It’s Time to Balance Profits and Social Good
BY TRANSCEND MEMBERS, 4 Mar 2019
“In a free enterprise, the community is not just another stakeholder, but is in fact the very purpose of its existence.”
— Jamshedji Tata
28 Feb 2019 – When we flip back through the business history of the world, we find that all large mercantile communities were great patrons of the art of philanthropy. They regarded it a divine tradition. The world is witnessing a growing realization in businesses of an important need for playing an active role in improving the world for the better. Hence, a great deal of money has been flowing into the social sector. Like individual citizens who have moral and social responsibilities, businesses are being perceived as corporate citizens who need to commit a part of their time, talent and resources for the welfare of the society as they draw their sustenance from it. This idea has now been corporatised under the appellation, ‘Corporate Social Responsibility’ or better known by its acronym, CSR.
CSR is a very broad concept that aims at managing a business in a way that it contributes towards sustainable development by delivering social, economic and environmental benefits to all its stakeholders. It addresses many and various topics such as human rights, corporate governance, health and safety, environmental effects, working conditions and contribution to economic development. Whatever the definition is, the purpose of CSR is to drive change towards sustainability.
We are seeing the emergence of a new crop of mega donors who are upending long established norms in the staid world of big philanthropy. Not only are they increasingly willing to take on hot-button social and political issues, they also have a problem-solving and impact-making mindset. CSR is now being recognized as critical component to an organization’s values, its operating ethos, its business strategies and its purpose. Businesses are being measured on both on financial and social metrics.
The World Bank Council for Sustainable Development defines CSR as the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community. The core idea of these different definitions of CSR is that companies should conduct their business in a manner that also addresses the broader social environment. As William Clay Ford Jr said, “Creating a strong business and building a better world are not conflicting goals – they are both essential ingredients for long-term success.”
There have been so many voices within businesses who believe that business must break out of its conventional preoccupation with profit and do more to meet the world’s pressing social needs. The chorus has been joined by leaders from civil society; government, policy think tanks and world bodies on education health and rehabilitation. Business leadership has acknowledged the demand for enlarged corporate responsibility in ways which can reflect a profound attitudinal change individually and collectively.
As Benjamin Javits observed in his famous book, Ownerism: A Better World for All Through Democratic Ownership, “There is no longer doubt that business feels it must contribute meaningfully to the social health of the nation. Our problem now is learning how to work more effectively, both in the total community and with our new partners from Government, labor, and the body politic.”
CSR is however not a new concept. Gandhi’s theory of the ‘trusteeship’ is grounded on the same principles that enshrine the CSR philosophy. His idea of Trusteeship rejects both the capitalist and communist systems as practiced today. Although he could not get enough time to spell out his entire philosophy, he considered trusteeship a comprehensive system that could replace both exploitative capitalism and bureaucratic statism because, as he himself said, “no other theory is compatible with Truth and Nonviolence.”Gandhiji used the analogy of a man owning an industry to elaborate his understanding of the idea. As a trustee, the owner was, first and foremost, expected to:
- Work just like any other employee.
- Look upon his employees as members of his family who would be jointly responsible for making management decisions.
- To take no more than what he needs for a moderately comfortable life.
- Provide healthy working conditions and proper welfare schemes for the workers and their families.
- Make a moderate profit, a part of which would be devoted to the welfare of the community and the rest to the improvement of the industry.
- Regard himself as a trustee of the consumers and ensure not to produce shoddy goods or charge unfair prices. This applied to the employees as well who need to work in an ethical manner.
- Pass on the industry to his children or whoever he likes only if they agree to run it in the same spirit of the trusteeship.
The doyen of India’s industrialization, the legendary JRD Tata carried forward the Tata legacy of socially responsible business with still greater vigour when the corporate world in India had not even given a thought to it and considered Tata’s philosophy as a socialist ideal. He emphasized: “Let industry established in the countryside “adopt” the villages in its neighbourhood; let some of the time of its managers its engineers doctors and skilled specialists be spared to help and advise the people of the villages and to supervise new developments undertaken by cooperative effort between them and the company.”
The general sentiment for a long time was that for businesses, earning a profit should take precedence over ideals like, acting responsibly and ethically .many companies are paying only lip service to doing their bit.
India is the first country to mandate that the companies expend at least 2% of their net profits on special development projects. .It has a unique law— Corporate Social Responsibility (CSR) Rules in the Companies Act, 2013 —which came into effect on April 1, 2014.The mandatory funding applies to companies with a turnover of Rs 1,000 crore or those reporting a profit of over R s5 crore in a year
However, there is a crucial difference between the way CSR as implemented in western countries and in India. A generally accepted gold standard for CSR in the western world is that it must be closely integrated with a firm’s business strategy so that the programmes create a shared value for the company’s shareholders .In India, this linkage is explicitly prohibited for CSR; the focus restricted solely on contribution towards societal welfare.
The CSR rules in India also specify that expenditures that benefit the company directly or its employees will not qualify for CSR activities. The amount should be deployed directly for larger societal needs .The CSR rules require every company with a net worth of Rs 500 crore, or a turnover of Rs 1,000 crore or a net profit of Rs 5 crore or more during any financial year to constitute a CSR committee of the board of directors. This committee will recommend to the board a CSR policy as well as the amount of expenditure to be incurred on CSR activities and monitor the implementation of this policy. The company is required to disclose its CSR policy in its annual report and on the company’s website.
