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Defining the Social Responsibility of Businesses

Whose Business is it?

Rama Mohana R Turaga (mohant@iimahd.ernet.in) is with the Public Systems Group and George Kandathil (gmk@iimahd.ernet.in) is with the Organizational Behavior Group at Indian Institute of Management, Ahmedabad. 

If the concept of corporate social responsibility (CSR) has to be implemented meaningfully by companies, then the stakeholders impacted by their business should also have a say in defining what constitutes their social responsibility. Just specification of the amount that corporates should spend and activities they should undertake to fulfil their CSR obligation by the government is not enough.  

Please note that an earlier version of this paper was included in the "Reflections" section of the Proceedings of the first Indian Institute of Management, Ahmedabad FDP Alumni Conference on “Ethical and Social Responsibility of Business”, held on 20 and 21 December 2013 at GITAM University Campus, Visakhapatnam, Andhra Pradesh.  

India has recently become the first country to legally mandate expenditures on corporate social responsibility (CSR). The Companies Act, 2013 requires companies to spend at least two per cent of their net profits, averaged over the three preceding financial years, on CSR. This mandate is applicable to those companies with a net worth of 4,500 crores or more, or turnover of 1,000 crores or more, or net profit of 5 crores or more during any financial year. The Act also defines the activities that constitute CSR. These activities range from eradicating extreme hunger and poverty to reducing child mortality to ensuring environmental sustainability.

The mandatory CSR requirement has generated considerable debate. Those in favour of the mandate argue that industry spending on CSR will always be inadequate unless mandated by law. The criticism against the mandate, however, goes in different directions. Industries, expectedly, believe that it is an additional burden and will hurt their ability to invest (Venkatesan: 2013). Moreover, they argue that defining the activities that count as CSR stifles the innovative ways in which companies can spend for societal good (Gopalakrishnan: 2013). Others argue that social responsibility should be assessed based on the way businesses address the social impacts of their core operations, not on the basis of how much they spend on activities unrelated to their core business (Maira: 2013). In this note, we shift the focus from business actions to the stakeholders impacted by the actions. Specifically, we argue for an approach that accords rights to all the stakeholders, including the shareholders, employees, and communities.

CSR and Stakeholders

The classic view of a business, as articulated by Milton Friedman, is that of an entity generating profits to its shareholders by operating within its legal boundaries (Friedman: 1970). Accordingly, the dominant view considers the shareholders as the only stakeholders of businesses. With the ever-increasing scope and impact of businesses on the larger society, there has been a growing recognition that businesses have responsibility not just to their shareholders but also to other groups such as non-shareholder employees, customers, suppliers, and communities. In other words, the definition of stakeholders has been expanded to include several other groups that are impacted by businesses. The concept of CSR has appeared to have emerged within this context (Clarkson:1995).

One of the central characteristics of the widely understood conceptualisation of CSR is the voluntary nature of CSR activities (Newell: 2005). CSR activities are conceptualised as voluntary, charitable activities that businesses undertake beyond their legal requirements to fulfil their responsibility towards the larger set of societal stakeholders. This conceptualisation has an important implication: the power to define the societal responsibility of businesses lies with the businesses themselves. For example, a polluting firm can build a hospital or a recreation centre in the community in which it operates and define that as fulfilling its social responsibility. It is possible, however, that the community in this case has a preference for actions that reduce the pollution resulting from the firm’s operations rather than have a hospital or a recreation centre built.[1]This kind of CSR strategy makes “business case” since it is likely that it costs the firm much more to invest in activities that reduce the health impacts on the community than to build a hospital or a recreation centre. However, the question is whether leaving the power to define social responsibility with the business would really lead to actions that are consistent with the preferences of the larger society to who they are supposed to be responsible?

The Companies Act of 2013, to some extent, takes the power of defining social responsibility away from the companies by specifying the activities that companies could consider for the purpose of their two per cent CSR expenditure. However, this is only “to some extent” because it can be argued that Schedule VII of the Act defines CSR activities so broadly that it gives enough scope for companies to define any activity they desire as a CSR activity. If there is a problem with the companies themselves defining their social responsibility, is it appropriate for the governments alone to define social responsibility of companies? If not, who else should be involved in defining the social responsibility of the companies?

A Case for a More Participatory CSR?

Company laws in many countries, including the new Companies Act of 2013 in India, specify clear processes that define the rights of the shareholders and the responsibility of businesses towards their shareholders. In the United States, one legal interpretation of their corporate laws suggests that businesses by law cannot spend their profits on environmental and social causes without the consent of their shareholders (see for e.g., Andre: 2012). In order to provide this flexibility to the companies, several states have passed new legislations to allow the formation of “benefit corporations”, which can be structured to explicitly recognise groups such as employees and communities as stakeholders of the corporations. These new legislations can potentially provide the same kind of rights to the other stakeholders as they accord to shareholders.

