb run and his co researchers 2000 have also suggested that were firms to view citizenship through the real options lens they might overcome these myopic tendencies to under invest in it To illustrate the valuation concepts underlying the real options approach consider a hypothetical example of a company gaining access to a newmarket 26 through exposure from its philanthropic programs. Small medium sized enterprises S MEs in an emerging market country can form a sizable customer base for their products. However start up costs for a business venture are substantial and business revenues though potentially large are still highly uncertain So an established company funds a philanthropic initiative that helps SME owners to develop their business knowledge and capabilities This initiative not only improves the company s access to potential customers but overtime also allows it to develop and gauge market opportunities for its commercial products The company can choose to enter the market itself if and when it is determined financially viable or it may choose not to in which case it has protected its downside financial risk all the while contributing to improving socio economic conditions In practice calculating real options values requires sophisticated numerical techniques and should be undertaken with business units in the firm to ensure consistent assumptions are used Nevertheless its intuition can be illustrated by adding some numbers to this stylized example Assume a company s cost of capital is 10 Start up costs in a newmarket are 60 million while market size maybe drawn from three equally likely scenarios annual revenue streams of 3 million 6 million or 12 million Using the cash flow based approach the expected i e probability weighted average discounted value of these perpetual revenue streams is 70 million Therefore the net present value subtracting start up costs is 10 million However suppose the company is able to narrow this uncertainty after engaging in those philanthropic initiatives The company would decide togo ahead only if it knew that the market presented the highest revenue scenario where the company would likely earn 120 million 60 million 60 million The discounted probability weighted average profits would be 1 10 x 1 3 x 60 million 18 million since one would not proceed in the other two cases Only the real options approach allows a company the flexibility to wait and see if commercialization is viable This flexibility can protect downside risk and is financially most valuable to the company when 1 There is greater uncertainty about the size of the market 2 There is substantial investment needed for infrastructure 3 There are significant barriers to entry for competitors Even when a leading company cannot keep competitors completely at bay unlike with a patent protected by law it can still reap a disproportionate share of benefits by being the first to build a superior reputation and relationships in the newmarket

Summary

CGOs can make a more persuasive business case by articulating clearly the strategies by which they expect philanthropic initiatives to contribute towards strategic business needs such as improved employee engagement customer loyalty reputation al risk and growth opportunities These pathways are often not straightforward To realize meaningful benefits philanthropic involvement cannot be treated as just another check in the box Companies must understand the mechanisms by which they expect these business benefits to be achieved Related business disciplines have developed a body of evidence and measurement approaches that can be applied When benefits to the business are long term or intangible modeling approaches for valuing future cash flows analyzing scenarios and calibrating expected monetary profits linked to the behaviors of loyal customers and engaged employees can be used to estimate financial value as well as to clarify assumptions Intermediate metrics can help programs deliver those business benefits by enabling managers to make mid course adjustments as necessary Companies who find natural innovative opportunities to commit abroad array of company product expertise and capabilities beyond cash grants can multiply the business and social returns that their philanthropic