Chapter 9. Handmaid of Ethics: Corporate Social Responsibility – Business Ethics and Corporate Governance

CHAPTER 9

Handmaid of Ethics: Corporate Social Responsibility

INTRODUCTION

We live in an age in which companies have grown so large that they control much of the earth’s resources, and intervene in so many areas of social life, that they must be held responsible towards society and the environment. In India, as in the rest of the world, there is a growing awareness that capital markets and corporations are, after all, created by society and must therefore serve it, not merely profit from it. In the age of globalization, corporations and other business enterprises are no longer confined to the traditional boundaries of the Nation-State. One of the key characteristics of globalization is the spread of the market and the change in the mode of production—the centralized mode has given way to a highly decentralized one that has spread across the world. In the last 20 years, multinational corporations have played a key role in defining markets and influencing the behaviour of a large number of consumers. Globalization and liberalization have provided a great opportunity for corporations to be globally competitive by expanding their production-base and market share. The situation poses a great challenge to the sustainability and viability of such mega-businesses, particularly in the context of the emerging discontent against these multinational corporations in different parts of the world.1 There has been a widespread protest against the dominance of multinational companies.

The developments in information technology and the effectiveness of knowledge-based economies have led to the creation of a new model of corporate governance. Business leaders are now concerned about the responses of the community and the sustainability of the environment. We need to analyse the new trends in corporate social responsibility (CSR) against the backdrop of these changes.

The issue of social responsibility of business evokes varying—and often extreme—responses from both the intelligentsia and businessmen. Economists like Adam Smith and Milton Friedman were of the opinion that the only responsibility of business was to perform its economic functions efficiently and provide goods and services to society and earn for themselves maximum profit and that it was better to leave social functions to other institutions of the society like the government.

To Adam Smith, ‘It is the profit-driven market system, also called price mechanism that drives business firms to promote social welfare, though they work for private gain’. He observed further: ‘Every individual endeavours to employ his capital so that its produce may be of greatest value. He generally neither intends to promote the public interest, nor knows how much he is promoting it. He intends only his own security, only his own gain. And he is in this led by an invisible hand to promote an end, which was no part of his intention. By pursuing his own interest, he frequently promotes that of society more effectively than when he really intends to promote it.’2 Likewise, Prof. Milton Friedman does not give much credit to the concept of social responsibility. To Friedman, the advocacy of social responsibility of business is the green signal to pure socialism.3 He argued that business has no other social responsibility excepting making profits within legal and moral rules set by society. ‘Few trends could so thoroughly undermine the very foundations of our free society as acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible.’4

However, those holding the opposite view have criticized this highly materialistic viewpoint on several grounds. In their perception, governments cannot and need not be the sole repository for promoting the welfare of masses. It is an area where the corporate sector can play a significant role. They assert that it is imperative for business to be socially responsible. Prof. Paul Samuelson, for instance, advocates a spirit of social responsibility as an inherent feature of a modern business firm. This view is based on the argument that business organizations, corporate or otherwise, are part of the society and have to serve primarily its interests rather than work for the narrow economic gains such as making of profit.

T. F. Bradsha, a past president of the Atlantic Richfield Company in the United States, was of the view that Friedman ignored the fact that as a human being, a businessman is under pressure to fit within the social pattern to do something for society, more than making profit for himself. Further, Friedman has not taken into consideration the fact that in an explosively fast changing world, a businessman is judged on two counts—the social goals he meets, apart from the profits he makes.5

Further, Dr Clark C. Abt, the president of the Abt Associates Inc., Cambridge, in the United States, felt that business organizations while determining the socially responsible behaviour should first analyse its impact on short-term and long-term profitability of the organization.

According to Prof. Robert Dahl, a well-known political theorist, it is obligatory on part of business organizations to be socially responsible as they primarily exist to benefit society. He expressed his view thus: ‘Today, it is absurd to regard the corporation simply as an enterprise established for the sole purpose of allowing profit making. We, the citizens, give them special rights, powers and privileges, protection and benefits on the understanding that their activities will fulfill our purposes.’6 Corporations cannot exist without our letting them to do so. From our part we let them to exist only because they are beneficial to us.

