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.
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.
(The writer is a Distinguished Teaching Professor at the University of Texas at Austin. He acknowledges input from Professor Robert Prentice. E-mail: firstname.lastname@example.org)