Robin Hanson might say: corporate gift giving isn't about generosity.
There are lessons of unintended consequences for the various rules, laws, and norms that discourage, limit, or prohibit corporate gift giving. In finance specifically these include laws and rules that evolved out of Sarbanes-Oxley. This also includes practices that I generally endorse such as CFA ethical guidelines. Note that this is just a view into part of the investment world, but it mirrors other professions like doctors and dentists, lawyers, and many other regulated (i.e., government-protected) industries.
In all cases generally these are laudable goals as there are obvious and unobvious downsides especially when done in excess: conflicts of interest, misaligned incentives, outright fraud, internal resentment.
Yet we need to keep in mind that these serve multiple potential purposes, many of which are quite desirable and above-board. Namely but not exclusively:
Building trust
Building friendships
Building extended team morale
Let me give some personal insight and examples. Over my 15-year career in investment management, I have witnessed a steady decline in the annual Christmas gifts received at my firm. Some of this might be because the givers have come to realize they do not need to schmooze us as much as others and perhaps there is some self-selection at play—they don’t waste resources on the uncorruptible. To the extent it is the later, this is obviously a good thing.
However, I don’t think this plays any role in why it has declined in my personal experience. My firm, as with basically all of my competitors, is not interested in nor ever has been interested in being schmoozed—regardless of the giver’s intentions. I believe the decline is primarily due to changes in law and norms and perhaps to some degree of a changed equilibrium irrespective of changes in law—there are better ways than sending a Christmas ham.
The value of the above-identified benefits of gift giving are subtle yet important. Again, leaning on personal experience:
Building trust - Gifts are a way to convey a connection beyond the transactional nature of most business-to-business (B2B) relationships. This might be ironic as they can be transactions themselves, but it is a building block on making real that person on the other side of an invoice or trade. Even more fundamental with regard to this point would be sharing drinks or a meal together. A social component to a business relationship helps to build trust because it breaks down barriers and reveals vulnerabilities.1
Building friendships - I may need above and beyond help at some point. It will be 4PM on a Friday before an extended, holiday weekend when I discover a trade error. Or I will get a request from a big, eccentric, and unreasonable client that is completely out of left field in complexity or achievability. I don’t just need someone I have done business with to help me out. I need a friend to call—someone who is willing to stay late or make the extra efforts to help me unwind a problem. For the client with the impossible request, I need a friend I can call to steer me in the right direction or let me know exactly how this request is impossible without thinking this request is indicative of what business with me in general will be like.
Building extended team morale - In my dealings with business partners certain rewards still do accrue to me and my colleagues. We may enjoy the occasional meal with an investment firm for which we are the client. But JPMorgan for example probably isn't taking my assistant or my operations department out for lunch much less a steak dinner. And if they aren’t, we can be assured that a small, niche money manager located several states away is not doing so. They have no direct way of rewarding or building trust with the many very important people that are within each transaction that occurs between my firm and theirs. A tray of cookies courtesy of Vanguard delivered to the office isn’t just a way for my coworkers to get a small thank you. Obviously my firm could do that and does occasionally. But coming from Vanguard it shows all of those in my office a connection to the value they bring outside of our walls. Beyond this and related to the previous point, in the eleventh hour of a client need or an error discovered I want my people to have a good feeling about working with their contemporaries on the other side of our B2B relationship.
Markets find equilibria. Obstacles placed in their path get routed around. When firms cannot use gifting as a form of trust and morale development, they will resort to other means. Some of these will be under-the-table arrangements while in other cases they will simply rely on existing connections favoring incumbent firms as well as big over small and close over far. In all cases there is deadweight loss—a cost to society—as trade offs will be made.2
Corporate gift giving serves many purposes. The devil is in the details. And like in all things, Magnitude Matters.
In the extreme consider how a sober person is viewed at a party or happy hour. One of the first things people naturally try to do is to get them to drink at least one drink. Yes, yes, this has all kinds of bad associated with it. Fortunately, designated drivers as well as those who are avoiding alcohol for moral or health reasons are much more accommodated now than decades ago. But focus on the social aspect—the nearly natural reaction people have. The greater the inebriation disparity between the people drinking and the sober person (e.g., if they just arrived and everyone else is a couple hours in), the more pressure there will be to get them to match up (i.e., get as drunk as the rest). I believe the instinct here is to make sure everyone is equally “guilty” or "culpable” or simply capable of acting like a fool. It works in reverse to where someone way too drunk or over the top is shunned. The idea is we want to trust one another that we are all in the boat together. One long-term benefit is when we’ve seen each other with our hair down or vulnerable, we have a greater alignment—a building block of trust.
See this related point about how noncompete contracts can help workers and firms.