Academic research shows that there is
increased shareholder value coming with goodwill garnered through
corporate social responsibility.
It is fashionable to expound the argument that corporations have no
social responsibility but to maximise shareholder value. Any social
agenda is supposedly the individual’s prerogative or responsibility.
People cite Milton Friedman, Nobel laureate and one of the greatest
economic thinkers and free market proponents of the 20th century, to
drive home the point.
Friedman famously said that as the agents of shareholders business
executives have a fiduciary responsibility to maximise profits, and
that the notion of corporate social responsibility (CSR) relegates them
to being public servants. He goes on to equate CSR with “unadulterated
socialism,” and downplays the “social conscience” of businesses as
“catchwords of the contemporary crop of reformers.” He trashes those
socially-minded business managers as “puppets” who undermine the very
basis of free society. Free-market proponents use his statements to
undermine those who advance CSR.
In perfectly harmonised utopian social, political, and economic
systems, there are few reasons to challenge Friedman’s arguments.
Unfortunately, we do not live in an utopian world of fairness and
equality, and unadulterated political processes and public policies.
What is practised is adulterated capitalism. For instance, when
businesses make bad decisions they often want the government to bail
them out, or when currency appreciates they want concessions or other
sorts of government intervention. Special interests dominate most
aspects of government. The weak can be exploited to benefit the
powerful. There is a growing, undesirable nexus between the political
establishments and the business community to unfairly exploit
resources. The free market principles are adulterated and capitalism is
compromised.
The free market posturing to discriminate against or to enrich certain
groups can lead to social upheavals. There is no better example than
the incidents in Nandigram where special interests dominated the rights
of the landowners. A true free market is one where landowners have the
freedom to create their own special economic zones — like the one
announced in Avasari, Khurd in Maharashtra.
Furthermore, the underlying assumption that shareholders are the only
stakeholders of a company is flawed. However, pundits often
conveniently forget the utopian premise and cherry-pick arguments that
further their pseudo-capitalistic viewpoints.
CSR takes many routes that go beyond the typical rules of engagement.
CSR is about ethics, morals, reputation, future, and vision that
enhance the collective value of all stakeholders of a corporation and
not just the monetary value of one stakeholder — the shareholders.
There are other stakeholders — employees, the local community, and
governments — who seek different values because they take monetary and
non-monetary risks as well in those establishments.
In order to encourage investments, governments have doled out cash
subsidies and tax breaks, given land at discounted prices, supplied
uninterrupted water and electricity, and incurred the cost of
healthcare and education. Some of the leading publicly traded firms in
India including many IT and biotechnology firms (and private business
schools) have received huge subsidies.
Some businesses at the time of their inception received subsidies as
high as 25 per cent of all capital expenditures. Many entrepreneurs
received free (seed) capital from industrial development banks to start
businesses. Sadly, some innovative entrepreneurs resorted to inflated
invoices to seek greater subsidies. If the government acted as a
venture capitalist — rather than as a provider of subsidies — it could
have been a major owner of these companies. Of course it is not a
desirable situation since all the bureaucratic and political
interference would have left these companies doomed. It is perfectly
fine for the government to make public the subsidies received by
various businesses and make the process transparent.
Of even greater concern to the public is the disproportionate amount of
resources spent on infrastructure requirements (for example, airports,
highways, metro rail systems, and industrial parks) to support
businesses. Thus, when benefits from accrued taxes are ploughed back
into the same community to further support their never-ending appetite
for even greater resources, the government and the community as
stakeholders can expect social responsibility to be shared.
Employees may have a greater stake in the company than most
shareholders. While their livelihood depends on their wages, they may
also be shareholders. They will expect better wages and work schedules,
and an environment that will not compromise their health and safety.
Without that expectation, staying within the legal realm firms can
exploit high unemployment levels by paying below-living wages. Employee
health may be compromised with cheaper technology, while any negative
consequences may be unknown to regulators and, hence, legally
acceptable. These may increase shareholder value, but may not be
necessarily proportional to the employees’ losses in terms of wages and
health.