initiatives achieve These opportunities are more likely to arise when companies establish meaningful long term relationships with nonprofit partners aligned with the company s priority areas When corporate donations are disbursed without strategy the benefits will be greatly limited Heike Bruch and Frank Walter 2005 When corporate from the University of St Gallen in donations are disbursed Switzerland distinguish companies as being without strategy the market or competence oriented in their benefits will be greatly philanthropic focus Endeavoring to live up limited to stake holder expectations these market oriented companies are likely to care most about measuring competitive advantages such as improved marketing capabilities and better stake holder relationships By contrast competence oriented companies focus on internal skills when deciding on the nature of their charitable involvement and for such companies measuring value from employee engagement and business innovation is more important than for market oriented companies. The best approach would seem to be a balanced combination of an external market and internal competence orientation which would be more likely to maximize business and social benefits concurrently 13 This review focused on studies that concentrated on companies social and community behavior which for many companies begins with corporate philanthropy the charitable donation of dollars products services and employee volunteer time Some of these studies also considered a company s broader corporate citizenship performance beyond social and community engagement and included other aspects of corporate social responsibility CSR such as governance structure and environmental impact 14 Known in the psychology literature as the motivation crowding theory See FreyJegen (2001) and Weibel, Rost, Osterloh (2007). A recurring statistical criticism of such empirical studies is How can one disentangle the possibility that companies for whom employees enjoy working might simply be financially valuable in the first place Researchers attempt to mitigate this problem by including in their regression models a slew of control variables such as measures of past financial performance More rigorous statistical tests require controlled experiments and field studies that are more complex to undertake 16 Hills Mahmud 2007 17 See http www pfizer com responsibility global health global health fellows jsp 18 One can turn to the HR measurement field for calculation and estimation approaches to convert outcomes from an HR program to monetary values although no standard approach exists For example Phillips 2005 provides a review of HR measurement strategies and describes pp 182 183 how a large financial institution RB S developed and used an employee engagement model to link HR information to key business indicators enabling the business to measure the impact of HR initiatives on business profits 19 In a survey of HR managers and corporate executives who sponsor executive education programs Charlton Osterweil 2005 found that while respondents agreed that measuring ROI was important people may mean different things when they talk about ROI The researchers conclude that sponsors may not be as wedded to proof of financial ROI as many HR professionals assume 20 Reichheld Sasser 1990 21 Reich held 2003 22 Luo Bhatt acharya 2006 and Lev Petrov its Radhakrishnan 2009 23 Conjoint analysis is a statistical technique that originated in mathematical psychology and is applied to marketing and survey analyses See Green Srinivasa n 1990 The technique uses statistical de compositional methods to quantify consumers relative preferences given their overall evaluations of a set of alternatives which in turn are specified as levels of different attributes 24 Christi a ens 2008 25 Eccles New qui st Schatz 2007 26 To illustrate the potential role of philanthropic programs this hypothetical example was adapted from the field of international business management For example Li Rug man 2007 investigated how to apply real options analysis to foreign direct investment decisions made by multinational enterprises The focus of their paper was on only traditional market entry modes such as exports licensing and wholly owned subsidiaries

