CIBC Centre for Corporate Governance and Risk Management
Hierarchy, Hybrid and Market: Assessing
Governance Structures for Corporate
John Peloza and Derek N. Hassay
CCGRM C Working Paper
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Hierarchy, Hybrid, and Market:
Assessing Governance Structures for Corporate Philanthropy
John Peloza, Simon Fraser University
Derek N. Hassay, University of Calgary
Forthcoming in the Journal of Nonprofit & Public Sector Marketing.
Please do not quote without author’s permission.
School of Business Administration
Simon Fraser University
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Make Versus Buy Philanthropy:
Managing Firm-Cause Relationships for Strategic and Social Benefit
This article uses transaction cost analysis (TCA) to explore different approaches to corporate
philanthropic governance, and the firm and market factors that favor one form of governance
over another. Specifically, it examines the conditions under which a firm might choose to enter
into an arm’s length relationship with an existing charitable organization (i.e., a market
governance structure), develop a partnership with an existing charitable organization (i.e., a
hybrid governance structure), or form its own self-branded or firm-owned charity (i.e., a
hierarchy governance structure). Research propositions and a conceptual framework concerning
these conditions are developed to assist firms looking to increase the sustainability of their
Corporate philanthropy, transaction cost analysis, cause-related marketing, donations.
Make Versus Buy Philanthropy:
Managing Firm-Cause Relationships for Strategic and Social Benefit
Corporate philanthropy represents a critical source of support for many charitable
organizations, with donations topping $12 billion annually (Conference Board 2006). Donating
firms have enjoyed a number of benefits from their investment in philanthropy, such as enhanced
brand/firm image (e.g., Barone, Miyazaki, and Taylor 2000), and increased sales (Mohr, Webb,
and Harris 2001). Given that firms can realize important strategic benefits from their
involvement in philanthropy, and that the philanthropic efforts of many firms are actually
motivated by these benefits (e.g., Bennett 2002; Vogel 2005), it is argued that philanthropic
investments are actually more closely related to purchases than donations.
However, the literature examining corporate philanthropy has focused primarily on
philanthropic initiatives that are characterized by a market governance structure (i.e., an arm’s
length relationship with a standalone charity). Much of this research has implicitly made the
assumption that market structures are the most effective method for the firm to engage in
philanthropy. Although the hybrid governance structure (i.e., a relationship that approximates a
joint venture between a firm and a charity) has been examined by previous researchers (e.g.,
Austin 1999; Hoeffler and Keller 2002) it remains largely unexplored. Finally, the hierarchy
form of governance (i.e., an internally developed and controlled charity such as Ronald
McDonald Children’s Charities) has remained unexplored with the exception of Husted (2003).
Extensions to Previous Research
This article makes a number of contributions to the marketing and corporate philanthropy
literatures. First, we use the transaction cost analysis framework (Coase 1937) as a lens into the
make versus buy philanthropic investment decision, in an attempt to improve the efficiency of
such philanthropic investments. More specifically, we use transaction cost analysis (TCA) to
examine the conditions under which firms should adopt and pursue one form of governance
structure over another. TCA has a rich history in marketing (see Rindfleisch and Heide 1997 for
a review) and this paper extends transaction cost analysis to an area of growing managerial and
research importance within marketing – corporate philanthropy. Indeed, the application of
transaction cost analysis theory to corporate philanthropy represents an important step in
addressing the calls for increasing the professionalization of both the management and corporate
support of charities (Andreasen 1999). Finally, by examining the financial implications of the
decision to invest corporate resources in philanthropic initiatives, we extend the work of Porter
and Kramer (2002) and others who have argued for greater attention to the strategic value of
This article also extends previous research in corporate philanthropy that has examined
collaborations, partnerships or alliances (e.g., Hoeffler and Keller 2002; Margolis and Walsh
2003) to consider the complete range of investment options specified by TCA – market, hybrid
and hierarchy (Williamson 1991). In doing so it provides an innovative approach to the
categorization and evaluation of corporate philanthropic initiatives, while providing insight into
the factors that shape corporate philanthropy by considering the complete range of investment
alternatives. Finally, the paper outlines future research opportunities in corporate philanthropy
as well as guidance to managers seeking to optimize the strategic value and financial efficiency
of their philanthropic purchases.
