A False Responsibility

The question to ask is whether CSR needs to be seen as something distinct from a company’s regular business.

The proposal in the new Companies Bill to make firms spend at least two per cent of their average net profits for the last three years towards corporate social responsibility (CSR) initiatives is flawed. Not because the job of companies is only to generate profits, rendering illegitimate any activity deviating from the goal of maximising shareholder returns.

That would tantamount to an extremely narrow and short-termist view of capitalism, which confuses greed for ambition. Businesses do owe something to their larger social environment; the mistake lies in presuming that companies need to be reminded about it, or that such behaviour inevitably militates against long-term shareholder value. It is this assumption, perhaps, that lies at the core of the Government’s legislative intentions: Companies are making profits; so they had better give back something to society!

The question to ask is whether CSR needs to be seen as something distinct from a company’s regular business. A Reliance Industries running community health centres or supporting women’s self-help groups in Jamnagar may technically be engaging in a ‘pure’ CSR activity. But how about a sugar mill or dairy plant that invests in improving cane or milch animal yields of farmers? Who benefits in this case? The company, certainly, as it is assured of higher raw material flow enabling optimal capacity utilisation and faster fixed cost recovery. But so do the thousands of farmers, who, by supplying more to these units, also earn more.

Would the increase in rural incomes resulting from this process of ‘shared value creation’ qualify as CSR, given there is no explicit philanthropy involved here? Even when it comes to ‘pure’ CSR, Reliance’s initiatives around its Jamnagar refinery may not be wholly divorced from long-term business interests. Just as politicians, companies, too, know the value of earning goodwill of people living in the area of their operations. As many have discovered, it may not be worth setting up factories at places where the locals just don’t want you.

So then, why oppose the CSR proposal at all, even if it is limited to companies with minimum net worth of Rs 500 crore or turnover of Rs 1,000 crore? Well, the reason is that it is not needed. Firms will do it on their own, if they see merit in it – and many increasingly are.

Some would even do it as part of conscious brand promotion to woo consumers or neutralise adverse public opinion (take PepsiCo’s campaign to project itself as a ‘water-positive’ company). But asking companies to mandatorily spend two per cent of their profits on CSR, and to give detailed reasons in the event of not doing so in the Director’s Report, makes little sense. Ultimately, the responsibility for eradicating malaria or providing potable drinking water lies not with corporates, but with the Government –  which is precisely why it is in the business of collecting taxes.

(This article was published on December 21, 2011 in Business Line)

Keywords: Companies Bill, corporate social responsibility, conscious brand promotion, woo consumers



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