CONVERSATION THREE. Between the Chief Executive Officer CEO and

investor community.

The investor community tends to pose two contrasting questions about corporate giving On the one hand shareholders want assurance that philanthropy adds to or atleast does not detract from shareholder value On the other hand a growing number of investors place increasing emphasis on the demonstration of corporate responsibility A large body of literature already exists seeking to demonstrate the business value of corporate philanthropy to both groups Merely for ease of distinction here we will distinguish these two investor groups as traditional and responsible

Question 4. How to measure the value of corporate philanthropy

for traditional investors.

Scholars have long searched for a link between corporate philanthropy and premiums in company profits or stock prices They believe that if this link can be proven statistically it could offer definitive financial justification for companies to behave as good corporate citizens Textbook accounting frameworks reveal that a company s share price multiple the premium that a company s share price may be worth over its book value of identifiable company assets can be driven higher through two financial levers 27 1 a lower cost of capital or 2 higher expectations of how much future profitability exceeds the company s cost of capital The share price premium that a company enjoys over its cost of identifiable financial and physical assets is attributed to intangibles which can comprise a significant portion of a company s intrinsic value 28 Empirical evidence on share price valuations and profitability Baruch Lev and Christine Petrov its at New York University and Sure sh Radhakrishnan 2009 at the University of Texas collected a large data set of charitable contributions made by public companies from 1989 through 2000 They applied a statistical methodology known as Granger causality which distinguishes causation from association and found that charitable contributions increased the subsequent revenue growth of their donors This causal relationship was found only in industries highly sensitive to consumer perception and for these consumer oriented companies within their sample period a basic calculation suggests that giving 500 000 caused net profits to rise by almost 800 000 The researchers could not detect a relationship between charitable giving and profits nor sales growth in non consumer industries such as industrial companies A study by Ray F is man and Geoffrey Heal of Columbia Business School and V in ayN air 2007 of the Wharton School used a different data set to explore similar hypotheses They collected financial data from 1991 to 2003 to calculate profitability and price to book ratios for individual companies and also collected information about average advertising intensity for different industries Philanthropy ratings came from the SOCRATES database maintained by KL D Research and Analytics Similarly to Le ve tal these researchers found a positive statistical relationship between philanthropy and company financial performance as measured by profitability and price to book ratios only in advertising intensive industries such as consumer oriented companies However the economic magnitude detected was not large Joshua M argolis Hillary Elf en be in and James Walsh 2007 from Harvard Business School University of California and University of Michigan respectively conducted a review of 167 similar scholarly studies They concluded that after thirty five years of research the preponderance of scholarly evidence suggests a mildly positive relationship between corporate social performance and corporate financial performance and finds no indication that corporate social investments systematically decrease shareholder value 29 More critically they and other researchers have acknowledged a the preponderance of number of weaknesses in the methodologies scholarly evidence and data comprising these studies Even suggests a mildly positive when such economic links exist flaws such relationship between as these would reduce the power of corporate social statistical tests to prove them performance and 1 There is wide variation in how corporate financial companies are assessed on their performance and finds no corporate social performance Many indication that corporate studies use observer perceptions or social investments insiders self reported impressions that systematically decrease may suffer from biases e g the halo shareholder value effect Others use third party audits that are often not transparent or open to validation Simple metrics like contribution amounts do not reflect how effectively donation dollars are actually spent 2 Much of the business value of corporate philanthropy can be classified as contributing to the intangibles of a company which may only show up in profits several years later and many studies do not examine the impact on profits over a sufficiently long timeframe There is also mixed evidence on how efficiently stock markets price companies whose intangibles makeup a large proportion of their value 3 Some studies measure financial performance as positive market adjusted stock price returns These results can be sensitive to the sample period chosen Ideally a study would observe along period that effectively smoothes out the high variability in stock price movement and spans full economic cycles Even more critically care must betaken when interpreting the hypotheses supported by such tests If philanthropic companies are successful in attracting more investors and raising capital at a lower cost one would expect the stock price multiples of these companies to be higher and average stock returns lower than for less philanthropic companies When stocks are priced efficiently the lower cost of capital required by investors in philanthropic companies should match the lower average returns they subsequently earn overtime as a result of holding those stocks Research by Harrison Hong and Marcin Kac per c zyk 2007 from Princeton University and the University of British Columbia Traditional investors respectively illustrates such a relationship with tobacco companies To date the tobacco industry represents the most prevalent negative screen applied by socially responsible investors Over the past three and a half decades tobacco stocks consistent with losing access to capital from a class of investors 30 have been priced at lower multiples their price to book multiples were 15 lower than non tobacco stocks At the sametime consistent with having to deliver a higher return on capital average stock returns from these s in stocks outperformed other comparable stocks by approximately 2 4 a year 4 Many studies are in explicit about the direction of causality Can companies afford to be more philanthropic because they have performed better financially rather than the other way around Studies also must control for other company characteristics that drive financial performance but maybe correlated to philanthropic spending such as industry risk size research and development and advertising expenditures 5 Across companies the relationship between corporate philanthropy and financial performance is quite complex Researchers 31 have found the relationship to be nonlinear and show decreasing returns to scale after all corporate philanthropy cannot be expected to increase financial performance in perpetuity The relationship has also been found to be weaker among companies and industries that are less advertising or innovation focused Summary M argolis Elf en be in and Walsh concluded that research must reach beyond simply assessing the magnitude of the corporate social and financial performance relationship it must now show how corporate social performance comes to bear upon corporate financial performance Put another way It is time to study mechanisms more systematically Addressing the hypotheses posed in both these scholarly studies and by traditional investors requires measuring and understanding the operational drivers of business value business value derived from increased employee engagement customer loyalty reputation al capital and opportunities for innovation

Question 5. How to attract responsible investors.

