August 5, 2019The Intersectioneconomicspublic policy

The case against mandatory corporate social responsibility

Mandatory CSR regulations never made sense to start off with. They have now become obligations that will add to the already stifling compliance burdens that companies face.

Mint This is from The Intersection column that appears every other Monday in Mint.

To mandate that private firms donate a part of their revenues to charitable causes is to profoundly misunderstand both the social responsibility of corporations and the meaning of the word donation.

Yes, companies have a social responsibility, but it is not to engage in philanthropy. Rather, their fundamental social responsibility is to generate wealth for their shareholders in a law-abiding, ethical and sustainable way. When they do that, they generate surpluses for society, provide consumers with goods and services that they need, create employment, purpose and dignity among workers, and strengthen the nation. To the extent that they do this, they have completely discharged their corporate social responsibility. So let’s be clear: a profitable, well-run corporation does more for India and its people than any charity could possibly do.

What about social welfare, help for the needy and worthy causes that need financial support? If the issue involves providing public goods like education, public health, safety and environmental protection, what are taxes for? It is for this purpose that we pay taxes, not for the government to pour more money into loss-making airlines, run soap companies, employ a salt commissioner and subsidise the undeserving in numerous ways. Sure, even the most fiscally responsible governments cannot cover all the gaps, which is where philanthropy comes in. But philanthropy is a private matter—it is up to the individual to decide whether, how much and who to give to. The government can encourage this—through tax deductions, public acclamation and moral suasion—but has no business intervening in those decisions. In other words, shareholders and employees, as individuals, should be giving money to causes that they like. The right role and the right balance between corporate profits, government taxes and individual charity promote social welfare.

Which is why mandatory CSR is a terrible idea, born out of the Congress Party’s distrust and misunderstanding of markets and capitalism. To compound that, as the Modi government has now done, with forced expropriation of unspent funds and the introduction of jail terms for non-compliance is terribler. The correct thing to do would have been to do away with mandatory CSR, and instead lower corporate taxes, and if need be, introduce tax deductions for certain activities that the government wishes to promote.

The only good reason I can think of to encourage CSR is to allocate funds into activities that a government of a low-income democracy cannot. Faced with immense developmental challenges, our governments cannot easily justify allocations for world-class art galleries, museums, theatres, sports facilities, research institutions and so on. Yet, without aesthetics, arts, sports, science and cultural life, India will remain poor in other senses of the word. Poverty is not merely about lack of income, it is also about a lack of dignity. We will remain poor if incomes improve, but dignities do not. That is where individual philanthropy and CSR can be useful — they can support causes that democratic politics won’t allow the government to.

However, if you look at corporate India’s CSR allocations, you’ll find the bulk of it going into education, health, rural areas, environment and so on. The point is not that this money doesn’t help — it does make a difference to the lives of the beneficiaries — but that it is like a flea riding on the back of the elephant. A few thousand crores of CSR money over and above hundreds of lakhs of crores of government expenditure for the same purposes. Does an extra one-tenth of a decimal point make a difference to the big picture?

Corporate executives are often unable to decide on the best social use of CSR funds because they are not equipped to do so. Nor should we expect them to, for their job is to run companies and create wealth. We can’t blame them for buying into the anti-poverty narrative and allocating CSR funds into safe’ activities, the equivalent of nobody gets fired for buying IBM logic. The UPA government must be blamed for prescribing what activities constitute CSR and what do not. India first legislated that the flea must follow the elephant. With this year’s changes to the law, the government will grab errant, lazy or adventurous fleas and force them to sit on the elephant.

Do not get me wrong. By using the flea metaphor, I do not intend to demean CSR contributions or the causes they support. Rather, I am using it to give you a sense of proportion. The same flea can be quite a large creature if we look at it at a different scale: a few thousand crore rupees could create Olympic athletes, enduring cultural institutions and beautiful public spaces, things that enrich India.

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The mandatory CSR regulations never made sense to start off with. They have now become obligations that will add to the already stifling compliance burdens that companies face. They will only get worse. To what end? Why choose such an expensive way to launder our conscience when simpler methods—like reducing taxes to promote growth—have proven to be a lot more successful in improving the lives of our people?

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