Notwithstanding all these controversial thoughts, the concept of corporate social responsibility has come to mean that the responsibility of a corporate to the society is an inalienable part of its operations and strategy. CSR is about how companies manage the business process to produce an overall positive impact on society. Let us consider Fig. 9.1.

Companies need to answer two questions relating to their operations:

  1. The quality of their management—both in terms of people and processes (the inner circle).
  2. The nature and quality of their impact on society in various areas.

Fig 9.1 The Business in Society in Relation to Its Responsibility

Source: Mallen Baker, Corporate Social Responsibility—What Does It Mean?, 2007, available at www.mallenbaker.net/csr/CSRfiles/definition.html.

Courtesy: Mallen Baker

 

Outside stakeholders are taking an increasing interest in the activity of the company. Most look to the outer circle—what the company has actually done, good or bad, in terms of its products and services, in terms of its impact on the environment and on local communities, or in how it treats and develops its workforce. Out of the various stakeholders, it is financial analysts who are predominantly focused on the quality of management as an indicator of likely future performance.

WHY SOCIAL RESPONSIBILITY OF BUSINESS?

‘The business of business is business’ was the motto of businesspersons in early times. Narrowly interpreted, it would mean that corporations have only one responsibility, the single-minded pursuit of profit. To economists like Adam Smith and Milton Friedman, in a capitalist society profit maximization by the continued increase of efficiency is the most socially responsible way of conducting business. This implies making quick money, with utter disregard for the responsibility of business towards society. This limited view of business would prove to be counter productive in the long run. But on the other hand, the long range view of business, which would imply an aim at the long term gains rather than at quick returns, would take into account the important dimension of social responsibility.

The ethical and social behaviour of corporations is essential for the generation of profit, owing its source to the reputation the corporation would acquire in view of its social behaviour.

James Burke, the chairman of the well-known consumer product and pharmaceutical company, Johnson & Johnson said this: ‘I have long harboured the belief that the most successful corporations in this country, the ones that have delivered outstanding results over a long period of time, were driven by a simple moral imperative, namely serving the public in the broadest possible sense better than their competitors.’7

If we are to compete effectively in the global market, corporations must take a long, hard look at their values, practices and assumptions. They need to question their accepted modes of behaviour, promulgating new values and set up new standards of conduct which are openly held and shared within the corporation, while proclaimed to the outside world.

Accountability to Society

There is yet another reason why corporations should be conscious of their ‘social responsibility’. In a democratic society any kind of enterprise exists for the sake of society. If private enterprise is justified and allowed to exist it is because it is seen to contribute better than public enterprise to the common good. It produces better goods and functions more efficiently, thanks to the encouragement given to individual initiatives. At the same time, private enterprise is not encouraged because individuals may accumulate wealth for their own exclusive and selfish benefit at the expense of the public.

Industries are allowed to exist because they are perceived by the public to be useful in the attainment of the personal, social and material goals of the people. It is because of this ethical perception that the employees of TISCO and the general public protested in 1977 when the then Union Minister for Industry, George Fernandes attempted to nationalize TISCO. On the other hand, when the public perceives that certain corporations do not function in the general interest of the nation it does not object to their take-over by the government, as it happened in the nationalization of the coal fields, the oil industry and the Indian Copper Corporation. Since corporations exist for the sake of the public, they are accountable to the public and have a social responsibility.

Corporations’ Debt to Society

Corporations, whether public or private, draw much from society. No corporation is an island in itself. It depends on society for a developed infrastructure such as roads, water supply, electricity and an educated work force. It also depends on society for the maintenance of law and order, public health, transport facilities and for reaching out to its customers through the mass media. Finally, all consumers of its finished products are drawn from society.

If a corporation draws so much from society it has to make its own contribution to society. It has a debt to pay to society. In the first place, a corporation has to behave as a good citizen. This is to be shown in the faithful and full payment of taxes, the observation of all local and national laws and perhaps even going beyond the law in matters of pollution, of standards of operational and product safety, and energy and resource conservation. The corporation has to donate generously towards causes of public welfare and must get itself directly involved, in social welfare programmes.

It is because of these aspects of social responsibility and public accountability that corporations have to consider not only the interests of its shareholders but also those of the workers, consumers, suppliers, the government and the general public who are its stakeholders. In short, corporations because of their social responsibility have to consider themselves as the ‘custodians of public welfare’.

