CSR may not be a game-changer

May 10 2014, 04:03 IST
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SummaryBut decentralised spending by companies may promote efficiency in project choice and implementation

Discharging corporate social responsibility (CSR) is now mandatory in India. According to Section 135 of the Companies Act, 2013, every registered company, above a minimum size, has to spend at least 2% of its net profit on CSR activities every year. The provisions of Section 135, which came into effect from April 1, 2014, are seen by many as corporate sector’s contribution towards the development of the nation.

However, there is considerable debate regarding whether companies should be mandated to discharge CSR. Proponents of mandatory CSR argue that companies that use national resources and infrastructure facilities provided by the government have a responsibility that extends to the society at large, beyond those of the company’s immediate shareholders and stakeholders. This idea is encapsulated in the triple-bottom-line approach that emphasises a company should balance economic, social and environmental objectives (ESG) while addressing the expectations of its shareholders and stakeholders. Many believe that investors use the ESG framework to evaluate corporate behaviour and to determine the future performance of companies.

Others are, however, cautious on the issue of mandated CSR. Many believe that stakeholder value maximisation, which forms the basis of CSR activities, is inconsistent with efficient operation of a company. The multiple objectives that the stakeholder theory envisages distort managerial incentives as it is not clear what the manager should maximise. What will be the weights on the different objectives of the different types of stakeholders and who will determine them? There is also the possibility that managers may strategically use stakeholders’ value maximisation as a pretext for making personal gains. A very strong form of this view is reflected in the Friedman doctrine that “the only objective of the corporation is to maximise profit and any social responsibility beyond this should be deemed as corporate social irresponsibility.”

In addition, there is also the concern that mandated CSR may impose disproportionate cost on smaller and younger companies for whom net profit (or internal sources of capital) forms an important source of funds for investments. Forcing such companies to make mandatory CSR expenditure increases the opportunity cost of funds as existing research has shown that smaller and younger companies are the predominant drivers of long-run growth of nations. Thus, many believe that economic efficiency dictates CSR spending should be made voluntary and companies would undertake it if the perceived benefits at the margin outweigh the opportunity cost. It is in this spirit that most countries

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