Social responsibility of business: the concept and the case for it

The concept of social responsibility

Society allows a business to operate and earn profit, so the business in turn owes it a duty not to act in ways society regards as harmful. Social responsibility is the obligation of a business to choose decisions and actions that fit the goals and values of the society around it. Selling adulterated goods, misleading buyers through advertising, dodging taxes, polluting and exploiting workers may raise profit but are socially undesirable; fair working conditions, honest tax payment, pollution control and prompt attention to complaints are desirable and also build the firm's image.

Three points sharpen the idea.

• It goes beyond the law. A legal duty is met by complying with the law; social responsibility also covers obligations the law does not impose.
• It is a moral question with a voluntary element. It asks what is right or wrong in the firm's conduct, and businesspeople are free to decide how far they serve different groups.
• It has layers. At the voluntary end are charitable acts, such as help to flood victims; there is also a duty of conduct that society expects but no law codifies, such as respect for people's religious feelings in advertising, a duty to obey the law, and a basic economic duty to make goods society wants and sell them at a profit.

In India part of this duty has been made law for larger companies by section 135 of the Companies Act, 2013, whose provisions apply from the financial year 2014-15.

• Who is covered. Under section 135(1), a company whose net worth is ₹500 crore or more, whose turnover is ₹1,000 crore or more, or whose net profit is ₹5 crore or more in the immediately preceding financial year.
• How much it spends. Under section 135(5), its Board must see that in every financial year the company spends at least 2 per cent of its average net profit of the three immediately preceding financial years on its CSR policy, with preference to the local area and surroundings where it operates.
• On what. The policy covers activities in the areas named in Schedule VII; work meant only for the company's employees and their families does not qualify, and only activities carried out in India are counted.
• Who oversees it. Section 135(1) requires a CSR Committee of the Board of three or more directors, at least one of them independent; a company not required to appoint an independent director under section 149(4) may instead have two or more directors on it. Under section 135(2), the Board's report under section 134(3) discloses the committee's composition.

Why business needs to assume social responsibility

Opinion is divided: one view holds that a firm owes a duty only to its owners, the other that it owes one to every group its decisions affect. The case for the wider view rests on these grounds.

1. Business caused some of the problems. Pollution, unsafe workplaces, corruption and discrimination in hiring have partly been created or kept alive by business, so it has a moral duty to help solve them.
2. It has the means. Business commands capital, experienced managers and organising skill that can be put to social use.
3. An orderly society protects business. Laws cannot foresee every situation, and people who feel cheated may turn to harmful actions outside the law that hurt business itself.
4. Fewer new laws. Voluntary action reduces the case for fresh regulation, which would limit business freedom.
5. Long-run interest and image. When workers, consumers, shareholders and officials feel a firm ignores them, they withdraw their cooperation; a firm that serves society gains in image and in profit over time.
6. A healthier setting for business. A society with fewer problems is a better place to do business, so it pays to act before social ills threaten the firm's survival.
7. Reason for existing. Business exists to meet human needs; profit should be seen as the result of serving people well.
8. Problems can become opportunities. Business has a record of turning risky situations into profitable ones and can do the same with social problems.

Pressures that have made it unavoidable

Whatever the debate, outside forces now push firms the same way. Educated consumers, aided by mass media and competition, know their power, so the old rule of let the buyer beware has given way to customer is king. Organised labour has made hire and fire policies untenable. Elected governments act against firms that behave irresponsibly, and this threat of regulation is itself a strong motive. Professional managers, unlike many owner-managers of the past, also try to satisfy several interest groups rather than profit alone.

A Pune auto-components maker that treats its effluent before release, pays suppliers on time and trains local youth earns the goodwill of its town and keeps skilled workers, which is the long-term gain the argument predicts.

Conclusion

Social responsibility asks business to judge itself by what society expects, not only by profit or by the letter of the law. Business needs it both for its own long-run interest and because society, which permits it to exist, demands it.