DEFINITIONS OF CSR

What is corporate social responsibility? It is not as simple as it sounds. The definitions differ vastly according to the perception and sensitivity of the analyst. The World Business Council for Sustainable Development defines CSR thus: ‘Corporate Social Responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large.’8 The same report gave some evidence of the different perceptions of what this should mean, from a number of different societies across the world. Definitions as different as ‘CSR is about capacity building for sustainable livelihoods. It respects cultural differences and funds the business opportunities in building the skills of employees, the community and the government’ from Ghana, through to ‘CSR is about business giving back to society’ from the Philippines.9

In the United States, CSR has been defined traditionally much more in terms of a philanthropic model. Companies make profits unhindered except by fulfilling their duty to pay taxes. Then they donate a certain share of the profits to charitable causes. It is seen as tainting the act for the company to receive any benefit from the giving.

The European model is much more focused on operating the core business in a socially responsible way, complemented by investment in communities for solid business case reasons. It is believed that this model is more sustainable because

  1. social responsibility becomes an integral part of the wealth creation process—which if managed properly should enhance the competitiveness of business and maximize the value of wealth creation to society; and
  2. when times get hard, there is the incentive to practise CSR more and better—if it is a philanthropic exercise which is peripheral to the main business, it will always be the first thing to go when push comes to shove.

But as with any process based on the collective activities of communities of human beings (as companies are) there is no ‘one size fits all’. In different countries, there will be different priorities and values that will shape how business acts.

Today, leading practitioners of CSR believe that CSR is an integral part of the wealth creation process and that it should enhance competitiveness of business and help the company in times of crisis.

The stakeholder theory of CSR stresses that it is a manager’s duty to balance the shareholders’ financial interests against the interests of other stakeholders, such as employees, customers and the local community.

Nobel laureate, economist Milton Friedman, says: ‘There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it engages in open and free competition, without deception or fraud.’10

Some experts look at ‘CSR as the golden mean between capitalist and communist ways of thought as far as business is concerned’.11

To Henry Ford, ‘The purpose of business is to do as much good as we can, everywhere for everybody concerned … and incidentally to make money’.12 Going one step further, Kenneth Dayton, former chairman of the Dayton–Hudson Corporation, insisted: ‘We are in business to make maximum profit for our shareholders. We are in business … to serve society. Profit is our reward for doing it well. If business does not serve society, society will not long tolerate our profits or even our existence.’13

The meaning of the concept of CSR seems to differ from person to person according to his or her own sensitivity. To Dr Manmohan Singh, Prime Minister of India, ‘Corporate social responsibility is no philanthropy. It is not charity. It is an investment in our collective future’.14

The simplest and the most significant definition of CSR was given by Mahatma Gandhi who said: ‘Wealth created from society has to be ploughed back into society.’15

The sum and substance of all these definitions can be put into the following propositions:

  1. It is an attempt made by companies to be voluntarily responsible to ethical and social considerations.
  2. It is not a legal binding for the company, unlike corporate accountability (which makes company adhere to legal and social norms).
  3. It is a set of obligations to pursue those policies, to make those decisions, or to follow those lines of action which are desirable in terms of the objectives and values of our society.16
  4. The set of obligations an organization has to project, enhance, and otherwise work with to the betterment of the society in which it functions.
  5. It is the overall relationship of the corporate with all of its stakeholders. These include customers, employees, communities, owners/investors, government, suppliers and competitors. Elements of social responsibility include investment in community outreach, employee relations, creation and maintenance of employment, environmental stewardship and financial performance.
  6. The social responsibility of business will cover the economic, legal, ethical and environmental expectations society has placed on organizations at a given point of time.17 This could be explained by the following equation:

    Total corporate social responsibility = economic responsibilities
              + legal responsibilities + ethical responsibilities + philanthropic responsibilities

  7. The socially responsible firm should strive to:
    • make a profit;
    • obey the law;
    • be ethical; and
    • be a good corporate citizen.
  8. Social responsibility of business is temporal and society-based, that is:
    • it differs from society to society; and
    • it changes over time.
  9. Societal differences exist, such that
    • each society has a unique history, culture and institution. Some societies have few strong, formal institutions (government, business, organized religion) and rely more on informal institutions (family, clan, custom); and
    • each society demands and receives different roles and actions from particular institutions. Most societies have strong roles and behavioural expectations for some institutions and weaker roles/expectations for others. What may be the responsibility of the family in one society may be the responsibility of government, religion, or business in another (income, security). For instance, in countries like India, governments become loco parentis for school-going children and provide them food, clothes, bicycles, footwear and free tuition to encourage literacy and empowerment amongst the poor.

