Ajay Shah
in his blog titled “Taxing investors to pay NGOs” criticizes two pro-NGO
policy elements in the pipeline as under:
§ A new Companies Bill requiring 2% of profit to be spent on
corporate social responsibility (CSR); and
§ SEBI’s decision to force listed companies starting with the top
100 firms, to describe measures taken by them along the key principles
enunciated in the ‘National voluntary guidelines on social, environmental and
economic responsibilities of business,' framed by the Ministry of Corporate
Affairs (MCA).
Though
seemingly laudable, the above attempted measures are misunderstood by its
proponents. Commercial corporations are vehicles for doing business in
accordance with their charter and in compliance with applicable laws. The role
of business is to assemble resources, undertake investments, and innovate new
products guided by the profit motive for the purpose of satisfying consumer
demands in the open competitive market. They raise money to do business in the
form of debt (the debt providers hold the company liable to repay their
principal and interest) and share capital (the shareholders being residual
claimant in the profit of the company after all contractual demands on the
company having been met).
Since
shareholders are residual claimant, goal to maximize shareholders value implies
proper servicing of all stake-holders of the company. From the above, it
follows that company is a vehicle for generating profit for its shareholders.
The pursuit of this goal may require fulfilling many sub-goals whose attainment
cannot be coerced. If it makes commercial sense for the company to take
positive steps towards goals such as environment protection (either as PR
exercise or sustaining its business), it can be justified as rational
commercial decision. The companies are:
§ not vehicles for protecting the rights of workers - that's the job
of unions and government.
§ not vehicles for protecting the environment - that's what
Greenpeace does.
§ not vehicles for setting public policy - that's for government to
do.
§ not vehicles for deciding legal issues - that's what the courts
are for.
§ not vehicles for determining what is ethical and what is not –
that is for temples, mosques, churches and godmen of various shades to decide.
Improper
understanding of the philosophical basis of existence of commercial companies
has led to passionate discussion on social responsibility of the business which
has been stretched a bit too far. Global Sullivan Principles of Social
Responsibility of 1977 led to some investment funds screening investments for
human rights or environmental records. These principles advocated consideration
for human rights, equal opportunities to employees, providing for skill
enhancement of employees, providing for healthy work place, not paying or
accepting bribes and last but not the least ”work with governments and
communities in which we do business to improve the quality of life in those
communities-- their educational, cultural, economic and social well-being”. The
last objective leaves much to be understood, measured or appreciated.
The
company’s efforts towards CSR (arising out of non-commercial considerations)
results into extra use of resources, higher costing, higher pricing and
therefore competitively disadvantaged position. This will deter the companies
from investing in some projects and products (which otherwise would have been
profitable). Other company which did not spend on CSR but was equally efficient
will replace CSR conscious company defeating the objectives of CSR.
Alternatively some economic activities, having become less profitable than
minimally expected, would be wound up leading to people suffering from lack of job and
attendant hardships. Some CSR activists point towards super-normal profits made
by companies. They fail to recognize that these supernormal profits are
embedded with seeds of its own destruction by attracting more investments, more
competition and lesser profit. Sustained commercial activities are always
carried on normal profit. By producing products and services at lowest costs
(and prices) and creating jobs are the legitimate objectives of companies which
are in no case less laudable than CSR. Improvements in health, longevity and infant
mortality have been
created by economic
growth. It is, in my view, superior to CSR objectives in the sense
that it is sustainable and coercion free without goal
displacement.
CSR of
any shade is harmful. The least harmful neoliberal school which recommends it
to be a voluntary exercise nevertheless leads to misallocation of resources.
State directed approach, apart from wastage of resources, leads to attaining
illegitimate political power without legitimate politics and civil society lead
approach makes it a process without accountability. Some other issues which
merit proper observation are the following:
1.
Some have argued that CSR
is just a public relations exercise that companies undertake because their
competitors have.
2.
Many social responsibility
campaigns had been taken up by the antiglobal movements. Some argue that their
hidden aim was to diminish the benefits of doing business offshore arising out
of cheap labor, loose environmental laws etc. This might cause companies to
remain at home.
3.
CSR campaigns can
backfire. Forcing western ideas about labor standards on foreign countries has
on occasion resulted in less overseas investment and fewer jobs.
4.
CSR may be used as a tool
to deflect attention from wrong-doing. Enron made large contributions to the
arts, sports and medicine clearly intending to purchase reputation. Royal Dutch
Shell has a much-publicized CSR policy. The 2004 scandal concerning
its misreporting of oil reserves seriously damaged
its reputation and led to charges of hypocrisy. Since then, the Shell
Foundation has become involved in many projects across the world.
What
about virtues of philanthropy? Is CSR not a kind of philanthropy? My response
to this poser is that CSR is misappropriation garbed in the form of
philanthropy. Philanthropy is an altruistic motive which gives warmth to the
soul of giver. The company does not have any soul and therefore is not capable
of feeling warmth. By indulging in CSR activities, the manager of the company
expropriates the money of shareholders and makes an attempt to experience
warm-glow feeling for self – an ethically unjustifiable proposition.
Let the
philanthropy be done by the shareholders out of their own money. The business
of business should be allowed to remain business. CSR by companies is
retreat of state into commercial activities going back to discredited concept
of socialism. Let it remain buried.