If we accept the premise that the concept of CSR embodies the recognition that businesses are responsible for a larger set of societal stakeholders than just their shareholders, then one could argue that these other stakeholders be accorded the same rights as the shareholders. Legal recognition of rights for all stakeholders makes for an especially compelling case because businesses derive resource benefits from not only the shareholders but also other stakeholders such as employees and communities.

In such a scenario, where all stakeholders are accorded the same rights, CSR will cease to remain just a charitable activity that either the businesses themselves or the government would define; instead, what constitutes societal responsibility would be defined by the stakeholders who are impacted by the operations of the businesses. In this approach to social responsibility, building a hospital or a recreation centre by a polluting firm in a community would become a socially responsible act only to the extent that the decision to construct these facilities is arrived at through a meaningful participation of the community and other stakeholders in the process.

The implication of this argument for the new Companies Act in India is that, having decided to regulate the CSR activities, the government (i) should broaden the set of stakeholders of the businesses to explicitly include other societal actors beyond the shareholders and (ii) should define the processes that companies should use to fulfil their responsibility towards societal stakeholders rather than specifying the level of expenditures and the activities on which such expenditures should be incurred. Such an approach has greater potential to improve the accountability of businesses towards the larger society that they impact.

Challenges to Participatory CSR

The effectiveness of a participatory approach to create business accountability rests on the premise that all the actors involved in the participatory process have an equal chance to influence the outcomes of the process. However, in the current socio-political context, satisfying this assumption is challenging for at least two reasons. First, the communities that are most affected by business operations are typically the marginalised groups, which usually wield less power to influence the process. Second, another line of argument suggests that the businesses have become more powerful than governments through a shift in power from the governments to the businesses or in other words, state power has been redistributed, aligning it more closely to the business interests and less so to the public interest (Bakan: 2004).

In light of these challenges, a legally mandated participation alone might not be enough to ensure meaningful participation. For example, the Environmental Impact Assessment (EIA) notification requires public participation in the decision to locate certain types of industrial and infrastructural projects, through the process of public hearing, before the government accords an environmental clearance to the project. In reality, however, this public hearing process is routinely violated, and the violation of this participatory process rarely results in rejection or revoking of an environmental clearance (Menon and Kohli: 2007). As this example illustrates, the legal mandates for participation need to be complemented by other mechanisms that empower communities to have an influence on the process and its outcomes.

References

Andre, R (2012):“Assessing the Accountability of the Benefit Corporation: Will This New Gray Sector Organization Enhance Corporate Social Responsibility?”Journal of Business Ethics, 110: 133-150.

Bakan, J (2004): The Corporation: The Pathological Pursuit of Power. (New York: Free Press).

Bera, S (2013): Phuldumer advises Vedanta not to return to Niyamgiri, Down to Earth, 30 July 2013, available at http://www.downtoearth.org.in/content/phuldumer-advises-vedanta-not-return-niyamgiri (accessed on 18 December 2013).

Clarkson, M.B.E (1995): “A Stakeholder Framework for Analysing and Evaluating Corporate Social Performance”, The Academy of Management Review, 20(1): 92-117.

Friedman, M (1970):“The Social Responsibility of Business is to Increase its Profits”, The New York Times Magazine, September 13, 1970.

Gopalakrishna, K (2013): New provisions in companies bill a ‘concern’, Hindustan Times, August 28, 2013. available at  http://www.hindustantimes.com/comment/columns/new-provisions-in-companies-bill-a-concern-kris-gopalakrishnan/article1-1114340.aspx (accessed on 11 November 2013).

Karnani, A (2011): “CSR Stuck in a Logical Trap”, California Management Review, 53(2): 105-111.

Maira, A (2013): “India’s 2% CSR Law: The First Country to go Backwards”, Economic and Political Weekly, XLVIII (38): 23-25.

Menon, M andK. Kohli (2007): “Environmental Decision-making: Whose Agenda?” Economic and Political Weekly, June 20, 2007: 2490-2494.

Newell, P (2005): “Citizenship, accountability and community: The limits of the CSR agenda”,International Affairs, 81(3): 541-557.

Venkatesan, R (2013): “Ordering Corporate Responsibility: A Misplaced Faith?” Economic and Political Weekly, XLVIII (38): 26-28.



[1]An example is the case of Vedanta’s bauxite mining expansion in Niyamgiri, where community’s demands clearly conflicted with the CSR activities of Vedanta (Bera 2013).

 

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