    Therefore, the responsibilities of business organizations for social purposes vary considerably.

  10. The concept of social responsibility for business is probably most advanced in the United States and in ‘Western’ societies than in the developing and emerging economies.
  11. Today there is an even more expansive view: ‘To protect, enhance, and otherwise work to the betterment of society.…’ Thus, broadly, the views governing corporate social responsibility may be classified into: classical economic model and socioeconomic model.

The Classical Economic Model

  • Adam Smith, father of the classical economic model, believed that an ‘invisible hand’ promoted the pubic welfare.
  • Smith believed that the public interest was served best by individuals pursuing their own self-interests.

The Socioeconomic Model

  • Business is seen as one sub-system among many in a highly interdependent society.
  • Recognizes that companies have stakeholders other than their stockholders.
  • A stakeholder audit allows companies to systematically identify all parties that could possibly be impacted by the company’s performance.
  • Business has an obligation to respond to the needs of all stakeholders while pursuing its profit.
TODAY’s CORPORATE SOCIAL RESPONSIBILITY

Today’s corporate social responsibility is to ensure the betterment of the society in which it functions.

Possible reasons for CSR achieving such importance may be

  • the result of greater acceptance of business as linked to its external environment;
  • greater professionalism of management; and
  • drawing of managers from all levels of the general society.

    The concept of corporate social performance includes a business organization’s

    • configuration of principles of social responsibility;
    • process of social responsiveness; and
    • policies, programmes and observable outcomes as they relate to the firm’s societal relationships.

Corporate social performance is not only acceptance of the idea of social responsibility, but a proactive approach (seeking out needs and implementing projects).

CSR and the Stakeholder

CSR is essentially a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with stakeholders on a voluntary basis. Stakeholders are those organizations and individuals who have taken an interest or ‘stake’ in the business or corporation and its success. That includes clients, the population of small business people, other business assistance organizations, other economic development organizations, legislators at the country, federal, and state levels, executive branches of government, executive departments and agencies, the staff and contracted consultants and trainers, vendors and taxpayers. The list is very broad and inclusive.

The development of CSR reflects the growing expectations of the community and stakeholders of the evolving role of companies in society and the response of companies to growing environmental, social and economic pressures. By committing voluntarily to CSR initiatives companies are making an investment in their future.18

Some of the driving forces behind the evolution of CSR are:

  • concerns and expectations from citizens, consumers, public authorities and investors;
  • decisions made by individuals and institutions influenced by social criteria;
  • concerns about the impact of economic activity on the environment; and
  • increased transparency of business activities because of the developments in information technology.

Implementation of CSR

The systematic implementation of CSR means:

  1. the adoption of strong organizational values and norms depicting behaviours that are appropriate towards a variety of stakeholders; and
  2. the continuous generation of intelligence about stakeholder issues, along with positive responses to these issues.

It is obvious that the pressure on business to play a role in social issues will continue to grow. Over the last ten years, those institutions which have grown in power and influence have been those which can operate effectively within a global sphere of operations. These are effectively the corporations and the NGOs. Those institutions which are predominantly tied to the Nation State have been finding themselves increasingly frustrated at their lack of ability to shape and manage events. These include national governments, police, judiciary and others. There is a growing interest, therefore, in business taking a lead in addressing those issues in which they have an interest where national governments have failed to come up with a solution. That is not to say businesses will necessarily provide the answers—but awareness is growing that they are occasionally better placed to do so than any other actors taking an interest.

THEORETICAL JUSTIFICATION FOR CSR

Social scientists have formulated several theories that justify the importance of corporations engaged in promoting welfare of the society in which they operate. These theories are described next.

Trusteeship Model

The trusteeship model has been evolved on a realistic and descriptive perspective. It considers the current situation of a public limited company reflecting that it is a social institution having a corporate personality as envisaged by the European concept of what constitutes a corporation.

