By forcing companies to set aside profits for developing social infrastructure, the government is sneaking away from its own responsibility

Sundeep Khanna

When the next big corporate scam breaks in India, chances are its genesis will lie in a seemingly-innocuous provision of the Companies Bill, 2011, set for passage by Parliament. Corporate social responsibility (CSR), one of the great claptrap of contemporary Indian corporate life, and a concept that defies all laws of economics and business, will soon be codified and institutionalized.

Taking note of the protests by industry associations and corporate honchos, the drafting committee has ended the voluntary versus mandatory argument with a ridiculously hybrid compromise. Effectively if a suitably-sized company makes any real profits, it better set aside 2% of that to do what the government should be doing anyway using the tax payers money. And if it doesn’t, it better give a good reason why it didn’t.

With this it is open season for legal fixers. Through elaborate and intricate webs of family trusts, the cycle of cheques-for-cash, will be further fuelled.

Is the provision aimed at forcing companies into more socially responsible behavior? Or is it meant to force funds into developmental activities? If the first, then it is a laughable initiative. Why would a company behave any more responsibly just because it has to account for 2% of its profits on socially-oriented activities? Ramalingam Raju’s holy cow, the Satyam Foundation, didn’t stop him from cooking his books. In any case, is a tobacco company that spends 2% of its profits on CSR any more socially responsible than an organic products company that doesn’t?

According to some estimates, 80% of the multinationals and 50% of the private companies in India claim to have CSR policies in place. Fat lot of good that has done to Indian society! The elaborate charade of “doing good”, is often no more than routine corporate activities, a phenomenon dubbed “greenwashing”.

If the government’s objective is to force companies to contribute to national development, it defies the very definition of a company. A company is accountable first and foremost to it various stakeholders including its employees, shareholders and customers. In 1919 when Henry Ford wanted to step up investment in increased production and manpower at the expense of shareholder returns, the company’s minority shareholders dragged him to court since such a move would impact the company’s profits and in turn the shareholders dividend yield.

The Michigan court ruled in the shareholders favour stating that since a company’s objective is to generate “profit of the stockholders” the company must direct all its energies to do just that and it can’t change the end itself. Using that analogy, Maruti today would be better off spending a few extra rupees on improved living conditions for its workers since that affects its production and in turn impacts shareholder returns.

In any case there is no conceivable reason why a company that makes electric bulbs should do a good job of running a primary school. As Harvard economist Theodore Levitt put it succinctly, ‘government’s job is not business, and business’s job is not government’.

Let’s go back to the Friedman Doctrine to find clarity on the subject. In his book Capitalism and Freedom, Milton Friedman states: “There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

So should a company be answerable for not doing something which is not part of its charter? Individual companies and business groups have always done their bit to keep society honest. Through the years the Tatas have introduced path-breaking labour welfare laws. The Shrirams and the Birlas and many other groups have set up several public welfare institutions, not as a part of any government mandated program but actually as part of good corporate strategy. There has always been a coy relationship between CSR activities and the business goals of a company. If you have to donate a few million rupees, why not do it on a charity run by the relevant minister’s daughter-in-law working for the good of the electorate in his constituency.

In countries such as UK, Denmark and France reporting on CSR practices is compulsory which is only fair because the shareholders have a right to be informed about how the officers of a company are spending their money. But in these countries there is no mandatory investment that has to be set aside for CSR. A voluntary activity must remain just that.

(Source: http://www.livemint.com/Opinion/bKbMi5S0zbvtmxdLrbmSIN/The-humbug-of-CSR.html)

(Aug 17 2012.)