The article is organized as follows. First, corporate motives for investing in philanthropic
initiatives are explored. Next, an overview of transaction cost analysis theory and its
applicability to corporate philanthropy is presented. Philanthropic initiatives along the make-
versus-buy continuum are examined along with an application of transaction cost analysis to the
governance structure of corporate philanthropy. Research propositions concerning the strategic
and financial impact of various governance structures are presented next. The article concludes
with an integration of the major themes from the extant literature examining corporate
philanthropy with the TCA framework, and a discussion of future research opportunities.
CORPORATE MOTIVES FOR PHILANTHROPY
Corporate philanthropy dates back to the early 1900s, a period that witnessed a shift from
wealthy owner-managers like Carnegie and Vanderbilt to professional managers who weren’t
afforded the same degree of latitude when committing corporate resources to philanthropic
initiatives, as were their predecessors. As stewards of the money of others, professional
managers “were not free to make corporate gifts unless these could be justified on grounds of
corporate well-being” (Hall 1989, p. 222).
It has been suggested that companies engage in corporate philanthropy in order to
increase sales (Smith 1994), enhance image (Dean 2002), and increase employee and stakeholder
morale (Berger, Cunningham, and Drumwright 2005). Further, Smith (2003) argued that even
when firms are not motivated solely by enlightened self-interest, they engage in promotional
activities that enable them to capitalize upon or leverage their investments in social
responsibility. This underscores the importance of the potential economic benefits from
corporate philanthropy. According to Marx (1999), eighty-six percent of corporations
proactively manage philanthropic initiatives to meet corporate strategic objectives, and ninety-
six percent rate a favorable company image as either an important or extremely important
outcome of their philanthropic investments.
A study by Brammer and Millington (2003) revealed that the responsibility for
philanthropic initiatives resided in the marketing/PR department in almost one half of firms
surveyed; a finding that further demonstrates the importance of such initiatives to both the
overall corporate and marketing strategies. The architect of what is widely considered to be the
earliest cause-marketing campaign, American Express’ Charge Against Hunger, sums up the
issue: “Philanthropy is about marketing, not philanthropy” (Welsh 1999, p.24).
Garriga and Melé (2004) classified four theories of corporate social responsibility (CSR):
instrumental, political, integrative and ethical. Under instrumental theories of CSR, the
economic return to the firm is paramount, and social impact is supported only to the extent that it
can provide returns to the firm. Under political theories, the firm accepts that its power in
society must be used responsibly, and are bound by a form of social contract. With integrative
theories of CSR, the firm integrates societal demands into its strategies. This group of theories is
closely aligned with those who argue that CSR is a necessary cost, akin to a “license to operate”
in a given community (e.g., Peloza 2006). Finally, ethical theories suggest that managers place
social impact above all other considerations in CSR.
The current paper is closely aligned with the instrumental theory of corporate
philanthropy; one that considers philanthropy to be a strategic tool designed to achieve economic
objectives. Garriga and Melé (2004) point out that this view of corporate philanthropy has a
long tradition and has enjoyed wide acceptance in business. Indeed a common theme in the
literature on philanthropy is that corporate involvement in philanthropic initiatives is largely self-
serving. For instance, Himmelstein (1997, p. 5) has argued that a corporate culture of
philanthropy represents, “a shared set of understandings about how philanthropy serves corporate
In an examination of sixty firm-cause relationships Moir and Taffler (2004) found only
one that could be considered truly altruistic on the part of the firm. In fact, Polonsky and
McDonald (2000) argued that corporations have always looked to leverage their philanthropic
activities for promotional gain, and increases in corporate giving have been linked to increases in
marketing communications expenditures (Fry, Keim, and Meiners 1982).
Given that corporate investment in philanthropy is, at least partially, motivated by self-
interest, it is not surprising that such investments are expected to provide demonstrable financial
value to the company. Moreover, given the recent emphasis on developing the business case for
corporate philanthropy (c.f. Vogel 2005) firms appear to apply the same calculating, bottom-line
oriented decision criteria to their investments in corporate philanthropy that they apply to other
advertising or promotional expenditures. Therefore, these investments are perhaps more
accurately considered purchases on the part of managers. In fact, Bennett (1997, p. 89) argued
that corporate philanthropy “represents the purchase of useful associations with charitable or
voluntary organizations” (italics added).
