Blogs

Community Contributions as a Percentage of Pre-Tax Profits: War on Two Fronts

Peter Truesdale, OBE

The British were easily entertained in the 1970s. That’s got to be true, for on Sunday evenings we all gathered round the tele to watch Esther Rantzen’s That’s Life. That’s Life was a consumer show. It featured old ladies who’d been diddled by the Gas Board. It profiled harassed housewives whose hoovers had broken down 22 times. It covered families who had reached their brand new holiday-hotel in Torremolinos only to find it hadn’t yet got any electricity.

Dire? You said it.

I only liked one feature in the show. It was called Heap of the Week. The idea was that a consumer would come on the show and explain to Esther why their useless gadget should be junked. So after explaining that the washing machine (a) kept stopping in mid-wash, (b) leaked water all over the kitchen floor (c) was so noisy that it woke the next-door neighbours, Esther would arrange for the unfortunate consumer to be able to smash it up on screen with a sledgehammer or whatever.

That’s exactly what I’d like to do to the concept of measuring  community contributions as a percentage of a company’s pre tax profits. In fact I intend to wage a two front war against it.

Attack on Front Number 1. 

Proposition: Companies should focus measurement on the impacts they achieve, not the money they expend.

Reasoning: The whole point of having community contributions is to achieve a positive change not just to spend resources. Yet exalting community spend as a percentage of pre-tax profits to be the primary measure of corporate community programmes puts the spending of resources centre stage.

Dumb.

What would be the reaction if a cancer charity took such an approach?  Imagine the conversation:

Company representative: “How kind of you to come in. Please tell us about your work and how you judge success”

Cancer Charity: “We work in the field of cancer prevention. Our criterion of success is to spend £5 million this year.”

Company representative: “Is that your measure of success? What will the £5 million do? Do you measure that”

Cancer Charity: “Yes we measure the affect different courses of treatment have on cancer patients but the important opportunity we are giving you is the chance to finance our spending £5 million this year!”

Hmmm.

All this is not to say that the cost of corporate support should not be measured and reported on. It should be. It is of interest to the public. It is of interest to shareholders, whose money it is.

Input costs should never be the prime measure of corporate community contributions. They should always be auxiliary and used intently to measure the programme’s effectiveness at securing positive outcomes and impact.

Attack on Front Number 2

Proposition: Percentage of pre-tax profit giving is promoted as a measure of generosity. That’s plain wrong.

Reasoning: Why is it lazily assumed that total giving as a percentage of pre-tax profit is a measure of corporate ‘generosity’?  By very definition it is not and cannot be. The reason is that all companies end up with different effective tax rates. As pointed out in a recent survey of FTSE100 companies, while the average effective tax rate is now 22.6%, the average for pharmaceuticals is 13.1% and the average for oil and gas companies is 37.4%.

The doctrine of giving as a percentage of pre-tax profits suggests that if a pharmaceutical company and an oil and gas company both make £100 million pre-tax profit and donate £1 million they are being equally ‘generous’.

Nonsense!

The oil and gas company is being more ‘generous’, as in fact the contribution is coming out of its £62.6 million post-tax profit (1.6%). In the case of the pharmaceutical company it is coming out of the £86.9 million post-tax profit (1.2%).

Victory on both fronts? I hope so.

Yet the trouble with victory in modern war is that it is built on the back of devastation. And I don’t want measurement of community contributions devastating. I just want the right things measured for the right reasons and for bad measures set aside. So farewell then to ‘giving as a percentage of pre-tax profit’, my Heap of the Week’. Now where did I put that sledgehammer?

 

Corporate Citizenship manages LBG – the global standard for measuring corporate community investment. To find out more about how you can use the LBG framework to effectively measure your corporate community investment and its impact, as done by 220 companies around the globe, visit the LBG website.

Leave a Reply

Your email address will not be published. Required fields are marked *