Enforcing Corporate Social Responsibility

The whole issue of the responsibility of a corporate entity to the community in which it operates, whether in mineral extraction, manufacture, trading or providing other services came into the fore front in 1984 after author R. Edward Freeman published his landmark publication ‘Strategic Management – A Stakeholder Approach’.

Freeman developed an argument that an entity which operates in a social environment has a duty to be fair and just by all the stakeholders who engage with the entity. This would include investors, employees, consumers, those living in the community and all those in the supply chain.

Mere satisfaction of investors with a return on investment, or satisfaction of the consumers with a competitive product at a reasonable price and good after sales service, or mere compliance with the laws and regulation concerning the protection of the environment, land, forests, water and air in the vicinity and where the raw materials are resourced or extracted, and compliance with revenue and tax laws, etc., would not be sufficient for a corporate which had a social conscience. The entity would have to acknowledge that there was a wider range of stakeholders, to whom the corporate would be answerable.

In the United States of America where litigants are allowed to file ‘class actions’ against a corporate whose actions have affected them, in the field of environmental law and file civil damage claims, this capacity has vastly extended the ambit of responsibility of corporate entities for abuse of the natural environment. This concept has come to be termed as Corporate Social Responsibility (CSR)

Social responsibility

This aspect of corporate self regulation has today been extended to a social responsibility – the duty of a successful corporate entity to carry out targeted social development interventions to assist and help targeted marginalised and poor segments of society. Today CSR has become a tool to assist an organisation to establish a minimum standard of conduct regarding its responsibility to all stakeholders in the widest sense. This is a sea change from the earlier dictum enunciated by Paul Samuelson and a group of economists of the University of Chicago, commonly referred to as the Chicago School, that the duty of business is to make profits and no more. There is now a recognised international standard for CSR – ISO 26000.

Private organisations and the UN system adhere to the Triple Bottom Line, factoring in all aspects including profitability, social commitment and environmental sustainability etc, when computing and evaluating a bottom line assessment of an entities performance. The United Nations also have formulated a set of principles for Responsible Investment for corporate entities investing in other nations.

Critics and detractors like Samuelson of the Chicago School emphasise the economic role of business, the duty to be profitable. They treat run-of-the-mill CSR activities as an attempt to pre-empt government regulation, which may try to legislate a ‘conscience commitment’ for industry and business. These aspects have been exhaustively covered by Prof. Michael Porter , Head of the Institute of Strategy and Competition at the Harvard Business School and Prof: Mark Kramer , Senior Fellow at the Kennedy School at Harvard university in an article in the Harvard Business Review, ‘Strategy and Society; The Link between Competitive Advantage and CSR’.

Philanthro-capitalism

Philanthropy is the practice of helping the poor, especially by giving money. Capitalism is an economic system in which a country’s businesses and industry are run for profit by private owners. These two concepts combined, have come to mean an increasingly businesslike approach the wealthy have taken to the charitable work they earlier only funded, they are getting directly involved in the projects.

The flag carrier for philanthro-capitalism is the founder of Microsoft – Bill Gates. Gates has left Microsoft to take charge of the Bill and Melinda Gates Foundation. In 2007, Gates the speaker at the Harvard University’s Commencement, gave a powerful answer to the question as to why he is a philanthro-capitalist: “If you believe that every life has equal value, it’s revolting to learn that some lives are seen as worth saving and others are not. Melinda and I said to ourselves: ‘This can’t be true. But if it is true, it deserves to be the priority of our giving.’ So we began our work in the same way anyone here would begin. We asked, ‘How could the world let these children die?’ The answer is simple and harsh. The market did not reward saving the lives of these children, and governments did not subsidise it. The children died because their mothers and their parents had no power in the market and no voice in the system. But you and I have both. We can make market systems work better for the poor, if we can develop a more philanthropic-capitalism – if we can stretch the reach of market forces so that more people can make a profit, or at least make a living, serving people who are suffering. We can also press governments around the world to spend taxpayer money in ways that better reflect the values of the people who pay the taxes. If we can find approaches that meet the needs of the poor in ways that generate profits for business and votes for politicians, we will have found a sustainable way to reduce inequity in the world. This task is open ended. It can never be finished. But a conscious effort to answer this challenge will change the world.”

Recently, investor Warren Buffet, the Sage of Omaha, agreed to hand over the bulk of his fortune to the foundation run by Gates. Buffet recently summoned a group of likeminded billionaires to a meeting and got them to commit a large part of their fortunes to philanthro-capitalist initiatives. They signed onto the ‘Giving Pledge’. This concept of the Giving Pledge has reached India too. Wealth creators like Azim Premji of Wipro and Shiv Nadar of HCL have transferred millions of rupees worth of shares to endow foundations to tackle social issues.

Paul Tudor Jones, a hedge fund manager, founded the Robin Hood Foundation in the late 1980s. It has raised more than US$ 1 billion to fight poverty. The foundation’s Board members cover the administrative overheads of Robin Hood, all donations are directly spent on anti-poverty efforts in four key areas – early childhood and growth, education, jobs and economic security. Robin Hood also rigorously evaluates the programs and projects it funds and provides an honest appraisal to its donors.

Billionaire and legendary investor George Soros has long planned to give away the bulk of his fortune. Aged 80 now, he no longer believes he can donate all his estimated US$ 14 billion in his lifetime. On 17 September 2010, he gave Human Rights Watch US$ 100 million; the gift will be paid out over the next decade on the condition that every dollar of Soros’ must be matched by another dollar from another source.