When viewed as marketing expenditures, investments in philanthropy can be subjected to
the same criteria used to examine other vertical integration opportunities, such as channels of
distribution. By providing a framework with which firm-cause relationship governance can be
optimized or at least improved, TCA holds the potential to increase the efficient allocation of
billions of dollars committed to corporate philanthropy each year. Finally, TCA can prescribe
not only the most cost-effective method of philanthropic investment governance, but also the
form of governance that provides the best overall value for the firm (e.g., Zajac and Olsen 1993).
TCA: AN OVERVIEW
According to Rindfleisch and Heide (1997), investigations of inter-organizational
relationships represent a common application of TCA. TCA has been applied successfully to the
study of co-marketing and other forms of strategic alliances (e.g., Bucklin and Sengupta 1993);
inter-organizational relationships that are closely related to the firm-cause relationships of
corporate philanthropy. The ability of TCA to explain a wide variety of phenomena is often
attributed to the underlying concept of efficiency and specifically, its simplicity.
Set against the default of market transactions, TCA posits that organizational boundaries
exist as they do because they are able to economize on the costs of exchanging goods and
services in the market (Ouchi 1980). Specifically, TCA is concerned with identifying the
environmental and organizational factors that predict which form of governance organizations
will adopt under various circumstances (Williamson 1992).
The central tenet of TCA is that there are costs to executing any transaction regardless of
whether that transaction occurs in a market, a hierarchy, or some combination of the two
(typically referred to as the hierarchy form of governance). Each of these mechanisms can be
illustrated by the example of an automobile manufacturer deciding where to source parts. The
market option would see the firm purchasing parts from an external supplier. The hierarchy
option would see the firm build their own plant to manufacture the necessary parts. The
hierarchy option would see the firm enter into a joint venture with a parts supplier, with the firm
making a less than 100% investment in the new initiative.
Similar to its role in economics, efficiency is seen to play a central role in TCA, with
efficiency being maximized in transactions governed by the mechanism that minimizes these
transaction costs (Coase 1937). Indeed, transaction cost minimization is seen as a primary
determinant of organizational form in TCA based on the assumption that the most efficient
structure will displace all others. Therefore, for some transactions TCA predicts that the
hierarchy is the appropriate governance mechanism, while for others market governance is
appropriate and for still other transactions, a hybrid governance mechanism is predicted to be the
most appropriate. Although the hybrid form of governance can take many forms with subtle
differences, for the purpose of clarity the current paper limits its examination of governance to
the internal (hierarchy), external (market) and hybrid (partnership) forms of philanthropic
In their overview of TCA, Rindfleisch and Heide (1997) outlined four primary conditions
which give rise to different potential sources of costs in marketing exchanges: bounded
rationality, opportunism, asset specificity and environmental uncertainty. Bounded rationality
refers to costs that arise as a result of inefficiencies in decision-making. For example, managers
are often required to oversee a large number of diverse transactions, which reduces their ability
to manage these exchanges efficiently; a problem exacerbated by a high degree of environmental
change or uncertainty. According to Simon (1961, p. 24), bounded rationality assumes that
managers exhibit “behavior that is intendedly rational, but only limitedly so.”
Opportunism refers to the potential for economic actors to seek self-interest seeking with
guile. Although not all economic actors are opportunistic, it is impossible to know for sure ex
ante, which trading partners will be opportunistic (Williamson 1985), and therefore costs must
be incurred in the negotiating and monitoring of the relationship to prevent opportunism. In a
market form of governance the firm is most susceptible to opportunism because it is not in a
position to monitor suppliers. By virtue of the firms direct investment and therefore control,
moving to a hierarchical form of governance is expected to reduce, although not totally
eliminate, opportunism (since individual managers within the firm can still act in their own
interests versus those of the firm).
Asset specificity refers to the extent to which transactions are supported by specialized
assets; those that are uniquely tailored to that transaction. Morgan and Hunt (1994) referred to
these as “idiosyncratic investments.” TCA predicts that when one party makes substantial
investments in specialized assets in order to trade with another, that party will take steps to
safeguard the rent stream expected from the asset. The costs associated with establishing these
safeguards are known as ex ante transaction costs; they serve to reduce the risk of opportunism,
but not to eliminate it. It is, after all, impossible to develop truly comprehensive contracts that
will eliminate the risk of opportunism (Williamson 1985).
Finally, a residual risk of opportunism remains even after ex ante transaction costs, such
as the costs of contract enforcement and the unrecovered rent stream losses have been borne.
