As the holiday season approaches, individuals and corporations commonly consider charitable giving. Corporate officers should exercise care, however, in choosing both how much their corporations give and to which organizations they give. These decisions can open management’s decisions to scrutiny – and even to allegations of malfeasance – from the corporation’s shareholders.
First, officers should be mindful that, despite the many benefits associated with corporate giving, gifts amounting to five percent or more of the corporation’s total income can give a shareholder grounds to challenge management’s business judgment because such large gifts may conflict with every corporation’s overriding goal of producing profits.
Although officers’ decisions are protected by the business judgment rule, officers have a fiduciary relationship with their shareholders – the highest obligation that the law can impose – and must put shareholders’ interests first. Even when given to worthy causes, the corporation’s funds are the shareholders’ and should be treated as such.
Second, the eleemosynary organizations with which corporations choose to partner may invite scrutiny from shareholders. An officer’s steering corporate funds to a charity with which he is involved may invite allegations of an interested director transaction. And gifts to divisive advocacy groups may sow disharmony among shareholders and management alike.
It is disconcerting to consider that acts of altruism could invite skepticism. But keeping these considerations in mind can ensure that corporate charitable giving will be, as it should be, an entirely positive venture that helps a worthy cause, unifies the corporation, and strengthens the business’s ties to the community.