CSR, an indication of government failure By C. Gopinath


By C. Gopinath

The author is professor of International Business and Strategic Management at Suffolk University, Boston
The author is professor of International Business and Strategic Management at Suffolk University, Boston

Adam Smith, the father of economics as we know it today, is famous for advocating laissez faire, or leaving things alone, when it comes to regulating business activity. He argued that there is an ‘invisible hand’ that guides the actions of the individuals for, while they strenuously pursue self-interest in the products they make and sell, in the process, they are satisfying others’ needs and thereby society’s welfare.

We have also learnt, since his advice over 200 years ago, that there are market failures and externalities that require a measure of Government intervention.

Wise Governments utilise the market mechanism and intervene with a light touch to achieve their aims, often accompanied by fiscal incentives or disincentives. Foolish Governments are ham-handed when they regulate and love physical goals and targets or ban what they don’t like.

Social Responsibility

How much social responsibility a corporation should take on is frequently viewed from the Smithian light. Since the business works towards performance goals and has to satisfy investors, any activity to meet social objectives becomes a distraction. However, the public has a great expectation of large business organisations that goes beyond achieving mere monetary goals and, hence, the social objective of the corporation has veered between ‘do good,’ or at least ‘do no harm,’ over and above its pursuit of self interest.

It is also fashionable for some corporations to make meaningful investments in improving the lives of those around without severely distracting themselves, and they love to talk about it in their annual reports.

Those glossy pictures of grateful little children in classrooms funded by the corporation, or ragged villagers drinking pure water are heart warming, even if you think the company has no business to be doing this with investors’ money.

Most Governments leave the business world alone, knowing that they could be ruining a good goose that lays the tax egg if they meddle too much. Mr Kofi Annan, when he was the Secretary-General of the UN, initiated the Global Compact as a voluntary measure to rope in companies that had a heart, so to speak, and to ensure that their activities were not just restricted to writing cheques to take advantage of tax incentives.

By signing on to the Global Compact, companies were committing to incorporating CSR in the strategic decision-making of the organisation.

Companies Bill

But the Government of India (GoI), which loves to rush in where even fools fear to tread, thought it would mandate CSR. So in the proposed Companies Bill (2009, 2011), it decided that every company having a net worth of Rs 500 crore or turnover of Rs 1,000 crore has to constitute a ‘CSR Committee of the Board’ and allocate at least 2 per cent of their average profits over the previous three years to corporate social responsibility initiatives.

The resultant hue and cry seems to have had some effect, for reports suggest that the Bill has been tabled and this requirement may well be made voluntary rather than a mandate. But the very thought that the Government feels it can make such activity a requirement for corporations, gives us pause for thought.

Just as businessmen often don’t worry too much about the morality of corruption and treat it as a cost of doing business, one can dismiss this Government misadventure as another tax on the companies and get on with it. I, however, take a different view. I see this as a cry for help from the Government for it is essentially admitting its abject failure to get anything done.

It first made a mistake thinking it could run engineering companies, financial institutions, textile mills, watch companies, and so on. It even thought it could run, heaven forbid, a severely competitive activity like an airline.

We’ve seen the results of that policy. The Government managed to drive the airline into bankruptcy. When a few smart folks working in the halls of Government administration realised their folly and tried to hand these enterprises back to the private sector, they found themselves often unable to deal with the vested interests stifling the enterprise. These were the labour unions, and sometimes suppliers and distributors. With an eye on the elections, the Government has often had to back off.

I think those few and weak rational voices within the Government have realised the Government’s failure in even those areas that fall within the purview of national governance. They are now pleading to the private sector to do it. That is what this intended mandate in the Companies Bill on CSR essentially is. A cry from deep within the Government for help.

This becomes obvious when you look at the intended list of activities they want the large corporations to undertake. These include eradicating extreme hunger and poverty; promotion of education; promoting gender equality and empowering women; reducing child mortality and improving maternal health; combating the human immunodeficiency virus, malaria and other diseases; ensuring environmental sustainability; employment enhancing vocational skills; and so on.

Plea to India Inc.

Now let’s consider the Government’s record on these activities as evidence supporting my argument. A recent UNICEF report says that 20 per cent of children under five dying in the world are from India. India contributes a quarter of global maternal deaths; 47 per cent of young children in India are malnourished; 300 million are living on less that $1 a day.

The Government has not made much of an impact on these issues as it has been distracted in trying to run steel plants, airline companies, and textile mills.

So here is my plea to India Inc. Please do not object to the clause in the Companies Bill. Take on these challenges. The Government needs your help. I would even like to add a few more items to the list, such as garbage collection, water distribution, and crime fighting. We see the abject failure of state and local Governments in these areas too.

Of course, the money saved by the Governments not attending to these matters can go towards increasing benefits that the next pay commission is sure to assign to the bloated bureaucracy.

(The author is professor of International Business and Strategic Management at Suffolk University, Boston)

(This article was first published in Business Line on January 1, 2012)

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