Specifically, environmental uncertainty creates costs for firms that attempt to develop contracts
that will allow flexibility in the face of change; additional costs incurred to deal with this
uncertainty are defined as the ex post transaction costs.
Therefore, total transaction costs in any exchange are seen to be the sum of ex ante and ex
post transaction costs. The core prediction of TCA is that if total transaction costs in a market
setting exceed the costs of governing the same transaction within either a hybrid or hierarchical
setting, the exchange should be internalized in one of these two forms. However, simply
internalizing the transaction does not eliminate contracting costs, because doing so merely
replaces a contract for inputs with an employment contract. A firm does not avoid the market by
internalizing a transaction; it merely replaces contracts for outputs with a contract for inputs
(Hennart 1994). Hierarchical and hybrid organization involves both the cost of developing and
maintaining the organization and a potential loss due to the theoretically greater efficiency of the
market in transmitting information.
Thus, the basic argument of TCA is that when market organization of economic exchange
is costly other forms of transaction governance may prove more efficient, and non-market (i.e.,
hierarchy or hybrid) forms of governance will arise when these alternative forms promise greater
TCA AND THE GOVERNANCE OF CORPORATE PHILANTHROPY
Williamson (1996, p. 3) stated that, “the analytical action resides in the details of
transactions and governance.” Likewise, the form of governance used to organize corporate
philanthropy will have an effect on the efficiency of philanthropic initiatives. Thus, the
application of TCA represents an extension of previous research that has focused largely on
consumer response to corporate philanthropy.
Corporate philanthropy has become an increasingly active area of study in recent years.
Although early research focused on describing the breadth and participation rates of firms in
various types of philanthropic efforts, recent efforts have identified strategies that would enable
firms to successfully leverage philanthropy for promotional if not strategic gain. For example,
researchers have examined the extent to which firm-cause fit affects the success of the business-
nonprofit relationship, with the majority of authors concluding that businesses should align
themselves with and support causes that have some relevance to their core strategy (e.g., Sen and
Despite the volume of research on firm-cause fit, there are relatively few studies that
have examined public perceptions regarding the formal relationship between firms and the
causes that they support. Further, those few studies that have explored the structure of firm-
cause relationships have typically considered firm involvement only up to the quasi-joint venture
status. For example, Austin’s (1999) collaboration continuum: consisted of three stages. The
first stage, philanthropic, is exemplified by the kind of arm’s length relationship that exists
between a donor and the charity recipient and according to Austin (1999, p. 71) is “the nature of
most nonprofit-business relationships today.” Because the firm engages an external charity with
no direct investment, this stage involves a market governance structure. Some firms have moved
to the next or transactional stage of collaboration, where donations are focused around specific
activities (e.g. a percentage of every sale) or events. Similar to Austin’s first stage, because the
firm still engages a standalone charity and simply donates the proceeds from a specific event, the
initiative still incorporates a market governance structure. The final stage in Austin’s (1999)
continuum is integrative, where the collaboration includes shared employees and activities - a
relationship that approximates a joint venture (i.e., hybrid governance). Firm-cause relationships
of this latter type are seen in Merck’s development and distribution of a treatment for river
blindness in Africa, and Monsanto’s efforts to teach innovative farming techniques to
impoverished farmers in Africa and Asia both of which were cited by Dunfee and Hess (2000) as
examples of direct corporate humanitarian investment. Although Austin’s integrative stage
requires increased firm involvement when compared to the philanthropic and transactional stage,
it does not capture the hierarchy form of governance since the firm still partners with an external
charity for its philanthropic initiative.
Although a few studies have considered the complete range of firm-cause relationships,
these examinations have been largely descriptive in nature and focused on the development of
typologies. Hoeffler and Keller (2002), for instance, considered internally branded initiatives as
well as arms-length firm-cause relationships, and Bednall and colleagues (2001) identified
charity ownership as a form of commercial orientation in corporate philanthropy. One notable
exception is Husted (2003), who examined the impact of centrality (the degree to which a firm
has expertise to manage the initiative), and specificity (the degree to which a firm can benefit
reputationally from its initiative) on the governance decision. However, the internal form of
philanthropy, referred to as the “hierarchy” form of governance within the TCA literature, has
not yet been directly compared to other forms of governance, and therefore firms seeking to
maximize the impact from their philanthropy lack guidance. This paper seeks to address this gap
in the literature by using TCA to explore the complete range of firm-cause relationships.
