Hence, firms need no fiscal incentives.
While speaking at a conference on Companies Bill 2009, the Union Minister for Corporate Affairs Salman Khurshid had asked the industry to propose a corporate social responsibility (CSR) system that rewards the industry. He said the ministry’s attempt was to see that the industry takes up CSR activities in such a manner that it turned out to be a next-generation affirmative action that went beyond reservations for weaker sections of the society. Khurshid's comments lead to a few questions. Whether the government should provide fiscal incentives to companies for CSR activities? Whether the government should make it mandatory for companies to spend a specified percentage of profit in CSR activities? Whether the government should intervene in deciding the target groups which should receive benefits from CSR activities? We need to examine the nature of CSR to answer these questions.
Corporate governance and CSR
The central theme of corporate governance is to develop a governance system that ensures that management takes decisions in the interest of shareholders. The stakeholder theory of corporate governance, which says that while taking decisions, management should balance interests of all stakeholders, has not found wide acceptance. However, the stakeholder theory could create the awareness that the interests of stakeholders (e.g. employees, customers, vendors and local community) cannot be ignored for long in company's pursuit to create shareholder value. This awareness is one of the major drivers of CSR movement. Other drivers include media pressure, campaign by voluntary organizations to create awareness about human rights and environment protection, social awareness about 'sustainable development' and government interventions.
CSR campaign started with environment protection initiatives by those companies which cause severe damage to the environment such as large oil companies, mining companies and companies that extensively use underground water. But now CSR initiatives are not limited to environment protection initiatives. CSR initiatives cover education, health, women empowerment, livelihood promotion, sanitation, agriculture and many others.
Nature of CSR
Compliance with laws, rules and regulations is not a part of CSR initiative. CSR is doing something voluntarily for social development. For, example, compliance with environmental laws or safety norms is not a CSR initiative. But to do something more than what is required by law for environment protection is a CSR initiative. There is a time lag between when the society expresses a need for government regulation and when the law is promulgated. Therefore, what starts as voluntary initiatives by some companies turns into legal compliance when government through regulations makes it mandatory for all the companies to take such initiatives. An example is the laws related to environment protection. Therefore, what should be labeled as a CSR initiative depends on the extant legal environment in which the company operates.
Business case
CSR is a good 'business case'. Companies invest in CSR activities because it makes business sense. It is neither a pure philanthropic activity which aims to 'do good to the community' nor an activity that aims to 'pay back to the society'. Some experts observe that the role of nation-state is diminishing and large multinational corporations, which have command on huge financial, human and technical resources play the dominant role in influencing government policy (through lobbing and other means) and also in bringing social changes.
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Therefore, often the nation-state fails to protect the interest of local those groups of the society who have no linkage with companies. In this situation, the society expects the corporate sector to take voluntary action to protect the interest of the local community and the society in general. The local community also expects companies to play an important role in social development. Social expectations are expressed through mass agitations, campaign by voluntary organisations and media campaign. The CSR initiative is the response of the corporate sector to societal expectations.
Companies invest in CSR activities because they derive significant benefits from those activities. CSR activities help companies to build reputation, make environment less vindictive, reduce litigation, and attract talent. In addition to those benefits, companies that invest in CSR activities develop good understanding of social culture and dynamics and identify social changes much in advance of those companies which are not involved in CSR activities. Visionary companies identify social undercurrents and latent social needs and often convert them in business opportunities. CSR is a very potent tool for managing reputational risks.
It is unfortunate that many companies try to present CSR activities as purely philanthropic. This might be a public posture, but this set a wrong tone in the organisation and employees fail to see the ‘business case’ and act with the perception that CSR activities are discretionary in nature. This is detrimental to the long term interest of the company.
Selection of CSR projects
Companies align CSR projects with business strategy. Therefore, companies select those projects which support the company's business strategy directly or indirectly. Companies often select projects which will augment the market for inputs or outputs. For example, a steel company may develop villages surrounding its plant for the welfare of its employees and to ensure that future employees, who are inhabitants of the village, will be healthy and educated. Similarly, a company engaged in software business invests in spreading computer education to create markets for inputs (e.g. skilled employees) and output (e.g. software). In selecting projects companies also consider the level of satisfaction that employees will derive from each project.
The research report issued by the Times Foundation reports that most CSR activities are carried out in urban areas and covers people near the organisation or industry. The-refore, rural poor are largely untouched by corporate CSR initiatives. Companies do not necessarily target projects to weaker sections of the society because their objective is to maximise benefits from those initiatives.
Conclusion
CSR initiatives make good 'business case' and therefore there is no need to provide fiscal incentives from tax payers' money. It is also incorrect to expect that CSR initiatives will benefit the most deserving groups (e.g. weaker sections) in the society. They cannot replace government initiatives for social development. Government intervention to strengthen the CSR movement may not bring the desired result.
CSR movement will strengthen only if we as a customer make our choice for products based on relative performance of companies in the area of CSR and if as investors we take into consideration performance in CSR activities along with economic performance of companies in taking investment decisions. Government and voluntary organisations should create awareness about the importance of CSR. Companies who believe in CSR should educate capital market players that CSR makes a 'good business case'.
Companies should select projects that are of national importance or which are important to the local community. They should involve employees in selecting the project. This practice enhances employee satisfaction. Companies should collaborate with voluntary organisations to implement CSR projects in order to improve the quality of delivery and achieve economy of scale. It is observed that often companies selects similar projects in the same region and compete with each other. This results in waste of resources. It may be good idea that companies pool their resources to maximize benefits to target beneficiaries.