Corporate Social Responsibility

Ajay Shah in his blog titled “Taxing investors to pay NGOs” criticizes two pro-NGO policy elements in the pipeline as under:

http://ajayshahblog.blogspot.com/2011/11/taxing-investors-to-pay-ngos.html

§  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.