Insert table 1 about here
Table 1 applies the make-versus-buy decision schema of TCA to the range of options
subsumed under the general label of “corporate philanthropy.” This table also identifies key
characteristics of purchased versus produced philanthropic initiatives, the governance structures
related to them, as well as examples to help clarify each form of firm-cause relationship.
Interestingly, the hierarchy form of corporate philanthropy, while largely unused among
corporate managers, appears to thrive in the quick-service restaurant (QSR) category. For
instance, while Ronald McDonald Children’s Charities is perhaps the most widely recognized,
Wendy’s operates its own nonprofit public charity - the Dave Thomas Foundation for Adoption.
And Tim Horton’s, the number two QSR in the Canadian marketplace, operates a series of
summer camps for underprivileged children. Other well-known philanthropic initiatives such as
Home Depot’s support of KABOOM! or Avon’s Run For The Cure in support of the Breast
Cancer Foundation represent market and hybrid governed relationships respectively. In the
remainder of this section, each of the four sources of transaction costs under the TCA framework
are discussed and propositions developed.
As previously discussed, bounded rationality concerns the inability of managers to
engage in contracts that take into account every possible contingency. When bounded rationality
is high, the hierarchy governance structure is preferred because it helps to reduce the potential
long-term costs of entering into contracts with relatively unknown future costs. When bounded
rationality is expected to be low, the market structure is preferred since future contingencies are
relatively easy to predict. Finally, the hybrid form is preferable for moderate levels of bounded
rationality because they allow the firm some flexibility for future contingencies at a lower
investment cost than that of the hierarchy option. The variable most likely to impact bounded
rationality within corporate philanthropy is the degree to which the cause is related to the core
business of the firm, generally referred to as fit.
An example of a high-fit initiative would be the work that Starbucks has undertaken with
activist groups concerning its Free Trade coffee program (cf. Argenti 2004). In this situation, the
company has direct experience and expertise in the field and can therefore effectively work with
external groups without bounded rationality becoming a significant issue. A low-fit initiative, on
the other hand, would be if Starbucks were to undertake an initiative that supported efforts to
educe illiteracy. Although such an initiative may be popular with consumers and other
stakeholders, the firm has little expertise in this area and would therefore be susceptible to
Therefore, the degree of fit is expected to mediate the effects of bounded rationality
within corporate philanthropy. The financial, intellectual and human resources of a firm can
provide significant insights into and progress towards addressing social problems. Managers can
leverage their firm’s business expertise toward achieving social goals, such as the Home Depot
relationship with KaBOOM! where the firm engages the expertise of its employees in a highly
relevant social cause (building playgrounds). Where fit is used to guide corporate philanthropy,
managers are more likely to allocate resources and expertise to charities in a financially
responsible and strategic manner, counteracting the effects of bounded rationality. Further, it is
able to allocate a wider range of resources to the initiative including specific employee expertise,
goods and services and other resources in addition to financial support. Conversely, under
conditions of relatively low fit, managers are less able to predict with certainty the potential costs
associated with alleviating a social problem, and they are less likely to be able to use specific
firm resources (e.g., employee volunteers) to efficiently contribute to the initiative. Therefore, it
is predicted that:
P1: As the level of firm-cause fit (low, medium, high) increases, firms will become
increasingly likely to adopt the relevant governance structure (hierarchy, hybrid,
A second aspect of bounded rationality within corporate philanthropy concerns the ability
of the specific knowledge within the firm to be transferred to an external charity or nonprofit.
Because it can be more beneficial for firms to seek social impact in addition to the economic
impact from their philanthropy (Porter and Kramer 2002), many firms are expanding their
involvement from cash donations to comprehensive relationships with charities that could
include employee volunteerism programs, gifts-in-kind, and other non-monetary gifts. The issue
with these types of programs, as it relates to bounded rationality, is that the firm may not be able
to make a meaningful social impact with the initiative if its non-cash resources are not easily
transferred. For example, while the management and employees of a medical services firm
might be particularly valuable to a health-related cause, their skills as employee volunteers and
the benefits of other firm assets will have limited value to a literacy organization.