Further, several authorities on the subject reiterate the view and argue that a public corporation is not the creation of a private contract and thus not owned by any individual. Ownership is, by definition, where the owner has exclusive rights of possession, use, gain and legal disposition of a material object. Yet shareholders merely own their shares in a company and trade their shares with others in the stock market. They do not have rights to possess and use the assets of the company, to make decision about the direction of the company, or to transfer the assets of the company to others. The residual claims of the shareholders are determined by the company and if the company’s performance does not satisfy the shareholders’ requirements, the shareholders are left with a single option of ‘exit’ rather than ‘voice’, as shareholders in general are in no way able to monitor the management effectively and neither are they interested in running corporate business. In this sense, the assumption that the corporation is owned by the shareholders is in fact meaningless. To Kay and Silberston,19 ownership rights are not important to business. Many public institutions such as museums, universities, and libraries perform well without clear owners.

In fact, the Indian Company Law does not overtly confer ownership rights on shareholders because in its view the corporation is an independent legal entity different from its members. It is also implied therein that share holders are merely the residual claimants of the company. The company has its own assets, rights and duties, and has its own will and capacity to act and is responsible for its own actions. Therefore, it is generally held that management is not the agent of shareholders.

Instead, Kay and Silberston suggest that managers are trustees of the corporation. The trusteeship model differs from the agency model in two ways. First, the fiduciary duty of the trustees is to sustain the corporation’s assets, including not only the shareholders’ wealth, but also broader stakeholders’ value such as the skills of employees, the expectations of customers and suppliers, and the company’s reputation in the community. Managers as trustees are to promote the broader interests of the corporation as a whole, not solely the financial interest of its shareholders. Second, managers have to balance the conflicting interests of current and future stakeholders and to develop the company’s capacities in a long-term perspective rather than focus on short-term shareholder gains. To establish a trusteeship model, they ask for statutory changes in corporate governance, such as changing the current statutory duties of the directors, ensuring the power of independent directors to nominate directors and select senior managers and appoint CEOs for a fixed 4-year term and so on.

Social Entity Theory

This theory has, in recent years, been promoted by three major social thinkers—the democratic political theorist, Robert Dahl (1985) using economic democracy, Paul Hirst (1994) using associationalism, and Jonathan Boswell (1990)20 using communication notion of property. The social entity conception of the corporation regards the company not as a private association united by individual property rights, but as a public association constituted through political and legal processes and as a social entity for pursuing collective goals with public objectives. The social entity theory views the corporation as a social institution based on the grounds of fundamental value and moral order of the community. Sullivan and others argue that corporations are granted charter entity for a commercial purpose, but more importantly, as a social entity for general community needs. The corporation-identified executives are representatives and guardians of all corporate stakeholder’s interests. It is implied in the manner in which corporations are formed and managed that their executives are guardians of the overall interests of all stakeholders. The recent resurgence of the moral aspect of stakeholder perspectives has been in general associated with the social entity conception of the corporation.

Pluralistic Model

The pluralistic model supports the idea of multiple interests of stakeholders, rather than shareholder interest alone. It argues that the corporation should serve and accommodate wider stakeholder interests in order to make itself more efficient and more legitimate.

It suggests that corporate governance should not move away from ownership rights, but that such rights should not be solely claimed by, and thus concentrated in, shareholders; ownership rights can also be claimed by other stakeholders, particularly employees. Stakeholders who make firm specific investments and contributions and bear risks in the corporation should have residual claims and should participate in the corporate decision making to enhance corporate efficiency.

It is asserted that if corporations practise stakeholder management, their performance such as profitability, stability and growth will be more successful.

WHAT ARE CORPORATIONS EXPECTED TO DO?

In support of the view that corporations have a moral and social obligation towards society, some economists argue that corporations depend on society for a number of facilities they enjoy such as developed infrastructure, peace and tranquillity in the work place and a trained workforce. They also depend on society for the maintenance of law and order, without which they cannot carry on their productive or distributive activities, and also for reaching to their customers through mass media. Consumers of products, without whom they have no raison d’être, are all drawn from society. If a business body draws so much from society, it has to make its own contribution to the welfare of the latter. It has a debt to pay in the first place. It has to behave as a good citizen inasmuch as it has to pay its taxes in full and on time, observe the laws of the land and, going beyond it, ensure a clean and healthy environment, maintain standards of operational and product safety and help in energy and resource conservation.

