Want a free run, behave responsibly

Published: Financial Express, August 05, 2002
By Pradeep S Mehta

Once during the board meeting of the Life Insurance Corporation of India (LIC), a peculiar situation arose. Firstly, the board’s approval was sought for a donation to a cancer society. Secondly, money was sought to be earmarked for an ITC-sponsored sports event.

I pointed out the contradiction between the two sub-items, one helping cancer victims, and the other supporting a cancer-causing business. I argued in vain that it is socially irresponsible for the LIC to either sponsor or invest something in such industry, which is health hazardous. I was overruled by the board. They said that as far as the Government of India doesn’t prevent them from investing in such companies, they will continue to do so. The only concession I gained in this battle was a resolution that they would no longer co-sponsor any event, which is being sponsored by a tobacco or liquor company.

Indeed, people invest in tobacco or even liquor companies as shareholders and the company ensures a good return on their investments. But that is not the only thing which is the issue here. Businesses need to work in a socially responsible manner, which goes beyond shareholder satisfaction. It covers employees, consumers and community generally, and compliance with the laws. All things which are required for being a good corporate citizen.

The simplistic view that seemed to prevail even in the early 1990s that business leaders need to focus single-mindedly on shareholder value as determined by the share price, and that financial analysts are the best judges of business strategy, may have clouded better judgements. However, in today’s world the old business strategy of maximising profit, neglecting the social, economic and environmental impacts of its operations maybe a recipe for disaster.

There are at least two good reasons why business must live up to its broader role in society. The first is responsibility that comes with freedom. Increasing freedom from controls on business and the growing respect for market institutions in the later part of the century, accompanied by the decline in the role, resources, and even respect for governments, has given more power to business leaders. With this power comes the responsibility for making sure that right things are done in society.

From the time of Adam Smith to Mahatma Gandhi to the doyen of modern management, Peter Drucker, it has been argued that businesses cannot function in vacuum. Gandhi and Drucker stressed the social responsibility dimension by defining entrepreneurs, owners and managers as trustees for future generations. They need to look beyond the selfish needs of the individual organisations to ensure not only continuity of capital but also the establishment of socially useful and productive capital.

The second reason is that the backlash against globalisation by a rapidly globalising civil society can destabilise the highly profit-oriented operations of the corporations. This battle is against the growing influence of business, who wield disproportionate power over national and international institutions. Many of the top 100 corporations in the world have revenues, which are greater than most countries of the world. In the past when the countries were not so closely integrated, businesses viewed different markets in isolation. But today even one act of irresponsibility in one market will create ripple effects throughout the world as we are living in a globalised environment, with very fast information and communication processes.

Way back in the late thirties more than 100 people died from drinking Elixir Sulfanilamide, a form of sulfa medicine that was manufactured and sold in the United States. The company continued to do good business even after such a disaster. But in today’s world it would not be so easy to remain in business after such a scandal. Today Enron is a household name, of course, for a wrong reason. Andersen lost many of its important clients throughout the world after the Enron debacle.

Thus, though the corporate manager’s job is to maximise shareholder value, at the same time they should return something to the larger community, which they function in. And it makes good business sense also because it is not only the employees who want to be associated with corporates with a good public image, but also because the customers want competitive products, which are manufactured in a socially responsible manner.

Corporate social responsibility (CSR) is a constantly evolving concept, where the concepts of work and industries are constantly shifting to adapt to new paradigms. CSR still remains poorly defined. In the US, for example, it is considered by many as charity performed by businesses. At the same time, the current focus on the transparency, corporate governance and responsible behaviour has propelled CSR from a quiet corner of the corporate world to centrestage—and managers are struggling to catch up. The value-addition of CSR is quite evident. There have been many studies purporting to prove that it improves profits but they are not entirely convincing.

Craig Smith, associate professor of marketing and ethics at London Business School, has identified 80 studies. Of these, 42 demonstrated a positive impact, 19 found no link, 15 produced mixed results and only four showed a negative impact. There are companies that have managed to turn a commitment to CSR into financial success. UK-based Co-operative Bank’s policy of ethical investment has helped to turn it from loss making outfit to profit making one and to bring a nearly fivefold increase in customer deposits in 10 years. An independent cost-benefit analysis in year 2001 estimated that the bank’s environmental and ethical policies accounted for between 15 per cent and 18 per cent of its pre-tax profits.

An industry accumulates significant wealth by creating and responding to market demand while ignoring the social or environmental consequences of their business practices. Once the impact of bad corporate behaviour becomes severe and obvious enough, the backlash promotes a change in practice.

This is a cycle, which could be radically compressed, putting the cost of litigation and image-rebuilding back into the bottomline, if the owners of corporations used CSR mechanism and acted in their own self-interest to motivate management to take a long-term view and respect the world around them.

In India businesses detest regulation. Whenever government talks of any regulatory initiatives, they find the ghost of licence-permit raj in it. They want more freedom. The opposition to the proposed competition law is a case in point. But can they guarantee that they are not indulging in anti-competitive practices?

Are many of them not colluding in every which way and exploiting consumers? The recent opposition to the enactment of a law to recover non-performing assets is a joke. They must not forget that SEBI was created after the stock market scam engineered by Harshad Mehta. Thus if they really want freedom so that they can productively use their resources in pursuance of their main goal of creation of wealth, and also contribute to the society, they must behave in a responsible manner so that they are subject to minimum regulation and no over-zealous application of regulatory measures.

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