In situations of high tacit knowledge, firm expertise is not easily transferred outside the
borders of the firm (Kogut and Zander 1993). Thus, the social impact is lessened, decreasing
the overall value of the initiative. Indeed, Margolis and Walsh (2003) argued that firms favor
direct investment in philanthropy (e.g., hierarchy form of governance) when they have a
distinctive capability to address the social need. Therefore, it is predicted that:
P2: As the level of tacit knowledge transfer (low, medium, high) increases, firms will
become increasingly likely to adopt the relevant governance structure (market,
As discussed earlier, opportunism refers to the potential for one contracting party to take
advantage of the other. Such situations can occur when one party possesses specific knowledge,
or when there is a high degree of asset specificity in a contract, and one party is excessively
reliant on the other for its success. The managerial imperative with opportunism is to structure
contracts in such a way that the ability for one party to take advantage of the other is minimized.
Because of the one-sided nature of most philanthropic initiatives (the firm that voluntarily
provides funding, employee expertise, and other resources to the charity of its own choosing),
opportunism is not specifically an issue related to the firm-cause relationship. However, in
addition to transactions external to the firm, transaction cost analysis has also been useful in
examining the internal structure of the firm (e.g., Rugman and Verbeke 2001) and specifically,
the role that the internal corporate structure plays upon the potential for opportunism on the part
of internal managers. It is this internal structure that is of particular relevance to the issue of
opportunism within corporate philanthropy.
For example, it has been found that companies are concerned about the potential for
managers to make philanthropic investment decisions based on personal preference or for
personal gain such as political stature in the community rather than corporate gain (Kahn 1997).
Similarly, Bartkus, Morris, and Siefert (2002) used agency theory to illustrate the potential for
influential stockholders to steer philanthropic investment decisions away from the strategic
objectives of the corporation. Therefore, it is necessary for firms to institute policies and
mechanisms that prohibit individual managers to stray from corporate objectives and, in the
process, alleviate the potential for what Pringle and Thompson (2001) referred to as the
“chairman’s spouse syndrome.” To this end, Dunfee and Hess (2000) suggested that the internal
control mechanism of the firm has the ability to exclude corruption from the philanthropic
Opportunism of this type is expected to be a particularly salient issue for firms that have
dispersed control of the philanthropic support decision. For example, in a widely dispersed
organizational structure (e.g., the quick-service restaurant franchise model), without a
hierarchical governance structure each store manager/owner is free to make corporate
philanthropy investments. In many cases, the investment may be related to a personal motive,
and therefore provide the firm only marginal value in both economic and social impact terms. If
a hybrid or hierarchical structure is introduced, and decision-making authority is removed from
the dispersed audience, managers are better able to focus the firms’ initiatives on only those
issues that will deliver economic and social impact. Perhaps it is not surprising that, as
mentioned earlier, the QSR category is where many high profile hierarchical governance
structures can be observed.
Therefore, the extent to which there exists potential for dispersed managers to take
advantage of a corporate philanthropic initiative for personal rather than corporate objectives will
determine the governance structure a firm chooses for corporate philanthropy. Specifically, it is
P3: As the dispersion of decision-making for philanthropy within the firm (low, medium,
high) increases, firms will become increasingly likely to adopt the relevant
governance structure (market, hybrid, hierarchy).
Porter and Kramer (2002) state that firms can increase the success of their philanthropic
initiatives by focusing their efforts and building awareness of their support for a specific charity
or cause. Likewise, Varadarajan and Menon (1988) argued that some firms would benefit more
from their cause-related marketing programs by focusing on a specific cause that is meaningful
to their customer base. Through corporate philanthropy, a firm can establish a relationship with
a specific philanthropic cause or initiative. This specific initiative can be used to differentiate the
firm from its competitors and act as a source of competitive advantage. It can therefore be
argued that by choosing a single (or a select few) charity partner, firms are in a better position to
both gain economically and impact social objectives.
However, when a firm engages a single charity partner, it faces a higher degree of risk.
By building a long-term relationship with a specific charitable organization, the firm’s brand
image may become inextricably linked to this charity. The firm essentially becomes tied to one
particular charity and runs the risk of having that charity exploit its power, or even having the
charitable brand negatively impact the corporate brand (Bloom, Hussein, and Szykman 1995).
By becoming reliant upon an external organization for its future success, the firm is no longer
able to control the initiative. The balance of power shifts from the firm to the nonprofit partner,
which then has a credible hostage for further negotiations with the firm (Williamson 1996).
