Creating shared value will help private sector to foster inclusive growth
To enable the poor to reap the benefits of economic growth, much depends on how the private sector is encouraged to pursue social development through for-profit initiatives
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In 2014, India became the first country in the world to mandate Corporate Social Responsibility (CSR) rules for its companies, both public and private. According to these rules, companies with a net worth of Rs.500 crore or revenue of Rs.1,000 crore or net profit of Rs.5 crore are required to spend 2% of the average net profit of the preceding three years on CSR activities. If a company fails meet the target, the board is required to explain the reasons in the annual CSR report.
The initial period was mostly spent on instituting systems and ensuring compliance with respect to the new rule. The last financial year, however, saw a significant increase in fund allocation and expansion of projects.
According to a Mint report published on 21 September, CSR spending among the top 91 companies listed on National Stock Exchange (NSE) rose by as much as 27% in FY16.
The trend is likely to continue in the future even as companies conduct impact assessments and course corrections to determine the best manner of implementing social projects.
CSR, however, has long been a contentious issue for economists.
One of the earliest critics of this idea was none other than Milton Friedman, a Nobel laureate in economic sciences. In his seminal book Capitalism and Freedom, he blasted the idea of profits being diverted to any purpose other than what directly promotes shareholders’ interest. According to him, there is only one social responsibility for any business—to maximize profits for its owners, but doing so ethically.
Jagdish Bhagwati, professor of economics and law at Columbia University, buttressed Friedman’s view. He further argued that CSR is flawed in that it undermines democratic decision-making with respect to “how the corporation should engage in social responsibility on their stakeholders’ behalf. Each one would consider his or her CSR view the best”.
As an alternative, Bhagwati proposed the idea of Personal Social Responsibility (PSR), which is each of us engaging in philanthropy in our own voluntary capacity.
This, he said, would also lend diverse options to altruism. Billionaire philanthropists Azim Premji, N.R. Narayana Murthy, Nandan Nilekani, Shiv Nadar, Mukesh Ambani, Rahul Bajaj, and countless others topped Hurun’s India Philanthropy List 2015. Together, they donated as much as Rs.35,000 crore to charity. Even if we include CSR expenses as part of those donations, the amount given away through what Bhagwati termed PSR was considerably greater than the roughly Rs.6,000 crore companies spent on CSR activities in FY16.
Perhaps the most significant alternative to CSR was offered by Michael Porter, a professor at Harvard University, and Mark Kramer, a senior fellow in the CSR Initiative at Harvard’s Kennedy School of Government, in their two seminal articles published in the Harvard Business Review in 2006 and 2011. While neither of them were admirers of Friedman’s shareholder value theory, they argued that companies need not face a trade-off between profits and social good. By tackling social challenges by integrating them into their core competitive strategies, companies can bring long-term, sustainable changes in society. They called this idea ‘Creating Shared Value’ (CSV). It continues to define and shape the corporate governance structure of several companies around the world.
CSV is distinct from CSR on several counts. The current CSR rules mandate the constitution of a CSR committee, which would oversee the CSR commitment of the company. CSV, on the contrary, is to be integrated into the competitive strategy of the company, thus propelling the entire corporate engine towards social development.
Novartis’s Aarogya Pariwar, for instance, is a for-profit initiative that works to educate villagers about health and disease prevention and runs mobile clinics in remote villages for affordable health care. Realizing that rural India is more about volumes than profit margins, Novartis has pursued innovation in product offerings, strong network of doctors, and new distribution centres, to meet the needs of rural populations with low disposable income.
As per its fact sheet, Aarogya Pariwar broke even after two-and-a-half years of inception, and sales have since increased by 25 times.
Godrej Group has set a goal of equipping 1 million youngsters from urban and rural areas with vocational skills to close the gap between education and employment. Its consumer arm, Godrej Consumer Products Ltd, has begun training thousands of young in soft skills, mathematics, English, and marketing, to facilitate employment in its industry.
Instead of considering these initiatives as expenses, Godrej and similar companies participating in CSV initiatives consider them an investment that would provide long-term returns. This is another characteristic that distinguishes CSV from CSR. While the latter is manifest mainly in philanthropic initiatives, the former is evident in overall corporate strategies. This promises huge potential for enabling inclusive growth in India.
Governments have to manage tight fiscal targets, and they can only spend so much. According to CSR management firm NextGen Pvt. Ltd, the new CSR rules will eventually have 22,000 companies spending a total of about $3 billion every year in CSR-related activities.
This would still be only 0.2% of gross domestic product—hardly enough to drive a sustainable, long-term social change. To truly enable the poor to reap the benefits of economic growth in the next decade, much depends on how we encourage the private sector to pursue social development through for-profit initiatives. CSV holds great promises in this regard.
Harsh Vora is an entrepreneur, investor, and trader. He writes frequently on issues relating to public policy and economics.