The corporations among the business community also have a moral responsibility to take a long and hard look at their values, practices and assumptions. They have to ensure that the country’s fair name is not compromised during their deals abroad, either as exporters or importers. They have to ensure maintenance of the quality of their products, keeping up to the delivery schedule, etc. In the Indian context, socially responsible corporations are expected to create employment opportunities for the disadvantaged persons by directly setting up ancillaries; provide financial resources in several ways such as financing customer-related marketing; share marketing, technical and management skills; make available marketing support by purchasing both products and services from disadvantaged communities; by sharing company facilities; and donating the company’s products and services.21

Private Sector Needs Goodwill of the Society

For historical and other reasons, private enterprise is not favoured much in countries like ours because they accumulate wealth for their own exclusive benefit at the expense of the public, and is not generally seen to contribute to the common good. Corporations should, for their own good, come forward to erase such perception in the minds of the common public. In an era of intense competition accentuated by the advent of MNCs, it is necessary for them to generate and sustain goodwill among their clients and the general public. Active participation in social welfare projects will definitely improve their visibility and place them favourably in public esteem. They should understand the fact that economic goals and social responsibility objectives need not be contradictory to each other and that these could be achieved simultaneously. They should donate generously towards public causes and must get themselves directly involved in social welfare programmes, if they have to create goodwill among the public, and to avoid being branded as profiteers and self-seekers.

To summarize:

  • Private sector is generally seen as not favouring the society. The trend is accumulation of wealth for its own cause and at the expense of the public.
  • Corporations need to erase this perception, with the intense competition in mind.
  • They should participate in social welfare projects which will improve public esteem.
  • Participation in social welfare projects ensures the simultaneous achievement of economic and social responsibility goals.
  • The private sector also has to maintain the country’s fair name when they export and import by maintaining the quality of products and sticking to delivery schedules.
  • Corporations should create employment opportunities for the disadvantaged.
MODELS FOR IMPLEMENTATION OF CSR

Though there are several theories to justify CSR activities of corporations, not all of them lend themselves to be put into practice. A model for implementation of CSR is one that enables organizations to apply a particular concept or theory as a workable proposition. Before managers can apply the concept, they need a simple working definition of it, so that there is the required conceptual clarity. For instance, CSR can be associated with philanthropy or a business strategy. When several such alternatives are available, a company may choose a model that is suitable to its core competence. There are four models of corporate responsibility globally (See Table 9.1).

 

Table 9.1 Four Models of Corporate Social Responsibility

Model Emphasis Proponent
Ethical voluntary commitment by companies to public welfare Mahatma Gandhi
Statist State ownership and legal requirements determine corporate responsibilities Jawaharlal Nehru
Liberal Corporate responsibilities limited to private owners (shareholders) Milton Friedman
Stakeholder Companies respond to the needs of stakeholders—customers, creditors, employees, communities, etc. R. Edward freeman
  1. Ethical model: In the ethical model, there is a voluntary commitment to public welfare. It can be traced back to the pioneering efforts of 19th century corporate philanthropists such as, Cadbury Brothers in England. In India, it has its roots in the Gandhian philosophy of trusteeship. Examples of this model are found in the Tatas, Birlas, Infosys, Dr Reddy’s Labs and Reliance Industries—who have provided cash for social welfare projects, community investment trusts and schools. Many companies, particularly family-run businesses, continue to engage in philanthropic activities based on this model.
  2. Statist model: This model is based on the state-owned public sector units (PSUs). It is based on the socialist and Nehruvian mixed economy format that India had adopted for its economy. Propounded by Jawaharlal Nehru, this model calls for state ownership and legal requirements of CSR. The PSUs provide housing and schools to workers. They have existed in India since 1947, such as in Bhilai and Bokaro. The inspiration has been drawn from the labour laws and management principles. But this model is now being challenged by the trend of disinvestment and privatization.
  3. Liberal model: This is the liberal approach where the belief is that the free market would take care of corporate responsibility. It is drawn from Milton Friedman’s view which states that a company’s responsibility lies mainly in improving the economic bottom-line and increasing the wealth of the shareholder. It is sufficient for the corporate to obey the law and generate wealth, which can be directed towards social ends through fiscal policy and charitable choices.
  4. Stakeholder model: Since the late 1980s and through the 1990s, there has been an increasing realization that business has a social responsibility. It is generally understood that a stakeholder in an organization is an individual or a group of individuals who can affect or is affected by the objectives and activities of the organization. This has come about through public campaigns and pressure on the shareholders. Companies like Nike have been sourcing raw material from developing countries. There were allegations of sweatshops being run by Nike and it had to change its practices. Corporate responsibility now means ethical and environment-friendly practices. Companies are expected to stick to the triple bottomline of economic, social and environmental responsibility towards workers, the shareholders and the community.
CSR AS A BUSINESS STRATEGY FOR SUSTAINABLE DEVELOPMENT