In any philanthropic initiative, managers will seek to minimize the potential risks and
maximize the potential benefits from the effort. If the firm pursues a single cause, a manager can
minimize risk by incorporating a hierarchy structure and therefore retain control over the asset
necessary for future success. On the other hand, a manager can choose to minimize risk by
developing initiatives across a number of causes, thereby engaging in a diversification strategy of
philanthropy. Under such a strategy, pursuing strategies that encompass the other governance
options (hybrid and market) is the more efficient means of reducing risk. Therefore, it is
P4: As the focus of the philanthropic efforts on a single cause (low, medium, high)
increases, firms will become increasingly likely to adopt the relevant governance
structure (hierarchy, hybrid, market).
Corporations that are seen as more committed to a cause are perceived more positively,
while firms that are seen to be exploiting the cause for monetary gain in the short term are
perceived less favorably (Bloom et al. 1995). Further, Ellen and colleagues (2000) found that
consumer perceptions of long term corporate commitment were positively related to purchase
intentions. Based on these and other findings, researchers have encouraged firms to consider
social activities as strategic and long-term rather than opportunistic and short-term (Handleman
and Arnold 1999).
However, environmental uncertainty and the need for adaptation are in direct conflict
with the aforementioned benefits of long-term investment in philanthropy. Therefore, while
firms benefit by demonstrating commitment to philanthropy, these benefits may be outweighed
by the firm’s need to react to environmental changes. Thus a significant influence on the need
for adaptation is the industry in which the firm operates. Rapidly changing environments dictate
that firms remain nimble and reduce risk by incorporating fewer internal investments (Rangan,
Corey, and Cespedes 1993). Indeed, factors such as industry sector (Brammer and Millington
2003) and other institutional forces (Useem 1991) have been found to affect the giving behavior
When a firm engages an external charity partner, even when the relationship is a long-
standing one, its commitment is typically low. In fact, some firms institute strict time limits on
their support of external charities. However, when a firm establishes its own charitable
organization, as with any other forms of internal investment, the investment time horizon is
generally much longer. Even moving from a market to a hybrid model of governance requires
significantly more planning, resources, and a longer time horizon (Sagawa and Segal 2000).
Therefore the frequency with which the hierarchy form of governance appears within the QSR
category is arguably a reflection of the relative stability of this particular sector; generally
regarded as one of the most stable industries in North America and Europe.
P5: As the level of environmental uncertainty (low, medium, high) increases, firms will
become increasingly likely to adopt the relevant governance structure (hierarchy,
The propositions presented in the preceding section are summarized in table 2.
Insert table 2 about here
Given the increasing funding challenges faced by charitable organizations, the continued
viability of corporate philanthropy is critical to the sustainability of many charities and nonprofit
organizations. However, corporate investment in philanthropic initiatives is only sustainable in
the long run if it demonstrates a positive return to the firm. Thus, it is our contention that an
examination of the governance of philanthropic practices of firms is critical to ensure that
investments in philanthropy are optimized. The governance structure selected for a firm’s
production function or distribution network has been shown to have a dramatic effect on the
profitability of those functions (Hennart 1994; Rangan et al. 1993). Similarly, we argue that the
means by which a firm chooses to govern its philanthropic initiatives can have a significant
effect on the efficiency and efficacy of its philanthropic investments.
One of the most significant contributions of this article is the expansion of the continuum
of corporate philanthropic initiatives to include self-branded or firm-controlled charitable
organizations. Apart from offering a potentially more efficient means of philanthropy, the
hierarchy form can also help encourage other firms to support the same cause. For example,
charities such as Ronald McDonald Children’s Charities are supported by other firms looking to
participate in high profile philanthropic investment opportunities (Barnes and Fitzgibbons 1991).
Firm-cause relationship governance also influences the ability of a firm to promote its
philanthropic investment. Although the inclusion of cause-marketing messages in advertising is
generally seen as beneficial to the firm, researchers caution that this type of promotion requires
great care. For example, Webb and Mohr (1988) found that the vast majority of consumers are,
to some extent, skeptical of the actual amount of support generated by and motives behind
corporate involvement in cause-marketing programs. Indeed, companies run the risk of
offending their publics and unwittingly negating whatever good they might have been able to do
when they promote their good deeds. However, a firm reticent to talk about its philanthropic
initiatives may be perceived as inactive in this regard (Alsop 2002). For some firms, a
relationship with an external charity allows the firm to let the charity promote the relationship,
thus alleviating consumer perceptions of self-serving motives (Szykman and Clark 2005).
