Milton Friedman argued that the “business of business is business”. Not in India. With the New Companies Act mandating social welfare spending, companies that are “doing well” must “do good”.
However, a clear definition of what is good - or Corporate Social Responsibility - is not forthcoming. CSR is a "grey area" accepted Mr Sachin Pilot, Union Minister for Corporate Affairs, when Mr Anand Mahindra, Chairman of Mahindra & Mahindra, sought to know - in an online video chat event organized soon after the passing of New Companies Act - the Minister's view on a business activity that brings in commercial profit as well as social/environmental benefits.
In the good old days, it was just a matter of charity. Companies set aside a portion of their profit willingly and constructed schools, hospitals, temples, roads for the community, out of moral responsibility.
Today, nobody is comfortable with this cheque-book charity. They are interested only in CSR, which seems to have brought in the element of strategy in charity. If “giving back to society” is charity, then “giving back to society as part of business strategy” is CSR.
For instance, if a manufacturer of trucks sets up a driving school to produce more drivers, it is CSR because it creates both employment opportunities for people and business opportunities for the truck manufacturer. But if the same truck company constructs hospitals, there is no short or long term benefit - your shareholders may not like it.
Compensation or Compassion?
Companies count the activities they do to kind of compensate an environmental damage as CSR. However, a rainwater harvesting or ground water recharging project funded by a company that squeezes water table, could be better explained as Extended Producer Responsibility (EPR), rather than CSR. EPR as an idea is gaining acceptance in many matured economies.
Business is expected to create a marketable value that is not only faster, cheaper and better (based on the three constants of time, cost, and quality), but the value should also stand for inclusive growth and sustainability. In Sweden, for example, manufacturers have to make arrangements for recycling of their products, discarded after use, and arrange for their final disposal, all as part of EPR.
2x2 Value Matrix
In order to bring in a context, we may look at the types of value companies create, at various stages of their existence and growth. They could be broadly put in four categories, using a 2x2 matrix, formed by factors of “strategy” and “profit”, in the following way:
the first quadrant would have what is called the “flagship value”. It is a type of marketable value that is both “strategic as well as profitable” to a business. For instance, Windows Operating System is a flagship value for Microsoft.
the second quadrant would represent “fill-gap” value, which is “profitable but not strategic” - an example of a fill-gap value is a Mutual Fund or insurance product for a bank. Mutual funds are not strategic to a bank (or represent the core competency of banks) as much as a loan or deposit product, but still they are profitable for banks.
the third quadrant contains “future” value, which is “strategic but not profitable”. A hybrid car in a developing country is still not a mainstream product, and therefore there will not be any profit worth mentioning for the automobile company that manufactures it. But still, a hybrid car would be very strategic to the business of an automobile company.
the fourth quadrant holds the subject of our discussion, CSR. It is a “free value” - a value that is “neither strategic nor profitable” to a business. CSR is simply a social responsibility of a corporate to promote a value for the society, of which it is a part. And the value is a non-marketable value.
This sentiment is captured in the letter that Mark Parker, CEO, Nike, wrote in the company’s 2010 annual letter, which reads: “In the early days, our “systems” consisted of only those things that helped us build better shoes and shirts, and ads and events.
We are, after all, a consumer products company. It took us a while, but we finally figured out that we could apply these two core competencies — design and innovation — to bring about environmental, labor and social change.
We opened the aperture of our lens and discovered our potential to have a positive influence on waste reduction, climate change, managing natural resources, renewable energy and factory conditions."
A couple of local examples come from Ramco Group, which owns Ramco Cements, India’s fifth largest and most profitable cement manufacturer. At Rajapalayam of Virudhunagar district, Ramco Group, had set up a Vedapatashala, a gurukul-like residential school for upper class Brahmin community, to increase the supply of Vedic scholars in the society.
Nearly 75 students from all over the country come here, as there are hardly any schools for them to learn scriptures. Ramco has also created a modern hostel for Palia tribes. Currently about 150 students - boys and girls - stay in this hostel and study modern education in schools, along with students from other communities.
One cannot easily attribute a business reason in the case of a cement company running schools for Brahmins and Palia tribes. They are “free value” that stand as examples of charity-with-compassion.
Ask, Do not Assume
Defining what is CSR is one thing, but defining what is value for society is another. It is better if a business asks relevant stakeholders what do they value, instead of defining it on their own.
Even in a business context of creating a marketable value, businesses dramatically fail to understand what is value - or what customers think is value. It is no secret that over 80% of new product launches in many Fast Moving Consumer Goods categories fail flat in the market.
Late Professor CK Prahalad insisted that producers and customers should jointly define what is value and engage together in the value creation process, right from the product conception stage, to bring down product failures. If companies do not know what is a marketable value, which is important for their survival, how do they know what is a non-marketable value?
Usually, a CSR project is unilaterally decided by a CEO, based on his or her political, philosophical or ideological leanings. Therefore, there is a need to engage and empower the society, the local community, in defining a CSR value.
The reason why many industrial projects in India are stalled by social protests is that there is no win win for all stakeholders. In many cases, the Centre approves a project, while the State promotes it and the local body facilitates it. What does the local community do? It merely “spectates”.
When there is objection from the local community, the government usually pressurises the company in question “to come up with its CSR plans”. However, nobody asks the society what its needs are. The problems of social and environmental nature are not same everywhere. The issues of the Nilgiris district in Tamil Nadu is different from that of Anugul district in Odisha. Who knows what they are? Not any one party individually but every stakeholder collectively.
Hence, the process of identifying a CSR value should involve local bodies, other businesses, customers, NGOs and media.
A co-created approach has better chances to win than an unilateral approach. A notable beginning of co-creating social responsibility was made last year at Saint Herblain, a French city.
Under the initiative of Audencia Nantes School of Management, a business school in France, all stakeholders of the city, including the local municipal corporation, businesses, local community, students, consumers and NGOs, jointly listed the most important social and environmental needs of the city, and created a local charter of CSR. Businesses, and other stakeholders, can voluntarily adopt the local charter and discharge their co-created social contract.
If not business schools, industries or industry associations can come forward to try to replicate the model of Saint Austin and co-create local charters of social responsibility. This would make CSR meaningful and effective.
(G Sankarnarayanan is the managing partner at Younomy Consulting Services.
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