The Unintended Consequences of India's CSR Law

The Unintended Consequences of India's CSR Law

The CSR tax is just one policy instrument of many for governments to advance social policy goals. The question is whether it is effective.

Tima Bansal, Ivey Business School, Western University, Canada
Tima Bansal, Ivey Business School, Western University, Canada
India is showing corporate leadership on the world stage. Since 2013, large, profitable companies are required to pay 2 per cent of their net profits to improve Indian society. The money is to be spent on important societal issues, such as poverty, education, and the empowerment of women. To my knowledge, no other government has stepped up to legislate corporate social responsibility (CSR).

Most governments do not legislate CSR. Rather, they tax companies and reallocate the funds themselves. In that way, governments can prioritise social issues, rather than leaving them in the hands of corporations. One has to wonder if India's approach is visionary or whether it is short sighted.

CSR Legislation is Visionary

Legislating CSR clearly has its benefits. The most obvious benefit is that it will generate a significant amount of money for social causes. Charitable contributions are expected to grow from $600 million to $2 billion annually. The number of schools that can be built, teachers hired, and mouths fed with this amount of money is significant. This legislation will lead to a direct transfer of wealth from the owners of capital to people who have never had the opportunity to acquire capital.

As well, this policy is likely to build a culture of CSR among corporations. By requiring corporations to give to charitable causes, companies will build the corporate processes and relationships that will facilitate CSR. This will force companies to think more deeply about their role in society, rather than just paying more taxes to government. Charitable giving will become part of the corporate DNA. Furthermore, recipients of the CSR funds will start to see businesses as partners and not just part of an elite capitalist class.

This is the story that the government is likely hoping will occur. There is a darker side that could create unintended consequences.

CSR Legislation is Short-Sighted

In 1962, Milton Friedman wrote in his seminal book, Capitalism and Freedom, that "there is one and only one social responsibility of business-to use its resources and engage in activities designed to increase its profits ..." He argues that corporations are tasked to make money. They cannot be responsible, as this is the domain of individuals. The only responsibility of business is to make money and to distribute this money to their shareholders.

Friedman also argues that corporations do not have the skills to know how to alleviate poverty, educate the uneducated, and empower women. Instead, they know how to produce goods and services at the lowest cost possible, and sell them for the highest price possible. In many cases, these very activities are at odds with CSR, such as paying people low wages on temporary contracts with poor long-term benefits.

It is hard to reconcile the idea that corporations will disburse funds to the underprivileged, while at the same time profiting from low paid labor. Although some corporations may be benevolent, the corporate framework has been established to foster short-term self-interests.

Social problems, however, do not require handfuls of money to resolve them. Many problems are systemic and require long-term sustained commitment. Money can sometimes exacerbate these issues, rather than resolve them.

For example, building schools and providing teachers are often seen as the solution to the lack of education. In fact, these activities are among the most favored among Westerners, as it captures their hearts, minds and pocket books. However, poor education and illiteracy are often not the result of poor schooling; they are often a result of poverty so that children are needed to work at home or in a factory. Education is often symptomatic of other issues and cannot be resolved by quick fixes.

Changing mindsets and changing systems take time. Yet, the CSR legislation requires funds to be distributed annually and companies look for immediate results. They want to see their changes quickly. Building schools and staffing teachers provides corporations the visible artifacts that reward their CSR efforts. The CSR law could likely lead to window dressing or green washing.

Should Business be Determining Social Priorities?

But, there is a deeper, more philosophical question that should be asked. Should corporations be determining social priorities? It is widely assumed that the role of government is to protect the social good. Even Milton Friedman would agree. If government abdicates that responsibility to business, then will business become government. Do we want business to determine who should receive affordable housing, where schools should be built, or which communities to police and protect.

How Business Can Do the Most Good through CSR

India is experiencing a natural experiment. The legislation is enacted, so the consequences of the policy will be revealed over time. The success, I believe, is now in the hands of business. They can use their money for tackling some of India's most deeply rooted social concerns, or they can use their money to advance business interests. If they choose the former, I have a few suggestions.

1. Do what you know. Whereas CSR can be seen as philanthropy, it is likely to have the greatest impact if the money spent accords with current business activities. Food businesses can help feed the poor. Construction companies can hire local labor or build affordable housing. Telecom companies can provide free cellular airtime. By sticking with what you know, you are likely to have more positive impact, while building your reputation as a community-based organisation.

2. Work with research institutions. Universities house people who are entrenched in data and care deeply about social issues. Researchers can provide evidence and insights in the best ways to address social issues and serve as objective arbiters in mediating between partners with competing interests.

3. Engage the recipients. It is much easier to hand people money than actually hear their issues. When corporate employees sit with target communities, they will build empathy and find creative solutions to addressing problems.

4. Collaborate with NGOs. Programs are best delivered by on the ground, who can see the impact of the new programs. Find legitimate NGOs who will work with you, speak candidly with you, and execute the program. Businesses should do what they do well and make money; social enterprises can do what they do well and fix social problems.

The author is Professor and Canada Research Chair in Business Sustainability at the Ivey Business School, Western University, Canada.

(An earlier version of this column had inaccuracies and was erroneously uploaded.)