36 Social Responsibility of Business

Mandeep kaur

1.      INTRODUCTION

Social responsibility refers to the obligations and duties of a business to the society. According to KK  Andrew, “social responsibility may be taken to mean intelligent and social objective concern for the welfare of the society”.

HS Sighania classifies the nature of social responsibility into two categories:

(a)    The manner in which a business carries on its business activity and

(b)   The welfare activity that it takes upon itself as additional function

While there is no universal definition of corporate social responsibility, it generally refers to transparent business practices that are based on ethical values, compliance with legal requirements, and respect for people, communities, and the environment. Thus, beyond making profits, companies are responsible for the totality of their impact on people and the planet. “People “constitute the company’s stakeholders: its employees, customers, business partners, investors, suppliers and vendors, the government, and the community. Increasingly, stakeholders expect that companies should be more environmentally and socially responsible in conducting their business. In the business community, CSR is alternatively referred to as “corporate citizenship,” which essentially means that a company should be a “good neighbor” within its host community.

2.      WHY DO ORGANISATIONS DECIDE TO GET INVOLVED IN SOCIAL RESPONSIBILITY AND HOW DO THEY BENEFIT FROM IT?

Considering the growing completion in today’s time, more and more companies are realizing that in order to remain productive, competitive and relevant, they have to be socially responsible.

Further, globalization has blurred national borders, and technology has accelerated time and masked distance. Given this sea change in the corporate environment, companies want to increase their ability to manage their profits and risks, and to protect the reputation of their brands. Because of globalization, there is also fierce competition for skilled employees, investors, and consumer loyalty. Thus, CSR has become a determinant of the sustainability and success of an organization. The various benefits that an organization derives from its CSR activities are as follows:

o   Satisfied stakeholders, viz., employees, distributors, shareholders and the society at large

o   Positive public relations

o   Improved public image of the business

o   Positive word of mouth

o   Cost reductions through efficient staff hire and retention, implementation

of energy savings programs, effective management of potential risks and liabilities more effectively, less investment in traditional advertising etc.

o   More business opportunities (through an open, outward approach)

3.     FACTORS THAT AFFECT THE ORIENTATION OF A BUSINESS TOWARDS SOCIAL RESPONSIBILITY

The various factors that affect the social orientation of a business are as follows:

3.1 Promoters and Top Management: The values and vision of the promoters and top management is one of the most important factors to influence to societal orientation of a firm

3.2 Board of Directors: As the Board of Directors decides the major policies and resource allocations of the company; they have an important place in affecting the social orientation of a company.

3.3 Stakeholders and Internal Power Relations: The attitude of various stakeholders and the internal power relations affect the social orientation. Social responsibility involves attempting to unite the diverse interests of stakeholders to form a workable coalition, engaged in creation of value for distribution among the members of the coalition.

3.4 Societal Factors: The societal orientation is affected by the nature, compulsions and the expectations of the society. For example, a resourceful firm operating in a poor community may be required to facilitate education or engaged the local laborers.

3.5 Government and Law: Social responsibility of business may be a manifestation of the law. The business in such a circumstance has to fulfill the social responsibilities by virtue of them being codified in law

3.6 Competitors: When one or more competitors engaged in social activities, the business has to generally adopt them as well, in order to secure its competitive position. Also, if the competitors do not fulfill their social responsibilities, a business may gain competitive advantage over the competitors by engaging in social activities.

3.6 Resources: Social involvement of a business is affected and often constrained by the financial and other resources of it.

4. DIFFERENT STAKEHOLDERS OF A BUSINESS

Stakeholders of a company are defined as “”those groups without whose support the organization would cease to exist” (Stanford Research Institution). The stakeholder theory was developed by R. Edward Freeman in the 1980s. Since then it has gained wide acceptance in business practice and in theorizing relating to strategic management, corporate governance, business purpose and corporate social responsibility (CSR). A corporate stakeholder is a person or party that can affect or be affected by the actions of a business as a whole.

Depending on the degree of linkage of these stakeholders with the organization, they can be grouped in the following categories:

4.1 Primary Stakeholders (Internal Stakeholders) – They are usually the internal stakeholders who engage in economic transactions with a business. These stakeholders are the ones who directly affect a business organization and are also directly affected by it. For example stockholders, employees, owners, mangers, board of directors etc. are a firm’s primary stakeholders.

4.2 Secondary Stakeholders (External Stakeholders) –These stakeholders although do not engage in direct economic exchange with an organization, they, however can affect or be affected by its action. For example the customers, suppliers, creditors, employees, general public, communities, activist groups, business support groups, and media.

