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Tuesday, October 19, 2021

The great armtwist

Why CSR should not be Coercive Social Responsibility

Written by Pratap Bhanu Mehta |
November 29, 2011 1:52:16 am

The idea that private capital ought to further social goods beyond the direct interests of profit is a very appealing one. But the idea that Corporate Social Responsibility (CSR) should be mandated by law and enforced by the state is flawed. Capital’s primary responsibility is profitable investment. Through its activity it should be an engine of innovation and employment generation. It ought to work within the law and make sure that it does not inflict environmental damage. A society is also greatly enriched if wealthy individuals deploy wealth for higher purposes,ranging from helping the vulnerable to enriching aesthetic choices. But requiring companies to,by law,put aside a certain proportion of their profits is a counterproductive idea.

From time to time there are proposals to make CSR compulsory. Assorted politicians from Yashwant Sinha to Veerappa Moily have,in the past,supported this idea. While full details are not available,it appears that the new Companies Bill will initially make disclosure compulsory,but not full implementation. But there will be a schedule of activities that companies will be asked to carry out. They are holding out promises of CSR transforming India’s most backward districts. SEBI is asking business to submit “business responsibility reports” describing measures taken along the ministry of corporate affairs’ National Voluntary Guidelines on Social,Environmental and Economic Responsibilities of Business.

Some reporting is necessary for transparency. But these guidelines reflect deep confusion. For example,“Businesses should not engage in practices that are abusive,corrupt or anti-competition.” Are these practices not illegal? It is a bizarre corruption of moral language to describe them as voluntary,on par with an exhortation to companies to recycle waste? There is a joke in policy circles that when you go to conferences on innovation in government what you discover is this: when government simply does its job,it is called innovation. Similarly,part of CSR has simply been reinterpreted to mean “obey the law”. The illegal is made to sound optional. And there is more pressure to do what is purely optional.

Simplistically put,our society has three modes of being. Capital relies on incentives and profit. The state on compulsion backed by legitimacy. And civil society has to rely on voluntary persuasion. These modes of operating are the source of the contributions each of these sectors makes. The pursuit of profit brings its own forms of innovation in its appropriate sphere; and it is absolutely necessary to suspend considerations of profit in other spheres. Liberalism is founded on this art of separation.

By making CSR subject to state direction,we are saying that we will use the compulsive power of the state to direct profit-making entities to give to NGOs,whose basis should be voluntary persuasion. This is a real confusion of the dharma of different entities. Part of what makes these three entities different and counterbalance each other is that they have different degrees of freedom based on their aims and organisational structures. All have to be accountable in ways appropriate to their mission. A condition of their creativity is that they are not subject to norms that derive from the experience of other types of institutions. But this mixing of roles can be a ruse to extend government-type control over the functioning of private entities. What is the great idea? That SEBI de-lists companies who don’t follow CSR norms? That companies be penalised for not doing the right kind of charity?

In compulsory CSR there is a strange subversion of democracy. First,the state,instead of carrying out its dharma of providing public goods,is simply passing on this responsibility to the NGO and private sector. The energies and organisational experience of the NGO and private sector should certainly be deployed in thinking about better delivery of public goods. But this proposal represents an admission by the state that it will coerce private entities into performing a role that is properly its own. Instead of becoming supplements to the state responsibilities,they begin to displace it.

Second,a mandatory requirement of CSR is like a tax. It would be better if a government just straightforwardly taxed companies. But in revenues collected through taxation,the citizens,through their representative,at least exercise control over how these revenues are spent. If compulsory CSR is enacted we are in this anomalous situation. Government is exercising its coercive powers to get companies to pay out something. But it exercises no power over what the money is spent on. With taxation there is a process of both public justification on collecting and on spending it. With compulsory CSR,giving will be compulsory; but the spending of money generated through compulsory giving will not be subject to public justification.

The clamour for CSR is coming in a context where the government is itself confused about whether it wants to promote NGOs or make life more difficult for them. On the one hand,things like the new Direct Tax Code will make it more difficult for the NGOs; and the ambit of tax-exempt activity is being narrowed. In addition,the government has not really ever supported taxation regimes that would help encourage genuine giving,like estate taxes. On the other hand,we keep making a big deal about state nudging more CSR.

Government is not able to properly enforce the few rules on companies it ought to,in areas ranging from governance to environment. Governance and administration is,in all areas,a scarce resource. Needlessly multiplying directives is to stretch this scarce resource even thinner. By multiplying the facets on which corporates are held accountable to include CSR,the government will only ensure that private entities are subject to more potential harassment. Remember,part of the allegation against A. Raja is that he sought to direct Tata trusts to good causes of his choosing. Making the system awash with CSR funds,under the supervision of the state,sounds like a backdoor way of the state redirecting favours from corporates.

Finally,as Ajay Shah pointed out,there is something odd about companies,as opposed to individuals,furthering social goods,beyond the direct interests of profit and their long-term sustainability. There is no doubt that we would all be better off,if the wealthy regarded themselves as trustees and directed their private wealth for social purposes. A socially enabling environment for that would be desirable. But compulsory charity is an oxymoron. It violates both the ethics of compulsion and the meaning of voluntary furthering of social goods. CSR may seem like a marginal matter. But it is symptomatic of the confusion of our times.

The writer is president,Centre for Policy Research,Delhi
express@expressindia.com

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