Experience the world over shows that CSR is more socially relevant when it is driven by altruistic motives rather than being a mandated policy commanding philanthropy. It is very difficult to legislate moral obligations have to be inculcated, not legislated. Laws can set the minimum standards, but they cannot create an environment or ambience for a philanthropic mindset. This is precisely the reason why we see marked aberrations in the CSR agenda of most corporations. Many businesses harbor a variety of secondary aims and often use CSR for boosting their social profile and business markets. Such lack of well-intentioned commitment has been detrimental to this noble philosophy.
Challenges do exist. It is true that since there are so many causes competing for attention, it may not be possible for organizations to have a universally inclusive mission. Studies suggest that charity leaders have a geographic bias with corporations homing in on projects closer to their headquarters. Consequently, more remote regions where development aid is acutely needed are being ignored. Politics can also skew priorities, with companies looking to gain political goodwill by funding government-led projects rather than initiating more socially relevant initiatives which are thirsty for funds.
According to India CSR Outlook Report 2018, there has been a substantial increase in Spending on Corporate Social Responsibility (CSR) which was Rs 8876 crore in 2017-18, as against Rs 8194 crore in 2016-17, Rs 7324 crore in 2015-16 and Rs 5775 crore in 2014-15.
Even as annual CSR expenditure is on the rise, the impact on the ground remains a matter of debate. CSR has usually been peripheral in most organizations and it is not woven into the texture of business. Further, it is not always necessarily transparent or mission oriented. It may be used for enhancing the brand reputation or to provide a cover of moral counter balance for brushing off a besmirched public image or for camouflaging dark acts. There is always a creative tension between social mission and business goals.
Moreover, a significant amount of any CSR expenditure comes with strings attached .There are terms that dictate exactly where and how funds must be used. While this may be appropriate in some cases, it reflects a serious lack of trust in the non-profit entities and hinders their ability to operate effectively. When donors insist that their money should go exclusively to the people served, there is not enough money left for the non-profit entities to focus on building their own organizations .They are, therefore, unable to invest in talent, technology, systems, or reporting. Reporting requirements are often an onerous administrative burden on these small organizations which have to devote their scarce skills to educated, English-speaking personnel for writing reports for the donors rather than running the programmes.
There are so many small organizations that handle all of their international consultancy work in-house. They could easily have given contracts to the swelling band of starry-eyed consultants but they chose not to. Instead they send their own staff, so what the world sees of these organizations is not polished international jet-setters but men of modest backgrounds and Basic English language skills, lacking fluency but single-mindedly committed to getting on with the job. They are happy to work long hours as long as they can find somewhere to cook essential food and sleep peacefully. Having come up the hard way, they are used to being relocated to different projects in the most inhospitable environments.
These development agents are the right conduits for reaching the deeper backwaters which have tougher geographical terrains and are centres of social schisms and extremist ideologies. In such regions donors also need go beyond the sacred Trimurti -sustainability, replicability and scalability which should be restricted to mainland organizations. Too much insistence on technicalities leaves genuine development work out of the CSR net. A worm’s eye view is as critical as a bird’s eye view to ensure that projects deliver visible and lasting outcomes and a leave a larger and lasting imprint.
A more important aspect of CSR that needs greater attention is the need for embedding CSR values in employees. It is only when employees align their social philosophy with that of their employers that real benefits of CSR can materialize. A meta-analysis of 199 studies on volunteering programs, covering 152 organizations, 44 industries, and 26 countries, conducted by Gallup suggested that a high employee engagement in organizations’ employee volunteering program increased business performance numbers across the board: Profitability increased by 16 percent per productivity by 18 percent, customer loyalty by 12 percent and quality by an incredible 60 percent.
Experts share some ways in which volunteering contributes to business success:
- Recruiting Advantages:Millennial prefer employees whose community activities match their values.
- Better productivity:Increases employee morale and satisfaction, boosting productivity.
- Better corporate visibility:Creates the image of a socially responsible workforce.
- Vision building :Leads to broadening the mental horizon of employees.
- Team Spirit:Builds team spirit and camaraderie within teams.
- Empathy: Leads to employees inculcating empathy becoming more sensitive to both peers and clients.
- Better client engagement:Companies keen to work with socially responsible companies.
A sincerely and honestly practiced charity always delivers rich dividends in the long run. That is the lesson we learn from both philosophers and business leaders. It is wise to remind ourselves again of the advice of Henry Ford: “A business absolutely devoted to service will have only one worry about profits. They will be embarrassingly large.”
Moin Qazi, PhD Economics, PhD English, is a member of the TRANSCEND Network for Peace Development Environment and a member of NITI Aayog’s National Committee on Financial Literacy and Inclusion for Women. He is the author of the bestselling book, Village Diary of a Heretic Banker. He has worked in the development finance sector for almost four decades in India and can be reached at email@example.com.
This article originally appeared on Transcend Media Service (TMS) on 4 Mar 2019.
Anticopyright: Editorials and articles originated on TMS may be freely reprinted, disseminated, translated and used as background material, provided an acknowledgement and link to the source, TMS: It’s Time to Balance Profits and Social Good, is included. Thank you.
This work is licensed under a CC BY-NC 4.0 License.
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