Social Responsibility of Business & the Companies Act 2013

(Image: nationsroot.com)

(Image: nationsroot.com)

In an earlier version I titled this post as – Legalizing loot by the state – Companies Bill 2013. It was due to the coercive way of making businesses part with their profits over and above the taxes they pay (by the way of Companies Bill 2013) , to get some of its own work done. The question is – who is responsible and what is this emergent form of ‘social responsibility’ that is being forced upon businesses.

The legendary economist Milton Friedman wrote that the ‘social responsibility of businesses is to increase its profit’ in New York Times magazine in 1970. The analysis is remarkably relevant even now, when there are all sorts of loose analysis on responsibilities, mandates and spending being attempted which refer to ‘corporate social responsibility’ (CSR) with vague references to who actually is responsible and what are its/his responsibilities in the social context as implied by CSR. Such inexacting tendencies are typical of Indian policy process and can be witnessed in the new Companies Bill which has been passed. The resultant Companies Act 2013 mandates a compulsory annual spending as a percentage of net profits made by companies in India towards social causes. This is being done under the notion that businesses have a social obligation and that it must then be their responsibility to direct a part of their profits towards ‘social’ causes – it could be towards education for children, healthcare in areas with poor access, serving poor and below poverty line population and works of similar order. If that is what is expected of the businesses now then what are governments to do? And what is being done to the corporate taxes being paid by the companies? Doesn’t that make it a good share of spending which now the government has to direct and which it is not able to over these years as we see in India. If this primary responsibility of taking care of the economically weaker and basic services deficient constituencies too is to be imposed on businesses then what might the government want to do? Be a cashier perhaps.

In an opinion piece Samir Saran and Vivan Sharan of the Observer Research Foundation hold a quick trial of Indian businesses and dispense a poor performance judgement. Following this they list their reasons for why the new act is important and how this ‘scheme’ might work in transferring profits  –

Perhaps, the most important new element introduced in Clause 135 of the Bill is the notion of mandatory Corporate Social Responsibility (CSR). Colloquially referred to as the “2 per cent clause,” it has the potential to transform the landscape of CSR in India. Indian businesses have been loath to go beyond the “glorified worker towns” syndrome or providing employee services and benefits passed off as social interventions. Indeed, “Corporate India” has fared rather poorly when it comes to affirmative action in employment, environmental responsibility and in resource efficiency and revitalisation over the years. Therefore, a scheme that potentially transfers profits towards social causes, environmental management and inclusive development could be the much needed medicine for a nation with such deep socio-economic cleavages. This provision in the new bill must be welcomed and its efficient implementation must be ensured.

There is some excitement among the NGOs in India about the resultant fund inflow or the ‘CSR money’ that is likely to come in annually, after the Companies Bill comes into effect. This has also led to a positive outlook on the hiring in development sector and for entry level jobs for graduates with social work, social science and development studies degrees. The buzz is rather appalling. I find that it is absurd and (policy wise) misguided to mandate corporate spending on ‘social responsibility’ by a legal statute that Indian government has brought into force now.

The reference to Milton Friedman was to highlight this brilliant analysis of social responsibility, which is being ignored in India. The socialist streak of India’s early years keeps surfacing and sometimes in a damaging form as this Companies Bill.

What does it mean to say that the corporate executive has a “social responsibility” in his capacity as businessman? If this statement is not pure rhetoric, it must mean that he is to act in some way that is not in the interest of his employers. For example, that he is to refrain from increasing the price of the product in order to contribute to the social objective of preventing inflation, even though a price increase would be in the best interests of the corporation. Or that he is to make expenditures on reducing pollution beyond the amount that is in the best interests of the corporation or that is required by law to contribute to the social objective of improving the environment. Or that, at the expense of corporate profits, he is to hire “hardcore” unemployed instead of better qualified available workmen to contribute to the social objective of reducing poverty.

In each of these cases, the corporate executive would be spending someone else’s money for a general social interest. Insofar as his actions in accord with his “social responsibility” reduce returns to stockholders, he is spending their money. Insofar as his actions raise the price to customers, he is spending customer’s money. Insofar as his actions lower the wages of some employees, he is spending their money.

Companies Bill in India and similar such coercive measures by governments are against the interest of economic growth as well as human development in the long run. In principle what it is doing is to reaffirm the idea that businesses are extractive and that government can step in to redistribute the wealth so generated. This is a negative view of markets and is likely to create an environment which could be stifling for growth of businesses and consequently impact production, employment and overall growth.

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