Oprah Winfrey, through her Angel Network in the United Sates, uses her enormous popularity as the USA’s most-watched talk show host, to publicise and hold accountable worthy projects and invites her viewers, even if they can donate only small amounts of money, to support them. Oprah covers the costs of management, fund raising and other operating costs, in order that all donated funds ‘go to help underserved people rise to their own potential’.

Philanthro-capitalism is not confined to the West, like the Giving Pledge taking root in India, recently N.R. Narayana Murthy, a co-founder and Chief Mentor of Infosys, India’s leading BPO software company, and his wife Sudha, declared an intention to give their wealth to charities working in basic healthcare, basic education and basic nutrition.

A Sri Lankan example of philanthro capitalism would be the construction and donation to government in 1946 of the Homagama Hospital by the late businessman B.A. Semaneris Appuhamy. In 2007 his youngest son B.A. Mahipala, also a successful entrepreneur, constructed and donated a new building to this same hospital. The Bamunu Arachchi Foundation, which is the family’s charitable vehicle, is actively involved in the day-to-day support to this hospital.

The hands-on approach of philanthro capitalists reflects an increasing frustration in civil society and the business community with development and disaster mitigation politico-bureaucracies. The over heads are too high, governance is questionable, expatriate staff lifestyles stick in the eye of the poor and displaced. So mere giving money is not enough, let’s get involved, participate and ensure that we get a sufficient bang for our bucks.

Philanthro-capitalism has become institutionalised; in Britain the Institute for Philanthropy helps charities raise funds for good causes by providing donors with greater incentives for giving. The institute wants to be a catalyst, to use their networks and knowledge to develop organisations and ideas for the benefit of British philanthropy. Philanthro capitalism is clearly on the march.

A step further

Some countries have gone further than leaving corporate philanthropy, corporate self regulation and corporate social responsibility as a matter solely within the area of responsibility and authority of boards of director, corporate executives or even shareholders and wider stakeholders, who may be able to influence the corporate entity. They have actually enacted legislation, compelling corporate entities to act in a manner, which is deemed ‘responsible’ by the State.

An example in Sri Lanka is the revenue proposal known as the ‘Deemed Dividend Tax’. By this broadly, in the case of a profitable company, which has made an operating profit but has not declared a dividend for shareholders, the Department of Inland Revenue is empowered to ‘Deem a Dividend’ and recover it as a tax for revenue. This is not draconian as it sounds, as where the management of the company has made a genuine investment for the furtherance of the business objective of the entity, exemptions may be allowed. But still, it is clearly an invasion b the State revenue authorities into an area which hitherto was solely within the ambit of the manager, directors, owners, shareholders and other stakeholders of the company.

India

India has gone even further. The Indian Parliament recently enacted the Companies Bill 2012, which mandates certain companies, classified according to net worth, turnover and profitability, to allocate 2% of their profits to Corporate Social Responsibility (CSR) initiatives. The board of directors of the company is ‘entrusted’ with the responsibility, by the legislation, of ensuring that such an amount is actually expended on CSR activities, or when not in compliance with the provision of providing ‘detailed reasons’ for such non-compliance, which may attract regulatory intervention, in due course.

This provision in effect, for all practical purposes, makes the expenditure of 2% of the profit on CSR mandatory. Which corporate entity will welcome regulator sniffing around the reasons for not spending this 2% of profits on CSR activities? The law requires the company to have a CSR committee including an independent director as a member of the committee. This CSR Committee has a duty to formulate a ‘CSR Policy’ for the company and recommend CSR projects to the board of directors.

Some analysts question whether the imposition of such a CSR tax, in effect, is a violation of Article 19 (1) g, of the Indian Constitution. This guarantees the freedom to practice any profession or carry out any occupation trade or business. Article 19 (6) allows the State to impose ‘reasonable restrictions’ on this freedom. This means in effect the State cannot tell an India how to run his business, much less to compel CSR spend.

When CSR spend is compelled by law, it virtually amounts to an appropriation of resources by the State. Is it similar to our ‘Deemed Dividend Tax’? Gross interference of a nanny state on the freedom of enterprise, analysts contend. The decision to spend on CSR to pay a dividend is matter for the stakeholders of a company. Is this intervention the thin edge of the wedge? The state trying to order an entrepreneur on how to run and manage his business?

In Sri Lanka we have seen ceilings on income imposed by the State on everybody other than themselves and their acolytes! The Indian legislation has not been challenged in court yet. It is bound to be, in due course. The Constitution of Sri Lanka, in Chapter III on Fundamental Rights also has an Article- 14 (1) g: ‘Every citizen is entitled to the freedom to engage by himself or in association with others in any lawful occupation, profession, trade, business or enterprise.’ As in India there are restrictions on these fundamental rights provided by Article 15 of the Sri Lanka Constitution.

Sri Lanka

CSR is given a very high profile in Sri Lanka business circles. Top providers of CSR services are evaluated, judged, recognised and rewarded annually. Corporate annual reports are full of social development and service activities undertaken by them. CSR has become a major aspect in assessing the image of a corporate entity. Separate divisions have been set up to run CSR programs and projects.

In the USA there is some talk of mandatory CSR reporting. Corporates being compelled to spell out the parameters of CSR spending in their annual reports. But compulsory reporting is a far cry from being compelled by law to spend 2% of profits on CSR. Will other nations follow India’s step? Sri Lanka has already given the revenue authorities the power to ‘deem’ dividends. It will be interesting to watch developments.

(The writer is a lawyer, who has over 30 years experience as a CEO in both government and private sectors. He retired from the office of Secretary, Ministry of Finance and currently is the Managing Director of the Sri Lanka Business Development Centre.)