The United States is experiencing an evolution in its
expectations of corporations and their responsibilities in society.
Regulatory pressures have failed to guarantee ethical behavior and
social responsibility in corporate America, and efforts at
self-management have fallen short time and again. The government usually
turns either to regulation or to tax credits to spur responsibility,
but to make these programs work, we need a combination of incentives
(usually through tax breaks or tax credits) and government involvement
to create new kinds of social systems.
There is one avenue that holds promise for revitalizing corporate
social responsibility in a time of distrust and doubt: the creation of
networks of stakeholders where responsibility is shared and the benefits
accrue to all of the parties. In this construction, the three legs of
the social compact – government, nonprofit organizations and
corporations – come together to harvest capital, remake policy and
employ strategies for the public good.
In recent columns I have discussed the importance of corporate
citizenship and corporate social responsibility, teasing out the
differences and pointing the way for a new role for corporations in a
new century. Critical in these discussions has been the underlying
notion that corporations reach the bar of citizenship best when they are
able to serve their shareholders while satisfying their community
responsibilities.
This is a key characteristic. When looking for innovative solutions
to out-size problems, such as developing renewable energy resources or
resolving health care financing dilemmas, the answer can’t be a regime
of tax credits, venture capital or corporate giving. They aren’t
sufficient to finance and maintain the momentum for massive, long-term
undertakings. Instead, what is needed is a mutually beneficial
philanthropy where corporations work with government and nonprofit
organizations to create intense networks of capital, policy and
practice.
The networks among stakeholders are critical; tax credits alone do
not usually solve problems, just as regulation alone does not solve
issues, though legislators often seem to miss the importance of building
dense networks of stakeholders. This is the main reason recent tax
credit-driven solutions, such as the New
Markets Tax Credit and the Renewable
Energy Tax Credit have failed to stimulate the growth in the areas they have targeted.
The most successful example of this case in recent years is the
Low-Income Housing Tax Credit (LIHTC), the 1986 provision to the federal
tax code that sparked a revolution in urban redevelopment and resulted
in an upsurge of new organizations and activities to promote the
development of low-income housing. The 1970s and early 1980s were dark
times for urban America, and few in Congress knew how to turn the ship
around. Congress had seen its earlier efforts to incentivize the
investment of corporate resources in the development of low-income
housing, including the Community Reinvestment Act of 1977 (CRA) and the
passive-loss provision in the Economic Recovery Act of 1981, fail. With
the CRA, Congress pressed banks to invest in poor communities, but they
were reluctant to do so and looked for ways, including traditional grant
giving to local nonprofits, to avoid what was arguably a risky
financial proposition. Meanwhile, congressional efforts to encourage
wealthy individuals to purchase low-income housing through the
passive-loss provision had proven problematic as investors allowed their
properties to decline to capture a greater tax write-off.
By the mid-1980s, Congress knew that something new had to be done.
The LIHTC, approved in 1986, was the legislative response to significant
changes in government housing policies. First, it addressed the
elimination of direct federal subsidies for low-income housing
development. Known as the Section 8 New Construction Projects grants,
the U.S. Department of Housing and Urban Development struck them as they
became politically untenable.
With the LIHTC, the government would create incentives for powerful
alliances of banks, nonprofit organizations and corporate investors to
build low-income housing. In fact, the LIHTC became a catalyst for one
of the most significant injections of corporate dollars into the inner
city in the history of this country, providing tax abatements for
corporations and giving rise to a host of community-based housing
developers and the nonprofit, locally based organizations that lobbied
for more housing for low-income individuals and families.
The process set in motion with the LIHTC saw corporations provide
capital in exchange for federal tax credits. This capital was then used
to leverage resources from banks and private developers, many of which
were in partnership with nonprofit development organizations known as
community development corporations, to build low-income housing. In
effect, this limited the government’s involvement in public housing
development and management yet resulted in a massive private investment
that has few rivals in U.S. housing development history.
However, the building of networks of stakeholders did not end there.
The passive-loss provision from 1981 worked in tandem with the LIHTC to
allow corporations to double-dip when it came to applying federal tax
incentives. “With large tax liabilities, the tax credit made sense for
corporations, but on its own, it is basically an even tradeoff with
paying taxes to the government (a dollar-for-dollar write-off of tax
liabilities). However, by combining the credits with book value
depreciation of the property meant that corporations could receive the
double-dip Congress had explicitly argued against individual receiving:
with the passive loss provision still in place for corporations, the
opportunity existed to take the tax liability and turn it into an
investment for corporations. Over a 10-year period, beyond the credit
corporations could yield an additional graduated write-off against
future taxes,” my co-author Michael McQuarrie and I wrote in
“Privatization and the Social Contract: Corporate Welfare and Low-Income
Housing in the United States since 1986” in
Research and Political Sociology.
To help serve this complex structure, new organizational forms
emerged to manage these investments (so the corporations could own the
“asset” and thus qualify for the passive loss without becoming property
managers) in the form of intermediaries such as the National Equity Fund
(NEF) and the
Enterprise
Social Investment Corporation (ESIC), which emerged to facilitate these
investments. Working with local community development corporations
(CDCs), these organizations built relationships with banks and
corporations to make these deals work. These relationships evolved into
dense social networks that changed the game significantly.
For corporate America, this could easily become a model of social
investment, eclipsing traditional corporate philanthropy in favor of a
muscular social investment that is built on a complex and financially
beneficial network of relationships between government, nonprofit
organizations and corporations. These public-private partnerships are
obviously built, in part, on tax incentives and government regulations,
but they succeed in creating a new social compact by encouraging these
dynamic and dense networks. By transforming the social structure through
economic alliances, corporations and their partners in government and
the nonprofit sector may be able to promote social change through
aggressive corporate philanthropy and citizenship.
What is clear from this model is that this type of game-changing
corporate philanthropic investment does not occur without substantially
rewarding the corporate community through tax incentives. Even so, the
urban revitalization that came about as a result of these networks and
the catalyzing federal tax incentives offers an opportunity for
corporate citizens and government leaders looking for new ideas to spark
the next revolution, whether it’s in energy, health care or
biotechnology.
As we demand that corporations take on the mantle of citizenship, we
as a society must ask ourselves if we are willing to provide the
financial incentives to not only woo corporations to an expanded social
responsibility but also to ensure that they are successful.