5. RESPONSIBILITIES TOWARDS DIFFERENT STAKEHOLDERS

There is no unanimity of opinion as to what constitutes social responsibility. The various important generally acceptable responsibilities of the business towards various stakeholders are discussed below:

5.1 Responsibility towards Shareholders: Shareholders are the owners of a firm. The primary responsibility that a business has is towards its shareholders. The fact that the shareholders take a great risk in making investments in the business should be adequately recognized.

In order o protect the interests of the shareholders the “primary business of the business is to stay in business. The business should therefore fulfill its ‘economic objective/s’. To protect the interests of the shareholders, it should safeguard capital, earn reasonable dividend and maintain a successful competitive position. Having said this, the business should realize that shareholders are interested not only in the wealth creation but also in the societal performance o the company. It shall therefore be the endeavor of the company to make and improve its public image.

5.2 Responsibility towards Employees: The success of the organization depends upon the morale and dedication of its workforce. The responsibilities of an organization towards its workforce include the following:

o   Payment of decent wages

o   Decent working conditions

o   Fair work standards

o   Provision of labour welfare facilities

o   Arrangements for proper training and development

o   Reasonable chances and fair method of promotions

o   Proper recognition, appreciation and encouragement

o   Installation of efficient grievance handling mechanism

o   Opportunity to participate in management decision making

It may be pointed out here that the expenditure on employee development and welfare should have relevance to the financial position of the company and the economic conditions of the nation. Such expenditure should not exceed the economically and socially warranted limits and not pose any burden on the ultimate consumer.

5.3 Responsibility towards Consumers: According to Peter Drucker, “there is only one valid definition of business purpose, and that is to create a customer”. It has been widely recognize that customer satisfaction shall be taken as the key to the satisfaction of organizational goals. The responsibilities of a business towards customers are as follows:

o   To engage and spend adequately on research and development to improve the quality of products and services

o   To supply products/services at decent prices

o   To provide after sale services

o   To ensure that an appropriate customer grievance management system is in place

o   To provide necessary information for the usage of products/services

o   To not engage in misleading advertisements

o   To understand customer needs and respond adequately to them

5.4 Responsibilities to the Community: A business owes the following responsibilities to the community:

o   Prevention of environmental pollution

o   Rehabilitating the population disturbed by the business

o   Assisting the overall development of the society

o   Improving the efficiency of the business operation

o   Contributing to research and development

o   Development of economically backward areas

o   Promoting small scale industries

o   Promoting indigenous industries

o   Contributing towards social causes like promotion of education and population control

5.5 Responsibility towards the environment: A business damages the environment by causing pollution in the following ways:

o  Emission of gas and smoke from manufacturing plants

o  Use of machines, vehicles etc. contributing to noise pollution

o  Deforestation due to acquisition of forest lands for setting up plants

o  Growth of urbanization and industrialization

o  Disposal of wastes and effluents into rivers and canals

o  Disposal of solid wastes in the open space

o  Mining and quarrying activities

o   A business can discharge its responsibilities towards the environment by assuming the following roles:

o   Preventive Role: It means business should take all possible steps to ensure that no further damage is done to the environment. For this, business must follow the rules and regulations laid down by government to control pollution at the very inception.

o   Curative Role: It means business should rectify whatever damage has been done to the environment. In addition, if it is not possible to prevent pollution then simultaneous curative measures should be taken. For example, planting of trees (afforestation programmes) can substantially reduce air pollution near the industrial area.

o   Awareness Role: It means making people (both the employees as well as the general public) aware about the causes and consequences of environmental pollution so that they voluntarily try to protect rather than damage the environment. For example, business can undertake public awareness programmes to sensitize people about environmental degradation and pollution.

6. MEASURINGANDEVALUATINGAN    ORGANISATION’SSOCIAL

PERFORMANCE

An organization’s social performance is an aggregate of its economic, legal, ethical and discretionary responsibilities. Archie Carroll who defines corporate social responsibility as the entire range of obligations to the society has proposed a multi-dimensional conceptual model of corporate performance. According to him, a firm has the following four categories of obligations of corporate performance. These have been individually discussed below:

6.1 Economic responsibilities: Each business unit is an economic entity, therefore the primary responsibility it has is to be a successful economic unit for the society. It is therefore, the responsibility of a business to produce economically viable goods and services and maximize profits for the owners and the shareholders. However, if this is carried to the extreme it is called the ‘profit maximization view’, as advocated by Nobel economist Milton Friedman. This view argued that a company should be operated on a profit-oriented basis, with its sole mission to increase its profits so long as is stays within the rule of the game.