A company's cost of capital is the price it pays investors to supply capital for its business activities It is the rate of return that investors require for investing in a company If a company attracts a larger pool of potential investors it can raise capital at a lower cost than its peers earn a wider profit margin and enjoy a higher stock price multiple Effect on cost of capital and share prices Socially responsible investing SRI the practice of investors who think ethically and socially about which stocks to buy sell or avoid altogether has along history In its earlier forms SRI was regarded as a niche investment style In the first wave of SRI strategies investors applied negative screening and excluded entire sectors or groups of stocks based on a set of ethical criteria The next wave of strategies using positive screening was introduced by benchmark providers such as the Dow Jones Sustainability Index DJS I This selected only the companies that rated highest on a broader set of environmental social and governance ES G responsibility criteria The total amount of money invested in traditional SRI is still considered to be relatively small and volatile In the 2008 Report on Socially Responsible Investing Trends in the United States The Social Investment Forum estimated that approximately one in every ten dollars of assets under institutional management in the U S an estimated 2 3 trillion out of 24 trillion was invested in companies that rate high on some measure of social responsibility Analysts generally estimate that SRI presently makes up no more than 5 10 of all stock market investments A far more important factor will depend on how much mainstream investors start to recognize and reward performance incorporate social responsibility CSR Increasingly investors are recognizing that responsible corporate performance when combined with traditional financial analysis in forms their assessments about whether companies are good financial investments This also removes the issue of personal values based preferences which can be a slippery slope to navigate particularly for professional money managers European institutional investors appear to be leading and adopting this movement more widely For example Swedish and Norwegian pension funds representing close to 1 trillion of combined assets recently signed on to the Sustainable Value Increasingly investors are Creation Initiative S VC to influence recognizing that companies to improve the social and responsible corporate environmental aspects of their operations performance when which they believe reduce risks and costs combined with traditional while harnessing and developing business financial analysis in forms opportunities 32 their assessments Researchers from the University of about whether companies British Columbia and the University of are good financial Vienna 33 created a model of stock market investments prices to examine how social investors materially affect those prices This model determined whether a growing class of socially concerned investors would create incentives for companies to act in a more socially responsible manner by lowering their cost of capital In their book Investing for Change August in Landi er and Vi nay Nair have applied this model to estimate a back of the envelope relationship between stock price valuation and the proportion of socially responsible investors in the market For example if the amount of SRI capital switches from 10 of the total available capital to 15 in three years the cost of capital of responsible companies maybe lowered by more than 0 8 Such a drop from say a 10 0 return required by investors to 9 2 could increase the valuation of these companies by as much as 11 34 Other researchers have approached this question by examining how substantially stock prices have moved based on SRI motivated capital flows SRI funds often track membership in certain specialized benchmarks to identify which companies to invest in These benchmarks are maintained by index providers such as Dow Jones or FTSE often in collaboration with ES G research firms As companies are included or dropped from such indexes one would expect SRI linked capital to flow into or out of those stocks These are potentially abrupt events if SRI flows are material enough they could drive stock prices of companies entering indexes to rise atleast temporarily and those exiting to experience a drop Researchers have collected large datasets of these events and examined the average stock price changes accounting for broader market movements and other factors typically controlled for in event study methodologies. In recent working papers from the Federal Reserve Bank of Atlanta and Bank of Finland 35 researchers looked at the price performance of all stocks between 1990 and 2004 on the announcement that they were dropped from the Domini 400 Social Index They found that the exiting company experienced a significant abnormal stock price drop of about 3 Another research team 36 at the University of Calgary studied additions and deletions of North American stocks to the Dow Jones Sustainability Index from 2002 to 2007 They found that inclusion in this index was valuable for a company measuring a boost in market value of about 2 compared to stocks that were dropped Mainstream responsible investing Contrary to earlier and more traditional approaches of SRI which was driven largely by investors personal values the case for mainstream institutional investors lies in recognizing that responsible corporate behavior is a proxy for the quality of company management and the extent to which that management is forward looking and adaptable Responsible investing RI is characterized by the incorporation of social and environmental factors within traditional investment decision making processes based on the rationale that such a combined investment framework is more effective for assessing the financial value of companies particularly over the long term The