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Shubhashis Gangopadhyay: Profiting from CSR

Mandatory spending on corporate social responsibility does not fit in a market-driven society

Shubhashis Gangopadhyay 

The parliamentary panel looking into the provisions of the Companies Bill wants to make it mandatory for the corporate sector to spend a portion of its profit on activities that are socially beneficial. From my reading of the discussions, the major areas of dispute are: (a) should it be one per cent or two per cent of profit; (b) what defines the corporate sector and socially beneficial expenditure by them; and (c) should the spending be mandatory or only its disclosure be mandatory. I find all of this very amusing. Let me explain why.

First, I am surprised at why non-governmental organisations are not opposing this move at a time when they are up in arms against cash transfers of all kinds. Their argument against cash transfers is that it shows a certain degree of irresponsibility by the government; instead of physically transferring the exact resources and services that households need for a minimum quality of life, something that the government is duty-bound to provide, it is throwing cash at decision-making households and asking them to obtain these directly from the market. In other words, a government that believes in cash transfers (for instance, as substitutes for subsidised food and subsidised kerosene) is irresponsible because it is asking heads of households to take decisions on how much to spend on what. Indeed, the most common refrain is that if cash is made available to the poor, they will “drink it up”.

By the same logic, a government that asks the corporate sector to spend its profits on socially responsible activities is also highly irresponsible. After all, citizens pay taxes for governments to spend on public goods and redistribute resources. A government that asks the corporate sector to chip in and carry out these activities should also be viewed as irresponsible. It is asking the corporate sector to do something that is fundamentally the responsibility of the government.

However, those who support cash transfers can still oppose making it mandatory for corporations to undertake CSR activities. The reason for supporting cash transfers is that households are idiosyncratic, and they know better than any paternalistic third party how much of what they need. In other words, households have the knowledge and the incentives to do what is best for them — they only need the opportunity to be able to do so. In a market-driven society, purchasing power — or cash — gives them that opportunity.

Private corporations are supposed to make profits and return them to their investors. Investors, therefore, choose those projects that give them higher returns, and managers of these projects are expected to specialise in the ability to make profits. If one wants entities that specialise in social activities, investors themselves can decide how much to put directly into these activities. Why put in money for steel production because such producers make social investments? Is it not better to choose the most profit-making steel producer and then use the dividends, or the realised capital gains, to directly fund social activities? This division of labour among steel producers and those that undertake social activities is what makes both efficient and transparent.

Many would argue that CSR is good business practice. If that were so, one would have to assume that good managers know that. And, if they know, then to signal that they are good managers they would be undertaking CSR anyway, with or without the law. Indeed, they would choose a level of CSR that is in keeping with what maximises the returns from investment. For some companies that would be 5 per cent of their total expenditure, for others it could be 0.5 per cent. And, observe, I do not say “of profit”. If social activity produces an enabling environment, you want that to be more stable than profits ever are in a market society. If CSR expenditure is tied to fundamentally volatile profits, and running schools is a corporate activity, your child will have new textbooks one year and no textbooks another year!

On the other hand, there are people who feel good investing in companies that work for society. Such investors want their investment to yield a return and be used for the greater good. They are unable to undertake socially good activities by themselves, for an obvious reason: social activities, like profit-making activities, require a minimum scale of operation to be efficient, or even feasible. Companies are aggregators of resources and they will do this well, especially if it is good for their business. And, if doing good CSR attracts more resources for their business, they will shout their intentions from available rooftops.

Therefore, defining disclosure norms for CSR activities is the way to go. People must be confident that what businesses are claiming is true and regulatory institutions need to be able to monitor truth-telling by companies. Indeed, what mandatory CSR spend does is take away the ability of efficient companies to distance themselves from the inefficient ones. After all, if everyone is spending similar amounts, how will you distinguish among them? If it works for them, they should spend more than 1 per cent; if it does not, they should spend less.

The thing that bothers me the most is that supporters of mandatory CSR by the corporate sector refer to pieces exhorting corporate CSR written by business-school professors abroad. While I am willing to grant that they are smarter than we can ever be, they are also not always right. 2008 is not yet a distant memory! So, why can we not try to think for ourselves instead of relying on others to do the thinking for us?

The writer is Research Director, IDF, and director of the School of Humanities and Social Sciences at SNU

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First Published: Sat, January 28 2012. 00:52 IST