6.2 Legal responsibilities: Fulfilling the legal responsibilities is what is considered as important with respect to proper corporate behavior. This means to ensure compliance and adherence to the laid down rules, laws and regulations that a business unit is deemed to follow. Such legal requirements are imposed by local councils; state and central governments and even international laws in case of a multinational company.

6.3 Ethical responsibilities: Such responsibilities include behavior that is not necessarily codified into law and may not serve the organization’s direct economic interests. To be ethical, organization’s decision makers should act with equity, fairness and impartiality, respect the rights of individuals, and provide different treatments of individual only when differences between them are relevant to the organization’s goals and tasks. Unethical behavior occurs when decisions enable an individual or organization to gain expense of society.

6.4 Discretionary responsibilities: Discretionary responsibility is purely voluntary and guided by an organization’s desire to make social contributions not mandated by economics, laws or ethics. Discretionary activities include generous philanthropic contributions that offer no payback to the organization and are not expected. Discretionary responsibility is the highest criterion of social responsibility, because it goes beyond societal expectations to contribute to the community’s welfare.

A summarized view of Archie Carroll’s Model of Business Responsibilities has been presented below:

Figure 3: Archie Carroll’s Model of Business Responsibilities

(Source: Management, A competency-based approach, Edition 10, by Hellriegel, Jackson, Slocum; Management, Pacific Rim Edition, by Danny Samson, Richard L.Daft)

7. ARGUMENTS FOR AND AGAINST SOCIAL RESPONSIBILITY

The important arguments for and against social responsibility are presented below:

7.1 Arguments for Social Responsibility

o   Business survives using the resources of the society, it, therefore owes a responsibility towards it, in return

  o   Business is an integral part of the social eco-system, it should therefore be responsible towards it

o   Social responsibility improves the image of the organization

o   Social involvement fosters a harmonious and healthy relationship between the society and business, to the mutual benefit of both

o   Social responsibility also has an implication for reduction in unnecessary government regulation and intervention

o   It helps in spreading positive word of mouth

o   It keeps the stakeholders happy and satisfied

o   It improves the corporate reputation

o   Is helps an organization in gaining a completive edge

7.2 Arguments against Social Responsibility

o   Business should confine itself to business operations. Social organizations should carry out social works

o   The ultimate cost of social responsibility is to be borne by the consumer in terms of heavy pricing

o   Involvement in social activities may adversely affect the economic health of an organization.

o   Companies engage in social activities for seeking tax exemptions rather than focusing for the societal welfare

o    Social involvement causes an increase in the price of a company’s products/services, and severely affects the competitiveness of the it

o   Social involvement of a business can unnecessarily lead to an increase in the dominance or influence of the business over the society.

8. WHAT LIMITS THE ORGANISATIONS FROM BEING SOCIALLY RESPONSIBLE?

The various factors which limit the social responsibility actions of a business are the following:

 o   Cost: Every social action requires money for its fulfillment; for example, donations to a village, hospital, educational institute; expenditure for organizing a campaign, adoption of a village etc. At time, a business may want to engage in such activity, but paucity of funds acts as a major impediment in this regard.

o   Efficiency: An effort towards social responsibility may bring down the efficiency ad the competitiveness of a business. Social activities are not the core business activities; hence, a business may not have an adequate idea about it, and thus indulge in over-spending.

Also, this may act as a distraction for the employees, which may result in loss of business efficiency.

o   Relevance: Some critics are of the view that ‘business has no obligation towards the society’. According to Friedman “there is only one social responsibility of a business; and

that is to use its resources appropriately to increase profits, so that it stays within the rules of the game …. And engages in open and free completion, without deception and fraud”

o   Scope: A business has a number of complex problems which are to be solved and concentrated upon. It is thus, unfair to expect from a business to solve other complex problems that are beyond d its operational ambit.

9.  BARRIERS TO SOCIAL RESPONSIBILITY

To fulfill the task of social responsibility, the following problems may be faced at the organizational level:

o   The Manager: It is the manager who is ultimately responsible for the action programmes

of any organization. In the absence of a policy for achieving social obligations, the managers may not insist actualization of the social objectives as it may distract the employees from achieving the business objectives for which they and the manager may be held accountable.

o   The Organization: The main objective of any organization is profit maximization. Profits are to be earned to provide the shareholders adequate dividend, to provide salaries and incentives to the employees and to use the profits for further growth and expansion of the business. Thus, social action projects need to be evaluated very carefully in terms of cost and benefit.

  o   The Industry: Indulgence in social activities by one company may cause distrust of others, operating in the same industry. It thus, becomes difficult for a company to survive in the industry

o   The Division There are number of divisions in the organization which are competing among themselves and also strive towards main goal of organization i.e. profit. Any social responsibility decision and project which affects or reduces the profit might threaten the existence of that particular division. This is one of the main reasons that most of the divisions feel hesitant in initiating and implementing social responsibility programmes unless & until there are clear guidelines and instructions from the people at top level.

