Corporate Governance More Important Than CSR


By Karthik Kumar

The Companies Bill 2011, passed by the Lok Sabha in the winter session of Parliament, claims that the concept of Corporate Social Responsibility (CSR) is being introduced in this edition of the Bill.

Corporate GovernanceAnd what, according to the Bill, constitutes Social Responsibility is articulated in Schedule VII. The first two of the ten gems of Social Responsibility listed are ‘eradicating extreme hunger and poverty’ and ‘promotion of education’.

Wait a minute, isn’t this why we elected a Government? Isn’t this why we ostensibly pay taxes? The other items in the list also include, what till hitherto the citizens of this county have been led to believe, are among the many functions of Government. Based on the list one can only conclude that the Government of India is opening the floodgates of governance to the private sector in its continuing drive to privatise everything. What the Government plans to do with the taxes it collects then is left to our collective imaginations.

Let us examine if the proposed CSR is desirable, and, even if desirable, sustainable at all.

More paper work and red tape

The purpose of a corporation is to earn a return on its investment. Any capital investment is an economic wealth-creating activity. Social wealth, on the other hand, is created by society via the Government that taxes its subjects, which includes corporations, to pay for it. This has been the basic framework of society since time immemorial.

Does this mean that the state’s subjects have no social responsibility? They do, indeed. They have a responsibility to obey the laws of the land, comply with administrative directions, pay taxes with due honesty, etc. These obligations extend to corporations too, and are limited by it.

The state cannot mandate, say, that a corporation should undertake activities to ‘eradicate extreme hunger and poverty’. The corporation has no role in having created the situation, which is a function of the evolution of society. Moreover, a corporation, by creating an economic activity is, in fact, already contributing to alleviating overall poverty. Hence, it makes no sense that a corporation be mandated to do so as CSR.

This logic applies to all of the nine activities listed in Schedule VII of the Companies Bill; the tenth says ‘such other matters as may be prescribed’. Thus taken in its entirety, the mandating of CSR under Article 135 of the Companies Bill 2011 is, at best, a piece of silliness that will create more paperwork and add an additional layer of bureaucracy, or, at worst, another stick for the punctilious babus of the inspector raj to beat corporations with.

Unwarranted intrusion

Does this mean that corporations should not undertake activities considered to be for the social good? No, this is not an argument for companies not to undertake such activities. Let companies undertake such activities out of their own free will and those of its investors.

The argument is against an interfering Government mandating such activities with intricate formulas that are an unwarranted intrusion into the primary purpose of a company. This is not only an intrusion, but, the sums of money so mandated are so miniscule that it would hardly make a dent in the vast task of creating social wealth. In fact, it would have been far better had the Companies Bill 2011 established administrative procedures to ensure that a company actually complied with the laws of the land.

The litany of corporate malfeasance that the media reports with unfailing regularity would suggest the need for enforcement of natural social responsibility, rather than mandating new activities that are the province of governance rather than business.

But as usual, our Government is well versed at missing the wood for the trees and on it goes blithely with its silliness.

(The author is Partner, Rage Communications, a technology consulting firm.)

(The Hindu Business Line)

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