Corporate social responsibility needs more than government regulation to foster it. It requires a corporation to be mindful of its obligations to all its stakeholders – with regular reminders from civic and pressure groups.
Recently, the Indian Companies Act was amended to mandate that companies spend up to 2% of pre-tax profits on CSR. However, this is a measure that is too late and too limited in its scope. Trying to promote responsible corporate social behaviour based on a mere 2% spend is an idea that is beyond its expiry date.
The new law fails to recognize that a business corporation has to take care of all its stakeholders – and not just shareholders – during the course of its operations. These stakeholders include the government, customers, employees, vendor partners and society at large.
In order to survive in today’s environment, a corporation has to balance the interests of all these varied stakeholders. If it favors the interests of one over the other, it will jeopardize its own existence. There are several ways in which such a scenario could play out. If a corporation overcharges customers or delivers sub-standard products or services, it will lose business. If it looks for ways and loopholes to evade taxes, it will eventually have to pay these and more in the form of fines. If it pollutes the environment in a narrowly focused quest for profitability, it will, sooner or later, pay the price for these actions. If it chooses to squeeze or otherwise take advantage of its vendor partners, the latter will not want to do business with it.
In short, the boards of corporations have to seriously weigh the interests of all the individuals and entities that have a stake in the business. This philosophy is now pervading the business world and corporations realize they have to embrace it if they want to survive.
If we had to identify one single major force in producing this mindset change, it would probably be civil society. This includes various non-governmental organizations and institutions, each with its own agenda for transforming society. They make themselves heard through pressure groups that push for goals not easily achieved through the legislative process or by lobbying the government.
There are many examples of this at work. Take, for instance, the problem of reporting oil revenues in oil rich emerging markets, a process that is riddled with inaccuracy and a lack of transparency. Through organizations such as the IFRS Foundation, it has been possible to incorporate accounting rigor into this process and to ensure that total oil revenues are accurately disclosed by geographical region and location.
Various watchdog organizations have been tirelessly striving for more stringent environmental and labor regulations in various parts of the globe. After the tragic collapse of an industrial building in Bangladesh more than a year ago, many NGOs increased the pressure on clothing companies in the West to make garment industry safety a top priority in the countries they manufacture in.
Similarly, Apple came under fire not too long ago for failing to ensure safe working conditions for employees in Chinese factories that manufacture its products. In the face of increased criticism, Apple sought to satisfy NGOs that it would enforce better safety standards in these facilities.
NGOs and pressure groups have considerable clout with consumers who in turn want to be assured that they are dealing with companies that treat people and the environment with respect.
As the pressure mounts, corporations are changing the way they do business. Food and beverage companies, for instance, are actively building their credentials in sustainable farming in order to get on the right side of consumers. Extractive industries that receive a great deal of flak for their polluting ways are now attempting to roll out several environmentally responsible measures.
Stakeholders have more power in this age of social media. Oppressive behavior by an employer, shoddy product quality, a bad customer service experience – any of these can be aired online with immediate and significant repercussions. And so, many corporations have set up special groups to manage this portion of their stakeholder engagement and the complexity of external communication.
In essence, corporations are attempting to be proactively responsible and to adopt a benign attitude towards their stakeholders. The era of business chieftains with absolute authority and the power to buy out government regulators is behind us.
That is not to say that everything is perfect. There are still many industries that are characterized by a lackadaisical attitude towards worker health and safety, among other things, and where change is desperately needed. The construction industry in India is a prime example of this.
Many of the safety issues that plague the industry are linked to the inability of the State to enforce standards. But beyond this, it is up to the corporate entities in the industry to overturn current norms and uphold global standards in working conditions. But who will push them to do this?
Again, this is a change that has to be driven by civil society. All over the world and throughout history, societal progress has been driven by civic and pressure groups. Public outrage forces corporations to change their behavior. And that is what is needed in this country today. When the government is ineffective and corporations are blatantly irresponsible, the only way out of the lockjam is for citizens to come together and expose unscrupulous business practices. We need many people to speak up and articulate their concerns; to present a convincing case for change. Someone wisely said that ‘eternal vigilance is the price of liberty’. What that means is that citizens cannot ignore their responsibility to fight for their rights.
And it will work. After all, it is incumbent upon corporations to take care of all their stakeholders. If they fail to do that, their mortality is assured.