However, for other firms moving to a hierarchy form of governance may help alleviate some of
the promotional challenges associated with corporate philanthropy, insofar as such initiatives
signal the increased efforts and commitment of the firm. Further, Ellen and colleagues (2000)
demonstrated that consumers are more supportive of firms that they perceive as more committed
and exerting more effort toward philanthropy, and firms can signal higher levels of effort and
commitment when they choose to brand their philanthropy (Peloza, Hassay and Hudson, 2005).
Although some firms will benefit from a hierarchical form of governance, it is not
appropriate for all firms. For example, Osterhus (1997) cited consumer trust in the firm as a
critical factor in corporate social programs. He states that trust in a corporate brand can enhance
the success of the promotion of corporate social programs, while lack of trust can cause the
initiative to backfire. Similarly, Strahilevitz (2003) found that perceptions of company ethics
had a positive effect upon the perceived motives for developing the philanthropic initiative.
Therefore, partnering with a well known, well-regarded charitable brand may be able to mitigate
the effect of negative consumer perceptions of a firm (e.g., Dawar and Pillutla 2000), or to
leverage the “halo effect” that a firm can receive when partnering with a respected nonprofit
(Basil and Herr 2003). In such cases, “purchasing” a philanthropic initiative would appear to
represent the best form of firm-cause relationship governance. However, corporations that
associate with charities that have tarnished images run the risk of having the tarnished image of
the charity impact the success of the philanthropic initiative as well as the corporate brand
(Bloom et al. 1995). In cases where firms may find their market options limited, they may be
forced to internalize or “make” their own philanthropic initiative.
Finally, although we examined corporate philanthropy as a form of instrumental
investment - one made to increase profits - firms engage in philanthropy for other reasons. For
example, the political theory of corporate social responsibility proposed by Garriga and Melé
(2004) suggests that firms engage in philanthropy to gain political clout and strength. In such
cases, even though internalization may be the appropriate strategy given market conditions, a
firm may still choose to engage an external charity to gain exposure to board members, etc.
The propositions presented here directly extend the work of Margolis and Walsh (2003,
p. 289) who stated: “Categorizing corporate responses using this scheme of make, buy or hybrid
can provide insight into the factors that shape companies’ investment and control decisions
surrounding responses to social ills.” In exploring the propositions set forth in this paper,
researchers can complement their examination of consumer perceptions to include the impact of
managerial-level factors on the shape of corporate philanthropic initiatives.
Finally, this article extends existing research on corporate commitment, effort, and firm-
charity fit within corporate philanthropy by examining the effects of transaction costs on firm-
cause relationship governance. The application of the TCA framework produced a number of
testable propositions and an innovative framework for understanding and examining firm-charity
relationships. The ability of firms to recognize and respond to these costs is critical if they are to
successfully leverage the billions of dollars spent annually on corporate philanthropy. Firms
who successfully invest in philanthropy will not only receive significant strategic benefits but
will generate considerable social benefit by helping the many charities that now rely on corporate
A Make-Versus-Buy Schema of Philanthropic Investment Options
Governance Structure Market Hybrid Hierarchy
Strategy Buy Collaborate Make
The firm offers The firm enters into a co- The firm develops and
support to an
branded partnership with
an existing charitable
brands its own, internal,
wholly- owned nonprofit
McDonald’s makes McDonald’s partners with Ronald McDonald
a donation to a a children’s hospital to Children’s Charities
local children’s establish and fund a
specialized burn treatment
Control of use of funds Charity Firm
Firm’s brand exposure (e.g.,
philanthropic investment risk)
Corporate Philanthropy Transaction Costs and Preferred Governance Structures
Source of Transaction Costs Key Issues Firm Preference
1. Bounded Rationality
1. Asset Specificity
2. Environmental Uncertainty Industry, Firm
P1: Fit ↑: Hierarchy
Fit ↓: Market
P2: Tacit Knowledge ↑: Hierarchy
Tacit Knowledge ↓: Market
P3: Decentralization ↑: Hierarchy
Decentralization ↓: Market
P4: Single Cause Focus ↑: Hierarchy
Single Cause Focus ↓: Market
P5: Uncertainty ↑: Market
Uncertainty ↓: Hierarchy
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