Don’t carry CSR overboard: Financial Express, 30th June 2011

Philanthropy is a good thing to talk about, and the visit of Warren Buffet to India has added more spice to the art of giving, which is what everyone wants others to do today. Several corporate honchos have gone on to have it well publicised that they give an awful lot of money for the needy and several pages in the media have been devoted to the same. At another level, it is averred that philanthropy should always be anonymous or else it is the cost of branding, of either the company or the individual. It works well both ways and is a win-win situation for everyone.

At a more serious level, it has been argued that companies should devote a certain amount for CSR (corporate social responsibility) or, more specifically, set aside money for the poor or social causes that are distinct from making statements on saving the planet. In fact, critics say that this should be mandatory and must be reckoned as a fixed percentage of their profits. This is so because society enables corporates to grow and prosper. Hence, it becomes obligatory for this sector to give something in return. Is there merit in this argument?

If one takes the overall net profits of the corporate sector, it would have been around R3.2 lakh crore in FY10. This is substantial and would be around 4% of India’s GDP at current market prices. Taking a portion out (1% would mean around R3,200 crore) can be benchmarked with various development schemes that will help society at large. Or so the argument goes.

While CSR is a good idea, it cannot and should not be made mandatory. Corporates are like any entity in the country that work for a profit and abide by the rules of the game. Therefore, taxes are paid and several other regulatory covenants are adhered to in the process. There would be a lot of lobbying going on to seek concessions but that is another issue as they are decided on merit. Therefore, we should not be going beyond the rules already laid down. If it were done, then it should be extended to individuals too, as there are several millionaires in the country who could contribute to CSR by the same logic.

There are essentially three arguments that can be made in this context. First, let us go back to the world of Adam Smith, which we are trying to pursue based on free markets. In this capitalist society driven by markets, private enterprise works with self interest in mind to earn profits. The government lays down the framework and ensures that the rules are obeyed. As we never do have a fully capitalist system, the government also enters economic activity and undertakes projects, for which we have the Budget and the entire tax system. At times, the government could go a step ahead and earmark specific charges in the form of additional taxes or cess for specific purposes. This goes for drought relief or education and is levied universally on all entities, which are fair measures. Instead of charging a corporate tax rate of, say, 30.6%, it is broken up into 30% tax on which there is a cess of 2%. The idea is that there is transparency insofar as the money from this additional charge is earmarked for a purpose. This being the case, CSR cannot be imposed beyond the realm of the tax system.

Second, it should be recognised that a company belongs to investors finally as the shareholders have made investments in the enterprise. While they could vote for such an allocation, it can never be made a rule for all as it comes in the way of economic freedom and imposes an additional cost to running an enterprise. Any mandatory move should be opposed, though corporates can always be made more responsible for the harm that may be coming about on account of their business activity. Asking them to pay for fuel emission is okay while asking them to donate to the poor is not in order. It has to evidently to come from within and we cannot stand on any such judgement.

The third is, even if we make it mandatory, who will administer the same? The public sector is considered to be inefficient when it comes to creating social infrastructure. Currently, there is little accountability for the money allocated for, say, health and education in the Budgets. We have hospitals without doctors and schools without teachers. These are issues beyond the leakages that are there. It is not surprising that even when corporates indulge in philanthropy; it goes in the name of the organisation or person because keeping it within one’s own purview makes sure that resources are better utilised. However, the core competence of companies is in specific lines of business and diversification into social infrastructure is inefficient.

Addressing the concerns of the poor is a public sector issue that has to be addressed separately by the government. Asking the private sector to mandatorily pitch in is against the grain of free enterprise and imposes costs, besides leading to undesirable and inefficient solutions. This should be opposed.