So-Called Corporate Social Responsibility

Prologue: This piece gets me a lot of feedback, so here is a short synopsis for the hurried: In this essay, I object that corporations disguise profit making operations as charities, and I illustrate this using the Ronald McDonald House Charities. I believe there is great corporate social responsibility out there, and I applaud and cheer on every corporation that gives money to charities and asks its employees to volunteer, as long as it does not take back more than it provides.

Corporate social responsibility is all the rage. Companies are lining up "to give back to the community". While some companies may truly intend to do so, more often than not companies just keep taking rather than giving. Here, I'll discuss how it works, using one of the more egregious examples I've seen recently, the Ronald McDonald House Charities.

The Ronald McDonald House Charity (RMHC) is a non-profit organization wholly owned by McDonalds Corporation. The declared purpose of RMHC is to help families in (financial) need. Usually, RMHC provides room for the families of hospitalized children to stay close to their children during their hospital stay. Without RMHC's help, these families frequently could not afford to provide the deeply needed support to their kids. A truly laudable goal.

Now let's take a look at why a for-profit organization like McDonalds might support such a cause. Obviously, because it is a good thing to help children. However, it also provides goodwill for McDonalds. As I'll show in a second, this goodwill is worth $478 million to McDonalds, and it is money that goes directly into the pockets of McDonalds shareholders. These $478M are the result of your support of RMHC, and would otherwise be spent on the global economy, that is your job.

To see this, we first need to turn to one of the most important corporate assets that McDonalds has: its brand reputation. According to Interbrand, a marketing agency that focusses on branding, this brand value is $24.6 billion. Interbrand says these are current dollars. For a large corporation, this is almost as good as cash in its hand. Imagine standing in front of a McDonalds as well as a non-descript burger place. Assume the burgers and everything would be absolutely identical between the two restaurants. A brand value of $24.6B means that to the tune of this money, you will choose McDonalds over the non-descript place. Not over the life-time of McDonalds, but within a year, because these are current dollars, not some future dollars. Somewhere in this $24.6B is the Ronald McDonald House Charities goodwill.

Using the 2002 financial statements from both McD and RMHC I estimate that RMHC contributes 1.8% of McD's total brand value. It is a back of the envelope calculation, but McD does not provide any more detailed data: The total SG&A expenses of McD are $1,713M and the total expenses of RMHC are $31M. (I use SG&A as a stand-in for McD's marketing expenses so this is a very conservative estimate.) $31M are 1.8% of $1,713M. Both companies have existed for many years and are in a reasonably stable state so this 1.8% is a reasonably stable value as well. This 1.8% of the $24.6B brand value is the $478M that I attribute to RMHC.

Assuming that McDonalds is a rationally acting player, its brand value is where McD wants it to be, otherwise it would increase its marketing efforts. This also means that the $478M contribution from RMHC is being taken into account. If it were not for RMHC, this money would be spent on marketing and advertising services, and thereby most likely, directly or indirectly, on your job. By supporting RMHC you help take away nearly half a billion U.S. dollar from the market. And RMHC needs your support! Because McDonalds provides primarily management and catering services to RMHC, according to the 2002 financial statements, and never contributed money anywhere near the amount it is getting out of RMHC.

But it is for the children, you might say! True, but if it were solely for the children, the management of RMHC would charge McDonalds Corporation exactly $478M for the marketing expense savings it provides. If McD would not be willing to pay, RMHC should auction off its name and moral support. For example, if Burger King would get a brand value increase of $300M by having RMHC renamed to Burger King House Charities, it would be willing to pay these $300M to RMHC. The management of RMHC could then spend the money on the children. Why does RMHC not shop its name and goodwill around? Because it is under McDonalds management, which apparently is not willing to sell this self-perpetuating asset. This is a classic case of conflict of interest, and a good reason why this type of company-sponsored charity is seldom worth supporting.

So... By giving money to RMHC, you help re-creating an asset for McDonalds for free that would otherwise cost $478M. If it weren't for you and me, supporting RMHC, this money would be spent on the economy, helping your and my job. Rather, we make it go into the pockets of the McDonalds shareholders.

I'd rather give my money and support to a non-profit organization that is free of any such corporate conflict of interest. My favorite non-profit is Doctors without Borders, but feel free to pick your own. Just make sure it isn't owned by a "socially responsible" corporation, otherwise you might get taken.