Governments asking big firms to spend money on social causes is an idea that needs to be carefully debated
India is probably the first country in the world to mandate Corporate Social Responsibility (CSR) spending by large companies. Firms with revenue of Rs.1,000 crore, or net worth above Rs.500 crore, or profits above Rs.5 crore are required to spend 2% of their last three years’ average profits on CSR. While this law is yet to take effect, it has in no way reduced the intensity of debate.
The concept of CSR emerged in economies where there was excessive focus on corporate business responsibility. For instance, in social democratic societies such as Nordic countries, the concept of CSR is quite nascent and is focused more on sustainability and innovations, as the basic social security needs of health, education and old-age relief are taken care of by the state. Even in continental Europe, where some kind of state socialism prevails, CSR has limited appeal. The role of the private sector in these economies is to pay taxes which then fund social programmes. It is only in liberal market economies such as the US where the private sector dominates healthcare and education by catering only to the needs of the economically better-off citizens that CSR has flourished.
The reason for this is not too difficult to fathom. The primary business responsibility of a company in such a setting is restricted to earning a profit by conducting its affairs legally. Social concerns were not addressed despite visible and pressing need as this was seen to infringe personal freedom.
Three distinct views to justify CSR have emerged in these liberal economies. Initially, CSR spending was seen as an optional marketing expense, essential for building a brand and goodwill in the public at large, potentially seen as a group of customers or employees.
Gradually, as the pressure to spend increased in companies operating in certain sectors such as mining and energy that used natural resources and caused noticeable pollution, a new logic emerged. CSR was seen in the light of social contract theory.
This article is written by Shankar Jaganathan for LiveMint