Thursday, April 23, 2009

CSR in India: Some Theory and Practice

Experts in the area of corporate social responsibility (CSR) have argued that CSR is not just philanthropy by companies. It should involve the right combination of enhancing long-term shareholder value and protecting the interests of various other stakeholders (such as employees, creditors, consumers and the society in general).


In a recent article in the Wall Street Journal, R. Venugopal and Nachiket Mor set out some key principles for CSR in India:


It is a sign of bad corporate governance when managers donate to causes that their companies are in no way better positioned to address than individuals are.


As trustees of corporate assets, are managers not exceeding their brief when they divert resources in this fashion and pursue personal passions with corporate resources?


Would it not be better to distribute profits among the shareholders and employees and leave it to their discretion, as individuals, to contribute to the causes that they deem fit?


Again, CSR is sometimes treated as being no different from image building. But such an approach is short-sighted and therefore not good corporate governance.

Corporate governance reaches its zenith when companies realize that long term business profitability results from business models that address social problems in a sustainable way.

Profits become a-posteriori indicators of business performance rather than as long-term goals; they are viewed as the means to keep companies going concerns and not as ends-in-themselves.


An obsessive focus on the competition gives way to innovation that makes competition irrelevant. The history of business tells us that companies such as these are the ones that thrive in the long run. Ironical as it may sound, the most profitable companies are the ones that are the least profit-minded.


While the prescription above is interesting and consistent with CSR approaches generally, it is not entirely clear whether it is adopted in India in practice. The following recent example in an Economic Times editorial seems to run counter to the idea of distributing income to shareholders who may then decide how to contribute to sustainable causes:


If forcing unviable pricing was not enough, the government now wants public sector oil companies to spend 2% of their profits on social programmes. The directive makes a complete mockery of the high standards of corporate governance the government wants India Inc to follow.


The dominant shareholder, the government, has unilaterally taken a decision that has a bearing on the investment and returns of other stakeholders. The government would do well to set a better example. The big four oilcos — ONGC, Bharat Petroleum, Hindustan Petroleum and Indian Oil — are all listed on stock exchanges with public shareholding ranging from near 20% in Indian Oil to 48.9% in Hindustan Petroleum.


The 2% levy on profits for corporate social responsibility (CSR) spending would depress the valuation of these companies and create a handicap vis-a-vis private sector competitors, apart from upsetting their capital investments and dividend plans. Besides, given the political culture we possess, the sort of social spending the government is suggesting for oilcos would degenerate into funding schemes ….


CSR would require a concerted approach with appropriate buy-in from all stakeholders (particularly shareholders) and not a unilateral approach by the controlling shareholder or the management of the company.

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