growth and influence of responsible investing will be determined more by the interest of mainstream investors than by traditional SRI funds In April 2006 former UN Secretary General Kofi Annan launched a global initiative centered on a set of voluntary values and guidelines for asset owners and professionals The PRI Report on Progress 2008 reported that as of May 2008 approximately 300 financial institutions representing a total of 15 trillion in professionally managed assets have subscribed to these UN Principles for Responsible Investment The six principles listed below are not prescriptive but they provide a framework according to which investors can organize and integrate ES G criteria into mainstream investment analysis and ownership practices Although subscription to these principles does not necessarily mean that all funds already fully comply with them funds are nevertheless expected to pursue compliance and to report to the UN Secretariat on their progress. The Six UN Principles for Responsible Investment are 1 We will incorporate ES G issues into investment analysis and decision making processes 2 We will be active owners and incorporate ES G issues into our ownership policies and practices 3 We will seek appropriate disclosure onE SG issues from the entities in which we invest 4 We will promote acceptance and implementation of the Principles within the investment industry 5 We will work together to enhance our effectiveness in implementing the Principles 6 We will each report on our activities and progress towards implementing the Principles The potential impact of responsible investing on how stocks are revalued and corporations behave is huge If just a third of subscribers implement these principles in their investment process the combined size of investments linked to some corporate responsibility criteria would triple However the range of screening criteria and rating assessments is wide in contrast to simple early SRI approaches like tobacco industry screens Professional managers and analysts cite a general view broadly consistent with recognizing ES G performance as a proxy for management quality insofar as it reflects the company s ability to respond to long term trends and maintaining a competitive advantage 37 Much of their specific analysis ultimately relies on the subjective judgment of individual analysts and on proprietary frameworks rather than standardized metrics A review of the ratings processes of major ES G research firms confirms that while their general principles share much overlap they do apply subjective metrics and proprietary rating schemes These ratings generally consider not only the level of philanthropic contributions but also attempt to account for other factors such as the innovative quality of giving and the measurement processes involved In 1999 Dow Jones Company launched the first global indexes tracking the stock price performance of leading sustainability driven companies worldwide According to the Dow Jones Sustainable Indexes 2007 Annual Review asset managers in sixteen countries collectively managed about 6 billion based on the DJSI. Inclusion within the index is based on criteria that are weighted approximately equally for economic environmental and social performance though actual weights differ among industry groups In order to apply for inclusion in the DJS I companies must complete a questionnaire an extensive survey that incorporates both generic as well as industry specific questions This information is supplemented by company and third party documents personal contact between analysts and company representatives and additional information from media and NGOs Companies are ranked within their industry groups and selected for the indexes if they are among the top 10 of sustainability leaders in the irrespective industry sectors Although a significant commitment of costs and efforts maybe required for collecting the information and completing the survey companies see the DJS I label as an important mechanism for establishing a reputation in sustainability The general section of the survey questionnaire is comprised of 51 sets of questions covering economic environmental and social issues Accounting for 3 5 weight in the company s overall score corporate philanthropy is assessed based in part on responses to these questions 38 1 Does the company have a system in place to measure the business social and reputation stake holder impact of its contributions in order to improve andre align its philanthropic social investment strategy 2 What is the estimated monetary value of its philanthropic contributions voluntary social investments in cash employee volunteering and product donations Two other prominent social ratings firms are 1 KL D Research Analytics Inc KL D has conducted research into the ES G performance of listed companies since 1988 Based on KL D s rating indicators the Domini 400 Social Index was the first socially responsible stock benchmark in America In 2008 FTSE agreed to co brand KL D s suite of ES G benchmarks KL D s research database SOCRATES contains ES G reports and ratings one very Russell 3000 and S P 500 company and is a widely used measure of corporate social responsibility for industry and academic research 2 In no vest Strategic Value Advisors is another global provider of extra financial and sustainability based investment research institution ally recognized since 1995 Its Intangible Value Assessment IV A model combines performance ratings on 120 sustainability practices categorized into four major areas stake holder capital relationship with local community as well as partnerships supply chain and human rights human capital employee development labor relations and health and safety strategic governance overall strategy adaptability product development and safety and environment overall environmental impact including strategy governance management systems opportunity and risk In 2009 the Risk Metrics Group a