The shareholders may live in the community caring not only for their
investments but also their health and environment. Further, the
community has the same rights to resources including water and air, and
expects that the firm will not pollute or over-consume resources to the
detriment of others. In other cases, the local community is coerced to
make sacrifices by giving up valuable land at below-market prices,
often through a heavy-handed political-corporate nexus.
Critiques of CSR assume that external shareholders have no interest in
other parts of the economy. Often the shareholders of a firm have a
diversified portfolio and may seek balanced growth in other parts of
the economy that may be negatively affected.
Government-corporate relationships
In arguing that corporations should have no social responsibility,
Friedman assumed that government will only be a forum to establish the
“rules of the game,” and be an “umpire” to interpret and enforce the
rules. That is, the government is a neutral observer for capitalism to
function effectively. He strongly believed in limited government since
unquestionable power curtails freedom and affects the efficient
allocation of resources. His arguments have been admired, challenged,
criticised, and disdained with passion. But the recent role of the
government in Nandigram, and government-enabled cultural radicalisation
in many parts of the world (for example, Talibanisation), give credence
to his arguments.
Unadulterated capitalism requires uncorrupted and incorruptible systems
where the only criterion is efficient allocation of resources.
Favouritism, nepotism, and subsidies are anathema to efficient
allocation. When resourceful segments of society using governmental
power curtail the freedom of citizens in both the social and economic
sense, capitalism in its purest form is not practised. Worse, the free
market is not in action when shareholder value increases
disproportionate to the residual value of the displaced people. The
close nexus between businessmen and government creates an environment
of distrust for capitalism to thrive.
Of late, many industry associations are lobbying for further
preferential treatment by the government by way of tax holidays and
subsidies. It is hypocritical of industry leaders to seek preferential
treatment after chastising the government for not liberalising faster.
Those who claimed “success in spite of the government” seem now to ask
for special benefits because of currency inflation or higher wages. The
rationale of capitalism would suggest that these companies must learn
to increase productivity, hedge against currency risks, find ways to
increase the talent pool, and become efficient in order to increase
shareholder value than seeking adulterated capitalism to enhance
shareholder value.
Offsetting adulterated capitalism
The big question is whether we can fix adulterated capitalism. Clearly,
the deep nexus between the government and businesses cannot be
eliminated, but we can strive for a greater level of transparency.
However, we can expect CSR (or the oxymoronic compassionate capitalism)
to compensate for adulterated capitalism.
Numerous companies in India have embarked on CSR initiatives. But it
needs to be pervasive and institutionalised, and not limited to major
tragedies such as earthquakes and tsunamis. Why ignore the daily
sufferings of thousands of people next door? The social good can become
corporate strategy. Academic research shows that there is increased
shareholder value coming with goodwill garnered through CSR. A firm can
declare social responsibility by allocating a certain percentage of its
profits or revenues to community development. The government can
facilitate this by providing appropriate incentives.
No sane mind should expect a firm only to engage in social development
at the expense of shareholders. There are simple things that each firm
can do. For instance, it can play an active role in developing talent
among socially backward citizens. Likewise, firms can decorate offices
with authentic Indian handicrafts, in the process supporting a large
number of skilled artisans and creating a market. This is neither
charity nor posturing for the social good. In fact, the government
should abolish the sales tax on corporate purchases of handicrafts and
even give tax breaks for such purchases.
In expecting CSR, society needs to seek a balance. It is naïve to
expect that a majority of profits will be ploughed back into social
development. It will be a classic case of the “tragedy of the commons”
— that is, when you overgraze a common good that we all share, all of
us will suffer. So society must recognise the balance that firms need
to maintain in order to keep both social obligations and shareholder
value.
There are intense criticisms on the effectiveness of CSR and how
resources are squandered in the name of CSR. But CSR is not exact
science. There is a lot of learning and experimentation to understand
the impact. So there is a need to rationalise CSR efforts than to throw
the baby away with the bathwater.
Industry associations can play a major role here. They can take a
leadership role in setting up programmes with non-governmental
organisations, or on their own identify, motivate, and train
socio-economically backward citizens to become more employable. These
efforts may offset the cynicism arising from tireless lobbying to seek
greater rewards from the government.
http://www.thehindu.com/2008/03/11/stories/2008031154530800.htm
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© 2008, The Hindu.
