The Hindu Business Line : Does corporate social responsibility need incentives?

If CSR has to always result in added shareholder value, then the activity ceases to be social in conception or results and becomes another economic activity of the company! Such an expectation is also not consistent with the spirit of the trusteeship principle.

P. K. Doraiswamy

In a recent statement, the ITC Chairman said that corporate social responsibility (CSR) involved an additional cost, both transactional and real, placing companies practising it at a disadvantage vis-a-vis those that did not, and that, therefore, investors, customers and the government should reward CSR in economic terms.

According to Milton Friedman, the only social responsibility of business is to comply with the law of the land and stay profitable.

Any other non-economic or social activities are the responsibility of the State using the taxes collected from profitable businesses. Peter F. Drucker considers profitability the first and the basic social responsibility of business as no other responsibility, social or otherwise, can be fulfilled by any losing business.

Responsible PSUs

When public sector enterprises were started, they located themselves in backward areas, set up townships for employees, followed socially desirable policies like job reservation, employing the physically disabled, purchase preference to small-scale industries, etc. Ignoring Drucker’s advice, they pursued CSR to the detriment of profitability and many of them became sick wasting national resources and endangering employment. Does CSR need incentives? A knee-jerk reaction to this question would be: ‘Socially responsible behaviour needs no incentives at all as it is the basic duty of every citizen and corporate; in fact, socially irresponsible behaviour deserves punishment.’

The three levels

CSR could exist at three levels:

(A) compliance in letter of the law;

(B) observing norms of common morality, like ethics and fair play, in its internal management and dealings; and

Level A needs deterrents for default rather than incentives for adherence, being the basic obligation of any ordinary or corporate citizen in any civilized society. Level B refers to behaviour that is not specifically obligatory under law but is expected in any just society. Level C is a non-obligatory, discretionary area and a company’s involvement would depend on its values and social commitment.

While level A may not deserve any positive incentive, it is certainly an area where unscrupulous companies would try and steal an unfair advantage over scrupulous ones and tilt the playing field in their favour.

Complying with the law of the land is no doubt non-negotiable, but the way laws are framed and administered often sorely tempts companies to circumvent them in order to survive.

Most serious instances of unethical or unlawful behaviour of companies at this level occur during their interactions with public agencies and not with businesses or customers.

The government, therefore, has the moral and economic responsibility first, to ensure that the laws governing business are framed realistically and reasonably, and enforced fairly and constructively; and second, to cleanse its own work environment of harassment and corruption.

Thereafter, the government should come down heavily on companies violating the law. In a sense, this is an ‘incentive’ for healthy, honest industrial growth.

In a genuinely competitive environment, level B will, in the long run, regulate itself. Businesses and customers dealing with a company would evaluate its behaviour and either continue to patronise it or ‘vote with their feet’.

Whereas levels A and B are independent of profitability, activity under level C arises only after the company ensures its own profitability, as otherwise CSR cannot be sustained. Level C is a rather vast area as it cannot be defined or listed out precisely.

In practice, popular areas of action have been the services sector like education, health and housing, water resources, employment, poverty alleviation, etc.

Level C does not, however, entirely rule out profit-making activities as long the activity serves an indisputable social purpose and does not involve any unjust activity or profiteering,

CSR and profits

For example, a corporate could undertake development of renewable sources of energy as a diversified CSR activity, sell the resultant power to the Electricity Boards and make a profit.

Level C is also an area where there is scope for a corporate to be imaginative and innovative as advances in information technology and biotechnology have opened up immense possibilities.

Just because a company does good work under CSR, the government cannot give it any preference or exemption, say, in purchases, contracts and regulatory approvals or any matter falling under level A. Such economic incentives are not being offered in any other country.

If, as the ITC Chairman suggests, CSR should always result in added shareholder value, then the activity ceases to be social in conception or results and becomes another economic activity of the company!

Such an expectation is also not consistent with the spirit of the trusteeship principle.

Recognising CSR

All that the government can do is, first, to set a good example in their own public sector units, and secondly, to create a mechanism for awarding some sort of formal recognition to good work done in this area like the export awards or environmental management awards being given at present.

The government or the apex organisations of industry could create a CSR Accreditation Council which would assess the work done by the applicant companies and award a star rating to each as is being done by the National Academic Accreditation Council to Universities.

Income-tax rebate used to be offered to a company undertaking rural development schemes but its working proved unsatisfactory. Moreover, any tax rebate scheme would involve a distinct possibility of abuse and too much verification and might well make CSR itself too cumbersome.

CSR at level C should first become visible enough for many companies to be attracted to and inspired by it.

To facilitate this, the apex organisations of business may set up CSR Exchanges in the various regions.

In these exchanges, the corporates would register their preferred areas of operation and their core capabilities and the citizen groups would register their priority felt needs so that the two could be matched and concrete, successful CSR projects could materialise quickly.

CSR for consumers

Is there any way customers and investors can be made to encourage CSR? In some Western countries, there are agencies that guide investors towards ‘ethical investment,’ i.e., in companies practising good CSR.

There are also consumer groups organising campaigns against companies whose practices violate CSR. Eco-labelling of products could be widened in scope to include total CSR.

Such developments are still to take roots in India where price and product brand image still count more than the company’s social image. Innovative, intense consumer and investor education needs to be taken up seriously if CSR is to become second nature to companies instead of being considered an external ingredient added reluctantly to normal business management.

While financial incentives for practising motivational reinforcement from the government, the customers and the investors is necessary to reinforce companies’ CSR behaviour.

(The author is a former Special Chief Secretary, Government of Andhra Pradesh.)

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