leading provider of financial risk management products and services to global institutions announced its intention to acquire In no vest and KL D and to integrate their sustainability research capabilities into its suite of financial risk management offerings Responding to its clients indicated belief 39 that ES G performance is a critical benchmark of companies risks and long term value Risk Metrics has committed to make ES G analysis an integral part of mainstream investment research An important effort to standardize corporate non financial reporting was initiated in 1997 by The Coalition for Environmentally Responsible Economies CERES The Tellus Institute and The United National Environment Program The Global Reporting Initiative GRI which these entities launched through consultation with multiples take holder groups publishes periodically revised reporting guidelines However the GRIn either assesses whether company reports conform to those guidelines nor verifies their accuracy thus potentially reducing the reports value to investors Moreover the growing length of reports may complicate financial analysts ability to use them effectively 40 The current set of guidelines entitled G 3 includes performance indicators that fall into one of the following categories economic 9 indicators environmental 30 labor practice 14 human rights 9 society performance 8 and product responsibility performance 9 Companies are required to update this data annually 41 The G 3 indicator for community impact SO 1 obliges companies to report the nature scope and effectiveness of any programs and practices that assess and manage the impact of operations on communities including entering operating and exiting In a review of 72 company reports the GRI found that the majority of G-3 reporters claim to be reporting in accordance with the G-3 Guidelines SO-1 indicator however in reality only 11 of the G-3 reporters fully report according to the SO-1 indicator protocol 42 The reports examined were found to focus mostly on reporting their own performance as opposed to what changes or benefits occur as a result of their activities and to emphasize positive community impact without mentioning any negative ones Summary A high quality measurement process is If the criteria applied by social rating firms a critical input for good seem inconsistent and subjective this may management and be as much a result of the unevenness and demonstrates that a ambiguity of what many companies company recognizes how disclose It is also unclear to what extent its philanthropic strategies criteria and disclosures are linked to can be successful in financial value There is a significant creating long term opportunity for companies to lead the business value industry in developing standards or differentiating themselves to the investor community through their disclosures about philanthropic efforts Documentation of the measurement process should bean important part of establishing quality disclosures and standards A high quality measurement process is a critical input for good management and demonstrates that a company recognize show its philanthropic strategies can be successful in creating long term business value The Dow Jones Sustainability Indexes questionnaire also asks if the company has in place a measurement system although it does not provide guidance about what Dow Jones considers to be a good system The review and findings summarized in this report suggest that companies could berated on at least the following criteria 1 The company has documented high quality logic models or understanding of the process by which its various types of philanthropic initiatives achieve business benefits 2 The company has defined business related outcome metrics measures them and has in place a rigorous process to improve or re align its various philanthropic strategies 3 The company systematically tracks social outcomes and compares these to targets or benchmarks by which it can monitor whether its philanthropic investments are effective overall. A general formula for the Residual Income Model commonly used inequity valuation reduces the relationship of price to book multiples to cost of capital r profitability as measured by Return on Equity ROE and growth g P B 1 ROE r r g 28 Lev 2001 29 M argolis Elf en be in Walsh 2007 p 22 30 The researchers found that tobacco companies enjoyed 14 21 lower ownership by institutional investors and 15 lower coverage by brokerage analysts 31 For example Wang Choi Li 2008 and Lev Petrov its Radhakrishnan 2009 found a decreasing rate of return to philanthropic spending in their sample of companies while Luo Bhatt acharya 2009 found in their sample that companies enjoy a stronger link between measures of financial and social performance if they are heavy investors in advertising and research and development 32 See Swedish AP funds join sustainability initiative I PE 2009 September 11 33 He in kel Kraus Ze chner 2001 34 The perpetual growth model is often represented by the following formula which assumes a constant long term growth rate of earnings P earnings r g Substituting an assumption of 10 normal cost of capital and 2 long term earnings growth g and modeling a drop in the cost of capital r to 9 2 shows an increase of 11 1 in stock price valuation See Landi er Nair 2008 35 Bec chet ti Cici r etti Has an 2009 36 Robinson Kleff ner Bert els 2009 37 The report by the Asset Management Working Group of the United Nations Environment Programme Finance Initiative and Mercer October 2007 surveyed the frameworks of several major sell side research firms 38 SAM Research 2009 Corporate Sustainability Assessment Questionnaire 39 See press release Risk Metrics Group Announces Acquisition of KL D Research Analytics Inc 2009 November 3 Retrieved from http www risk metrics com press R MG a quires KL D 40 Vogel 2005 41 Global Reporting Initiative 2006 42 See Global Reporting Initiative University of HongKong and CSR Asia 2008.

