The heat and dust raised over the penal clauses introduced in the amendment to the Companies Act in 2019 for non-compliance with the mandatory corporate social responsibility (CSR) may have abated after the finance minister Nirmala Sitharaman’s assurances, it has led to a churn over what exactly companies owe to the society.

At one end of the debate are diehard devotees of Milton Friedman, who claim that the business of business is business and that the end goal should be to maximise profits for the shareholders. At the other end are those who believe that unbridled capitalism has had its day and needs to be replaced by some other construct. In between are the advocates of corporate philanthropy, CSR and mandatory CSR.

While each of these approaches has its advantages, none is considered perfect for an optimum corporate-society relationship for reasons seen below.

Philanthropy, or the voluntary giving of wealth without expectation of a quid pro quo, and the oldest concept of redistributive justice, is today accused of being self-serving of ‘unfettered paternalism’ and other vices. There is little trust in ‘the man of wealth considering himself the mere trustee and agent for his poor brethren, bringing to their service his superior wisdom, experience and ability to administer’. (Good to Great, Jim Collins, 2001 )

According to Edgar Vilenueva, author of the book Decolonising Wealth, philanthropy is top-down, closed-door and expert-driven. Change is a long and slow process, which needs commitment over many years. This is what today’s philanthropists, driven by markets, do not understand.

Though the concept of a voluntary and comprehensive CSR had found favour as early as the early decades of the twentieth century, it had a revival, especially after the 2008 global crisis and the formulation of the Millenium Goals, because philanthropy did not address the issue of responsible behaviour towards society by business. The concept had evolved beyond a corporate giving a portion of the company’s profit for social benefit.

It came to imply a continuing commitment by business to behave ethically, to contribute to sustainable economic and social development of all its stakeholders, not just its shareholders, but also its employees, the government, suppliers, consumers, the local community and society at large, and to protect the environment. Instead of being concerned only with the bottom line of profits, it was believed it must be conscious of the triple bottom line or commitment to people, planet and profit.

It further implied that the process of making profit is as important as the use of the profits. A company must do no harm through its processes and operations to people, that is, it must minimise negative impacts and maximise the positive ones by engaging in initiatives to promote the progress of society.

With the adoption of the mandatory CSR, the comprehensive idea of CSR has lost ground. The concept of mandatory CSR that was adopted by the government under the Companies Act of 2013 is neither philanthropy nor universally accepted concept of CSR. It is not philanthropy because it is not voluntary. How much is to be given, to whom, for what, how and within what period is specified, leaving only a small window to a company within which to exercise its will.

Mandatory CSR is really an attempt by the government to involve business in the nation’s sustainable development goals and to supplement government efforts in this regard through monetary contributions. It gives only a limited freedom to donors on how they can spend their philanthropic rupee – limited to the categories mentioned in Schedule VII of the Act, and in ways mentioned therein. It is the result not of a personal philosophy or passion of one individual or family but a considered decision of the board and part of corporate policy and action.

By taking a common view, it is likely to lack passion that leads to path-breaking changes. In true philanthropy while there is no expectation of a quid pro quo, companies are motivated to be socially responsible mainly because of the possibility it offers to promote their brand, the benefit it offers for better labour relations and a good corporate image. The moves to align CSR activities with a company’s core competence is guided less by what is deemed good and necessary for societies in the long run, and more by the short-term compulsions and interests of a company.

At the same time, it must be admitted that the outreach of CSR, because it aligns with government goals and programmes is likely to be far broader than much individual philanthropy. Only a few philanthropic investments are truly path breaking.

But, mandatory CSR is nowhere near the original concept of CSR because the emphasis is on a fixed percentage of profits to be devoted to approved activities. It is not concerned with responsible behaviour towards all stakeholders.

A company can make its required contribution and be in compliance while continuing to indulge in irresponsible social behaviour such as drawing excessively on a community’s water resources, unmindful of the hardship such depletion will cause the community in the long run; or dump its untreated waste into rivers and ground water; or clear land of trees for setting up factories, unmindful of the implications for climate change. It can condone a supply chain which is exploitative towards its labour so that products can be sourced cheaply.

Large tobacco companies continue to make money off a deadly habit and pharmaceutical companies build their fortune on super drugs, which are inaccessible and expensive to those who need them the most. Such examples can be multiplied. Corporate irresponsibility can harm society much more than individual actions because the latter can never adversely affect society as much as irresponsible corporate actions.

To be fair, before mandatory CSR, the broader concept was just an ideal to which few companies actually approximated. Though some companies used to give more than the 2 per cent of profit, they were guilty of poor governance and unethical conduct.

While Miltons Friedman’s 1962 doctrine that the end goal should be to maximise profits for the shareholders had gone out of favour after the dot com speculative boom and the financial scandals involving Enron and the callous behaviour of Union Carbide, it has found new apostles particularly after mandatory CSR came into being.

The history of India’s business communities shows that charity and even some form of non-monetary social responsibility was considered a business strategy with the goal being a more profitable business. Most of the traditional business communities – the Marwaris, the Chetiars, the Jains – set apart a part of business income for both religious charity such as feeding the poor and financing local festivals, and secular giving for helping the community in times of drought, or floods and building wells or rest houses. Doing so was a considered business decision. It gave them higher visibility and status in society, contributed to their image as trustworthy citizens and added to their credit worthiness. It helped them build goodwill and social capital. All of these helped in business expansion.

Being on the right side of rulers was important for success (as it is now) in business, in getting licenses and avoiding taxes or penalties. Therefore, giving to causes favoured by rulers such as education in British times was part of business strategy.

Chettiars and others whenever they initiated business in a new city or a new country, often built temples, or endowed existing ones and gave lavishly to local festivals or engaged in feeding the poor. Charity was an instrument to create viable social identities in new markets and get entitlements for their business. Today MNCs do the same when they enter or expand new markets.

Mandatory CSR and philanthropy are indeed under attack due to flaws in practice and irresponsible corporate behaviour, capitalism itself is facing criticism despite the fact that it has brought many benefits including pulling large numbers of people out of poverty, and making lives comfortable through technology.

Thomas Picketty, Anand Giridhardas, Dr Narayana Murthy and others have called for compassionate capitalism particularly because today’s capitalism has widened the gap between the haves and have-nots. Hunger and malnutrition continue to plague the world. But there is no clear road map as to exactly how capitalism can be made compassionate over a wide enough area to have global impact and change a widely entrenched system.

In short, though many attempts have been made to find an ideal corporate-society relationship, each has faced some flaws. At the same time, public trust in government has been steadily declining. There is talk of crony capitalism, corruption and inefficiency. So, in what model should we repose our trust? The answer is in all – after plugging the holes in each – because each brings different strengths to the table.

At the same time, the quest for an ideal solution must continue.

Source: Business Today