The Companies Act, 2013, made it mandatory for profit-making companies to spend at least 2% of their average net profit in the previous three financial years on Corporate Social Responsibility (CSR) activities. The companies that come under its ambit are those having a net worth of Rs 500 crore or more, a turnover of Rs 1,000 crore or more, or a net profit of Rs 5 crore or more during any financial year.
The Act, comprising 470 sections and 29 chapters, is aimed at enhancing corporate governance and contains other provisions to ensure equitable and sustainable development of the country. So, what exactly is CSR, and why is the government justified in making it mandatory?
A good definition of Corporate Social Responsibility (CSR) is the one given by Khoury G et al in their 1999 work “Corporate Social Responsibility: Turning Words into Action” – “Corporate social responsibility is the overall relationship of the corporation with all of its stakeholders. These include customers, employees, communities, owners/investors, government, suppliers, and competitors. Elements of social responsibility include investment in community outreach, employee relations, creation and maintenance of employment, environmental stewardship, and financial performance.”
Milton Friedman, a Nobel Prize-winning economist, famously argued in a 1970 New York Times article that “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” This is the stockholder perspective on CSR – that is, a corporate executive when making decisions should seek only to maximize the profits and thus eventually benefit the stockholders of that company. He is not responsible for any other constituents related to the company.
The implicit assumption in Friedman’s arguments is that the pursuit of social responsibility and the pursuit of profits are mutually exclusive. But a 2011 survey of CEOs by PriceWaterhouseCoopers reports that “nearly half of the CEOs [surveyed] said they would change their companies’ strategies within the next three years because they expect stakeholders to factor companies’ environmental and corporate responsibility practices into purchasing decisions.” Of course, the rationale here is enlightened self-interest. Businesses are still striving to increase profits, but conform to the new rules of the marketplace.
The stakeholder perspective on CSR was first detailed by Edward Freeman in his 1984 book Strategic Management: A Stakeholder Approach. In it, he identifies and models the groups which are stakeholders of a corporation. Freeman writes in an article, “Managers bear a fiduciary relationship to stakeholders. Stakeholders are those groups who have a stake in or claim on the firm – suppliers, customers, employees, stockholders, and the local community, as well as management in its role as an agent for these groups.”
Law has evolved to constrain companies from pursuing merely stockholder interests. Customers are now protected with such legislations as product liability law and disclosure of ingredients in a product. Employees are benefited from labour relations laws and employment acts. Communities are being benefited by laws dealing with environmental protection. These groups, in addition to stockholders, have a claim on the firm.
Thus, the stakeholder perspective is gaining ground over the stockholder perspective. After all, businesses exist in an interdependent web of relationships and dependencies with society. So, they must be responsive to their role in these relations and dependencies. Given that companies, in their exclusive concern with profits, are likely to cut corners, it is quite correct that the government is trying to make companies more socially conscious and responsible.
Finally speaking, it has been rightly said that CSR is not just about what you do with the profits, but rather also how you make those profits in the first place. That is to say, it is important to all aspects of business, and it is to be integrated into the way a corporation functions – its values, culture, strategy, decision-making, and reports.