CSR Act: There's no substitute for govt doing its job better

CSR Act: There's no substitute for govt doing its job better

Government of India has recently promulgated the Corporate Social Responsibility (CSR) Act, and has made what was voluntary, compulsory.

As per the Act, every firm should spend 2 per cent of its gross profit on CSR. Further, every firm should form a board level committee on CSR, with at least one independent director, and publish in the annual accounts the details including reasons for falling short of the target, if it does not spend the full amount of 2 per cent profit.

Firms used to undertake CSR on their own for a variety of reasons, most of which were inspired by self interest, sometimes enlightened. Companies seen as crooks, tax dodgers, masters in corruption and sharp operators used CSR to whitewash their acts of bribery, extortionary pricing and unethical business practices.

Some of them diversified as champions of environment, adding a new word in the vocabulary, viz., green-washing. Some chieftons who became rich and famous in quick time wanted to ‘give something back’ to the society, under the name of philanthropy. Nobel prize was instituted by Alfred Nobel out of the profits of selling gun powder. Rockefeller became the richest man of his time through the Standard Oil Company, and with the riches established the University of Chicago besides Rockefeller University and Rockefeller foundation.

The rationale for CSR emanates from the view that good firms maximise total value in the long run rather than share-holder value in the short run. The goodwill created by CSR is presumed to fill a major portion of the difference. A similar but slightly different view is that CSR is not outside of shareholder value maximisation, but rather very much part of it. It helps the brand value of the firm, which is still part of share-holder value.

When Marks & Spenser placed wooden platforms for their sales girls so that their feet are somewhat protected from cold, during winter, this CSR activity, was aimed to create an impression that M&S are a bunch of caring employers. When Narayana Murthy told his book builder in the US to price the shares a few dollars less, the markets saw the ethics in that and handsomely rewarded him by a generous appreciation of the stock.

Giving is of two kinds: giving your own money and giving others’ money for which you are a fiduciary. Obviously the first type is what is laudable. Bill Gates, Warren Buffet and Azim Premji gave their own money for CSR. In the second type, the chairman and MD and other directors who may be holding 10 per cent of the shares of the firm make decisions on CSR affecting all the remaining 90 per cent of share holders. Most firms do CSR of the second variety, which is less commendable.
Certain questions arise: Is it morally right to give away share-holders’ money in CSR and on what authority do you do it? Is it not an abuse of the fiduciary responsibility of the directors of the firm?  What is your (superior) competence in the said CSR activity, which, mostly, is the job of the government?

Commitment and competence

Would it be better to donate to government and ask it to do its job better? In the same vein, the government can say “the mandatory tax amount you must pay; however, you can pay more, if you like.” This principle, incidentally can be used even for subsidies, as Railways have done. The oil companies which sell LPG to domestic consumers can say, “the subsidised price for a cylinder is Rs 350; however, you can opt out of subsidy, and can order the cylinder at market rate (of say, Rs 800). Railways have given a choice to senior citizens in like manner. The answer to the first question lies in the presumption that CSR will enhance the image of the company and raise its total value.

The answer to the second question lies in the commitment and competence of the initiator of CSR.
However, in the Indian context, making CSR compulsory through the Act is a short sighted and erroneous step, and is nothing more than an additional tax in the form of a cess (a tax directed to be spent for a specified purpose). It encourages waste and inefficiency with CSR patrons looking for ways to spend just because it is to be spent. Some PSUs spent money on CSR by coaching students for IIT admissions. Many of their own employees’ children could avail the benefit, along with candidates from the public.

There is a more dangerous potential fall out. It leads to public taking for granted government’s failure (in sectors like education and health). It is like government itself saying, “I am incompetent and am a failure; you come to my rescue”. The problem with this is, within CSR itself, good CSR will cover, say one per cent of government activity. What about the 99 per cent still with the government? With this, can we give leeway to government to become complacent about its mediocrity? There is no substitute for demanding government do its work better; no substitute for good government hospitals and good government schools. It is not that all government institutions are bad per se. Countless number of such institutions are doing good work, without advertisement and approbation. The very response of government school teachers to attend teaching improvement programmes of Azim Premji Foundation, on their own time and spending their own money for travel and food, emphasizes the fact that stereotypes have inherent flaws. But we need to demand majority of government institutions perform to a satisfactory standard.

A voluntary CSR makes way for good organisations to come up with great deal of commitment and competence. A mandatory CSR will lead to CSR bureaucracies in every firm, with compliance culture and meaningless work.

(The writer is a professor at IIM, Bangalore)