Conclusion

Philanthropic initiatives provide novel channels through which companies can meet core business goals and create long term financial value by increasing employee engagement customer loyalty reputation al capital and market opportunities These improvements are most effective when corporate giving teams work in concert with existing company operations However some companies do not target or measure the business benefits of their philanthropy possibly because these benefits are intangible or not easily associated with short term financial profits Measurement frameworks can be introduced by leveraging models and evidence developed by related business disciplines they can also help identify key intermediate outcomes that if targeted can ultimately yield desired business behaviors and benefits Scholarly studies have found that these links are not always straightforward however It is hoped that the analysis in this report will spark additional research measurement and understanding of these mechanisms For example it will be instructive to study how companies test and validate the effects of volunteer programs and other philanthropic activities on employee engagement and behavior It will also be useful to learn from companies experiences with estimating cash flows probabilities discount rates and other model parameters that affect the valuation of growth opportunities arising from philanthropic projects Many companies already possess related data and valuable examples There is much room for those companies to conduct and share thoughtful analyses of methodologies and frameworks without disclosing proprietary business information This work is not merely academic it provides actionable research based evidence in support of measuring value and promoting more effective alignment of philanthropic programs with core business goals A wide range of social impact assessment frameworks is available in the social sector many of these frameworks have been put forth by sophisticated private foundations reflecting their unique needs and goals Given the diversity of missions that nonprofit organizations and f under s pursue there appears to be no single quantitative or qualitative methodology against which performance of all grant types can be evaluated Which approach a corporate giver should apply will depend on the motivation and focus of its philanthropic program.

For example, the appropriate measurement strategy will depend on whether a company seeks to meet communal obligations build a signature partnership make a few high value grants to one cause make many one off grants addressing multiple causes or a combination of these Nonprofit organizations face mounting Measurement is not an pressure to demonstrate the effectiveness of unnecessary burden or their programs Because they can call on un recoverable cost if it internal relevant skills and experiences adds value companies are in an apt position to help grant ees emphasize and take advantage of measurement both to communicate and improve performance Measurement is not an unnecessary burden or un recoverable cost if it adds value Its value is maximized by organizations that harness it to build and learn from data over time In a challenging economic period when organizations seek to reduce overhead expenses of any kind it is particularly important to distinguish good from bad overhead and to maintain funding dedicated to the ongoing improvement of philanthropic bang for the buck The investor community increasingly esteems companies with strong community records Investors reason that such behavior represents the quality and foresight of management Investors and analysts appreciate disclosures about philanthropic commitments that are comparable material and financially relevant Absent effective industry standards companies have an opportunity to distinguish themselves in their conversations with the investor community by proposing standards of their own Part of such a proposal may include detailed insights into the related measurement process which can help demonstrate understanding of what drives long term business success quality of management and superior potential to create financial value The value of corporate philanthropy is measurable as with many elements of business however it cannot always be measured as precisely as we would like 43 What gets measured gets managed goes the old adage indeed measurement plays a crucial role in enabling companies to reach their full potential both philanthropically and as more successful and sustainable enterprises overall.

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MVCP.md

MVCP.md

Introduction

CONVERSATION ONE: Between grant recipients and the Chief Giving Officer (CGO)

Question 1: How to assess whether grantees are achieving intended results.

Impact evaluation

Outcomes measurement

Assessing impact achievement potential.

Summary

Question 2: How to measure the return on social investment

Cost-effectiveness analysis.

Cost-benefit analysis.

Estimating leverage effects.

Summary

CONVERSATION TWO. Between the Chief Giving Officer (CGO) and

Question 3. How to measure business benefits and make a business case.

Employee engagement

Summary

CONVERSATION THREE. Between the Chief Executive Officer CEO and

Question 4. How to measure the value of corporate philanthropy

Question 5. How to attract responsible investors.

Conclusion

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Introduction

CONVERSATION ONE: Between grant recipients and the Chief Giving Officer (CGO)

Question 1: How to assess whether grantees are achieving intended results.

Impact evaluation

Outcomes measurement

Assessing impact achievement potential.

Summary

Question 2: How to measure the return on social investment

Cost-effectiveness analysis.

Cost-benefit analysis.

Estimating leverage effects.

Summary

CONVERSATION TWO. Between the Chief Giving Officer (CGO) and

Question 3. How to measure business benefits and make a business case.

Employee engagement

Summary

CONVERSATION THREE. Between the Chief Executive Officer CEO and

Question 4. How to measure the value of corporate philanthropy

Question 5. How to attract responsible investors.

Conclusion