C Gopinath

CSR: Rhetoric and reality

Updated on: Apr 24, 2011
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Social goals are welcome, but a firm cannot be expected to dilute its responsibility to shareholders. Governments that feel cheated should re-work their incentives.

No corporate leader today would dare deny that his or her enterprise has a responsibility to society. Corporate social responsibility (CSR) is now an accepted obligation; gone are the days when heads of companies, or academics for that matter, insisted that the corporation only has a responsibility to maximise returns for its shareholders.

But CSR has also become a convenient umbrella under which to dump a whole range of activities. If you look at any annual report these days, you will be pounded with information on all the little children, the elderly, the trees, and the air quality that the company is busy working on, and you may well wonder if it is making any money at all.

The problem with CSR is that it is easy to define and talk about, but very difficult to put into practice when it comes in the way of business decisions. The inherent conflict between profit maximisation and obligation to society is going to rear its head at some point or the other. While you may be receiving awards for doing good work in one area, you are going to run into problems in another. Wal-Mart's chain in Japan is said to have successfully changed its packaging from oil-based to corn-based plastic, cutting the package's weight and cost, and thereby generating savings for the company and doing good for recycling. Deserve an award, right? What about the impact of this on the demand for corn, raising corn prices, and making it unaffordable to the poor as a food item?

GOVT INCENTIVES

CSR, very broadly, is based on an obligation to be responsible members of society. To help companies and their communities along, governments have often relied on subsidies and incentives to attract and retain economic enterprises as an anchor for their development initiatives. When large corporations announce their expansion plans, state officials rush out to attract them, promising better roads, utility connections, and throw in tax benefits, expecting in return that the corporation will hire the locals, and boost the economy of the region. And then we run into globalisation.

The state of Massachusetts (north-east US) is facing an unemployment rate of about 8 per cent. Better than before, but keeps the pressure on the administration to create new and retain existing jobs. The current governor has targeted select industries, such as life sciences, bio technology and alternative energy, as having the growth potential and has been handing out subsidies to attract investments. In pursuit of development, the state gave the firm, Evergreen Solar Inc, cash grants, tax exemptions, and other assistance in 2008, allowing it to build a solar manufacturing plant which employed over 800 people.

FEELING CHEATED

Times changed, the company decided it was too expensive to manufacture here, shut down the plant and moved it to China. Guess what else is driving the company to China? The incentives being offered by the Chinese government! This left the Massachusetts state government fuming, asking for its money back.

The head of the company retorted that the company did create the jobs it promised, and the state of Massachusetts made a small profit selling its share of its investment in the company. In any event, he reportedly argued that he would return about 20 per cent of the grant he received.

He is also quoted as saying that the state did not lose in the deal and got its money back. (I asked the Governor's office the details of their contract with Evergreen and have not got a response.)

How does one evaluate this relationship and the benefits to the company and the state? The state feels jilted, while the business feels it has to seek cheaper means of production and has less of an obligation to help the state achieve its employment goals.

Take another case. Massachusetts made a change in its tax code in 1996, benefiting the mutual fund industry. In return, the companies had to increase their workforce for five years to take advantage of the tax break. Since 2003, the state relaxed its rule and made the tax benefit applicable to all mutual fund companies, irrespective of jobs created or lost.

The mutual funds giant Fidelity recently decided to consolidate its operations by moving some offices out of this state into neighbouring states. The state is fuming again about the loss of jobs, but the company just said, ‘Sorry, it was a business decision.' Of course, the state needs to safeguard the interests of the people of the state and promote development.

However, there are better ways to do this. Rather than focus on specific firms or industries, a more sensible policy would be for the state to focus on improving the business climate in general.

This would involve keeping taxes low, simplifying regulations and cutting its bureaucracy, eliminating corruption, providing adequate infrastructure, and building a reputation for being a fair and efficient partner. This would automatically attract investment from large and small enterprises. This would also be more equitable, and not benefit large against small, or the more influential against the less.

Research shows that there are bottom-line advantages for a firm building an image of being responsible within the community. However, a firm cannot be expected to dilute its responsibility towards the shareholders because of perceived obligations to the local community. In a competitive marketplace, if the firm does not protect its bottomline, there would be no firm left standing for it to be responsible in any community.

(The author is Professor of International Business and Strategic Management at Suffolk University, Boston, US. blfeedback@thehindu.co.in )

Published on April 28, 2011

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