Should Companies be Philanthropic?

On August 10, 2020, GAMCO Investors proudly announced via a press release a “Shareholder Designated Charitable Contribution” of $7 million. The contribution was equal to $0.25 per GAMCO share, a 25% increase since the year before. According to the program, a registered shareholders in GAMCO Investors would be able to communicate which charitable organization they wanted to donate their pro rate allocation to.

Donating to charities is undoubtedly a noble act, but you might ask your way on earth a company is donating on behalf of its shareholders. GAMCO’s particular program is modeled after a similar program that Berkshire Hathaway implemented from 1981 to 2003.

In a letter to shareholders in 1981, Warren Buffett explained the rationale behind Berkshire Hathaway’s Charitable Giving Program: “In a widely-held corporation the executives ordinarily arrange all charitable donations, with no input at all from shareholders […] A common result is the use of the stockholder’s money to implement the charitable inclinations of the corporate manager, who usually is heavily influenced by specific social pressures on him. Frequently there is an added incongruity; many corporate managers deplore governmental allocation of the taxpayer’s dollar but embrace enthusiastically their own allocation of the shareholder’s dollar.“

I can certainly agree with the view, that owners should have a say in deciding how the charitable giving of a company should be allocated. The giving should not be seen as a perk for management. I can also see the light in the tax efficiency of having the philanthropy happen inside of the company than post-dividend.

But at the same time – and this particular case is illustrative of this – I can’t help to think that in certain situations, programs like this will cause more aggravation than goodwill among shareholders.

You see, had you bought GAMCO Investors stock in August 2015, each share would have cost you about $32. Five years later, the GAMCO’s share value is around $13. GAMCO’s earnings per share for the last twelve months was $2.25. This implies, that GAMCO is devoting about 10% of the companies operating profits to charity.

The company gives more to charity than it pays its shareholders in dividend.

I can’t help to think of that story of Karl Marx’s wife saying to him that perhaps he should have spent less time in thinking about how to divide Das Kapital and more to thinking about how to earn Das Kapital…