Without stricter regulation, corporate charitable giving is ripe for exploitation, UM business experts say

Some companies are specific and transparent about their charity, others vague and opaque.

This leaves companies free to exaggerate or even lie about how much they donate to worthwhile causes. It’s important for government regulators to monitor companies’ cause marketing activities and assess how differences in enforcement affect companies’ activities, new research shows.

When it comes to “cause marketing,” as it’s called, consumers can’t verify the distribution of company sales and profits, and laws governing corporate social responsibility vary from state to state. ‘other.

The study, accepted for publication by the International Journal of Research in Marketing, was co-authored by Aradna Krishnaprofessor of marketing at the Ross School of Business at the University of Michigan; Ouday Rajan, professor of finance at Ross; Praveen Kopalle, professor of marketing and management at Dartmouth College’s Tuck School of Business; and Yu Wang, professor of marketing at the College of Business at California State University Long Beach and former Krishna doctoral student at UM.

The team of marketing and finance experts set out to document the effects of applying cause marketing, which typically involves for-profit businesses donating a portion of their sales or revenue to charity in the hope that this will increase their income.

It’s no small feat: they say thousands of companies advertise that they will donate money to charitable causes. In North America, business spending on cause marketing was approximately $2.14 billion in 2018, representing an annual growth rate of 4.4%.

By studying both the truthful and misleading decisions of companies, researchers have found that their behavior towards cause marketing varies widely in terms of what they disclose to consumers. They cite Ethos Water, which “clearly announces” that 5 cents from each bottle purchased is donated to its charitable fund for programs in “water-stressed countries”.

On the other hand, researchers note vagueness in Gap’s pledge to donate 50% of profits from the sale of Product Red items to the fight against AIDS, and Apple’s announcement that “every purchase of iPhone Product Red Special Edition contributes to the Global Fund to support HIV/AIDS programs”. .”

Inconsistency is also widespread on the regulatory side. Researchers say some states require companies to disclose the exact amount they donate, while others have no such laws. Even where there are strict laws, companies can circumvent them – the authors cite the example of companies promoting breast cancer cause marketing without donating.

Given any variability — and unverifiability — the researchers recommend that new models be constructed for cause marketing that take into account the cost of oversight by regulators and the penalties imposed on companies if they break the law.

When a regulator enforces cause marketing and the enforcement is effective, the company earns higher profits if it is truthful instead of misleading. This scenario also results in the highest donation amounts.

Of course, balances must be struck: the researchers’ analysis model shows that strict and transparent laws are desirable when the stakes are high, such as with a large market size or a high-quality product. But their model also shows that when cause marketing oversight is expensive, it may be better for regulators to be lenient even if companies are more deceptive.

“Because marketing has immense potential for the good of society if done right. Unfortunately, marketing laws in many states are weak and businesses can exploit these laws quite easily,” Krishna said. “Exploitation is interesting because it is used by companies to appear more socially conscientious in front of their customers than they actually are.”

Kopalle said he believes this is the first study to link three important business domains: marketing tactics in terms of pricing, cause marketing as a matter of public policy, and the regulatory domain of laws. States.

“In this regard, we show that cause marketing campaigns can result in a win-win for the company, the charity and the regulator,” he said, adding that “the win-win scenario -Winning requires the regulator to have strong, well-enforced laws.”