Without Stronger Regulation, Firms’ Charitable Giving Ripe for Exploitation, Michigan Ross Experts Find
Some companies are specific and transparent when it comes to their charity, others vague and opaque.
That leaves room for companies to exaggerate or even lie about how much they give to worthy causes. It’s important for government regulators to monitor firms’ cause marketing activities and assess how differences in enforcement affect firms’ activities, according to new research.
When it comes to “cause marketing,” as it’s known, consumers cannot verify the breakdown of corporate sales and profits, and laws governing corporate social responsibility vary by state.
The study, accepted for publication by the International Journal of Research in Marketing, was co-authored by Aradhna Krishna, marketing professor at the Ross School of Business; Uday Rajan, professor of finance at Ross; Praveen Kopalle, professor of marketing and management at Dartmouth College’s Tuck School of Business; and Yu Wang, marketing professor at California State University Long Beach’s College of Business and a former doctoral student of Krishna’s at U-M.
The team of marketing and financial experts set out to document the effects of enforcement of cause marketing — which typically involves for-profit firms donating part of their sales or revenue to charity in hopes it will increase their revenue.
It’s no small matter: They say thousands of companies advertise they will donate some money to charitable causes. In North America, firms’ spending on cause marketing was about $2.14 billion in 2018 — representing an annual growth rate of 4.4%.
Through studying both truthful and deceptive decisions of firms, researchers found their behavior with respect to cause marketing varies greatly in terms of what they disclose to consumers. They cite Ethos Water, which “clearly announces” that 5 cents of every bottle purchased goes to its charitable fund benefiting programs in “water-stressed countries.”
On the other hand, researchers note vagueness in Gap’s pledge to donate 50% of profits from selling Product Red items to fight AIDS, and Apple’s announcement that “every purchase of iPhone Product Red Special Edition contributes to the Global Fund to support HIV/AIDS programs.”
“In both cases, profit is not known to consumers and the donation amount is ambiguous,” the researchers write in the report. “It is important to study the ramifications of such heterogeneity in firm behavior from a regulatory perspective.”
Inconsistency also is prevalent on the regulatory side. Researchers say that some states require firms to disclose the exact amount they donate, while others have no such laws. Even where there are strict laws, firms can skirt them — the authors cite the example of companies promoting breast cancer cause marketing without donating.
Given all variability — and unverifiability — researchers recommend that new models should be constructed for cause marketing that account for the cost of monitoring by regulators and for penalties levied on firms if they violate the law.
When a regulator enforces cause marketing and the enforcement is effective, the firm earns higher profits if it’s truthful instead of deceptive. This scenario also results in the highest donation amounts.
Of course, balances must be struck: The researchers’ analytical model shows that strict, transparent laws are desirable when stakes are high, such as with a large market size or a high-quality product. But their model also shows when monitoring of cause marketing is costly, it might be better for regulators to be lenient even if firms are more deceptive.
“Cause marketing has immense potential for societal good if done right. Unfortunately, cause marketing laws in many states are weak and firms can exploit these laws quite easily,” Krishna said. “The exploitation is interesting because it’s used by firms to appear more societally conscientious in front of their customers than they actually are.”
Kopalle said he believes this is the first study to connect three important business-related areas: marketing tactics in terms of pricing, cause marketing as a public policy issue and the regulatory domain of state laws.
“In this regard, we show that cause marketing campaigns can result in a win-win-win for the firm, the charitable organization and the regulator,” he said, adding “the win-win-win scenario requires that the regulator has strong laws that are well-enforced.”