10.  SOCIAL RESPONSIBILITY: INDIAN SCENARIO

10.1 Overview of the Rules for Social Responsibility under the Companies Act, 2013

The new Companies Act, 2013 has introduced several new provisions for Corporate Social Responsibility of Indian corporate”. These provisions have been notified by the Ministry of Corporate Affairs under Section 135 and Schedule VII of the Companies Act. Following are the provisions for the CSR spending of companies:

o    Applicability: Section 135 of the Companies Act provides the threshold limit for applicability of the CSR to a Company i.e. (a) net worth of the company to be Rs 500 crore or more; (b) turnover of the company to be Rs 1000 crore or more; (c) net profit of the company to be Rs 5 crore or more. Further as per the CSR Rules, the provisions of CSR are not only applicable to Indian companies, but also applicable to branch and project offices of a foreign company in India.

o    CSR Committee and Policy: Every qualifying company requires spending of at least 2% of its average net profit for the immediately preceding 3 financial years on CSR activities. Further, the qualifying company will be required to constitute a committee (CSR Committee) of the Board of Directors (Board) consisting of 3 or more directors. The CSR Committee shall formulate and recommend to the Board, a policy which shall indicate the activities to be undertaken (CSR Policy); recommend the amount of expenditure to be incurred on the activities referred and monitor the CSR Policy of the company. The Board shall take into account the recommendations made by the CSR Committee and approve the CSR Policy of the company.

o    Definition of the term CSR: The term CSR has been defined under the CSR Rules which includes but is not limited to:

o    Projects or programs relating to activities specified in the Schedule; or

o    Projects or programs relating to activities undertaken by the Board in pursuance of recommendations of the CSR Committee as per the declared CSR policy subject to the condition that such policy covers subjects enumerated in the Schedule.

o    Activities under CSR: The activities that can be done by the company to achieve its CSR obligations include eradicating extreme hunger and poverty, promotion of education, promoting gender equality and empowering women, reducing child mortality and improving maternal health, combating human immunodeficiency virus, acquired, immune deficiency syndrome, malaria and other diseases, ensuring environmental sustainability, employment enhancing vocational skills, social business projects, contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women and such other matters as may be prescribed.

o    Local Area: Under the Companies Act, preference should be given to local areas and the areas where the company operates. Company may also choose to associate with 2 or more companies for fulfilling the CSR activities provided that they are able to report individually. The CSR Committee shall also prepare the CSR Policy in which it includes the projects and programmes which is to be undertaken, prepare a list of projects and programmes which a company plans to undertake during the implementation year and also focus on integrating business models with social and environmental priorities and process in order to create share value.

Further, the company can also make the annual report of CSR activities in which they mention the average net profit for the 3 financial years and also prescribed CSR expenditure but if the company is unable to spend the minimum required expenditure the company has to give the reasons in the Board Report for non compliance so that there are no penal provisions are attracted by it.

(Source:http://www.mondaq.com/india/x/366528/Corporate+Governance/Corporate+Social+Responsibility+India n+Companies+Act+2013)

11. Summary

Social responsibility of a business is an ethical framework that suggests that an entity, has a responsibility to act for the benefit of society at large. Social responsibility is, therefore, a duty that an organization should perform so as to maintain a balance between the economy and the ecosystems. A trade-off may exist between economic responsibilities of a concern, and the welfare of the society. Social responsibility means sustaining the equilibrium between the two. This responsibility can be passive, by avoiding engaging in socially harmful acts, or active, by performing activities that directly advance social goals. Thus, social responsibility is a voluntary effort on the part of business to take various steps to satisfy the expectations of the different interest groups, while achieving and fulfilling its economic and legal responsibilities.

Suggested Readings:

1. Ashwathapa,K. (2011),Essentials of Business Environment,Text,Cases and Exercises , 11th ed.,Mumbai: Himalaya Publishing House.
2. Shukla, M.B.(2012).Business Environment Text & Cases. New Delhi: Taxmann Publications.
3. Saleem, Sheikh. (2010), Business Environment, 2nd ed.,New Delhi: Pearson.
4. Cherunilam, Francis (2014). Business Environment: Text and Cases. Himalya Publishing House.