What is CSR strategy? To IBM, CSR strategy refers to enhancing stakeholder value and the delivery of measurable results to society at large.22 In the context of developing societies, “CSR is about capacity building for sustainable livelihoods”. When CSR is adopted as a business strategy for sustainable development, it goes to improve corporate performance. It offers manifold benefits to corporations both internally and externally. Externally, it creates a positive image and goodwill among the public and earns a special respect amongst peers, customers, government agencies, investors and media, all of which go a long way in promoting long-term shareholder value and sustainable development. Internally, it cultivates a sense of loyalty and trust amongst employees in organizational ethics. More significantly, it serves as a soothing diversion from the mundane workplace routine and gives workers a feeling of satisfaction and a meaning to their lives. Companies like Infosys, Wipro, Satyam, Tata Steel, Dr Reddy’s Lab and Polaris, for instance, find ways and means of getting their employees interested in CSR activities. There are reasons to believe that such employee involvement has reduced attrition rates in these organizations. It is because of all these positive factors that organizations involve themselves in socially responsible investing (SRI). SRI is gaining importance because of two factors: (i) Socially responsible companies offer long term value; and (ii) evaluating a company’s social impact on top of its financial performance provides an additional hedge against risk.23 For instance, a Chennai-based automotive parts manufacturing company faced a severe risk at its new plant in Pune when a posse of thugs barged into the plant and demanded INR 2.5 million as ransom when several locals who were the beneficiaries of the company’s CSR unit came to the rescue of the company and offered to guard it against the extortionists in future. Many MNCs which have socio-political problems in emerging markets in which they operate, find socially responsible investing as one of the means to blunt the adverse sentiments against them and as a strategy to ensure their sustainable development. Most critics of CSR are against it because they look at it separately from business strategy. CSR is an outcome for business models, which goes beyond just financial viability. Cost of helping communities to develop becomes cost of the business—like materials or labour. Billions of poor people have a potential to become part of the market, if helped. Before looking upon the poor as a potential market, the future business models must build sensitivities and capabilities to reach out to the poor.24

Businesspersons fail to appreciate the fact that CSR is a key constituent of business strategy, as to many of them it is pure philanthropy and ‘do good’ activity unconnected with their business. Sound strategy provides business with a source of competitive advantage. ‘For any competitive advantage to be sustainable, the strategy must be acceptable to the wider environment in which the firm competes.’25 Lack of CSR or its improper execution is bound to threaten the competitive advantage a corporate may hold in an industry. Besides there are certain costs associated with being a socially irresponsible organization. Nike suffered significant damage to its brand and sales when it was brought to light that the company had poor labour standards in its supply chain. On the other hand, Nike gained its brand and sales once it started improving its labour standards down the line and publicized its efforts to comply with them. Nowadays, Greenpeace and other activist groups highlight socially irresponsible corporate behaviour that leads sometimes to voluntary corrective action on the part of the companies themselves, and at other times invites government action as we have seen in several instances of public interest.

Practitioners of CSR stress the fact that it is a cost-effective way to gain competitive advantage. Corporations in their effort to engage in strategic CSR aim to match business objectives with the needs of the community. For instance, in the rain-starved Wada taluk of Thane district of Maharashtra where its bottling plant is located, Coca Cola has been harvesting rain water since 2003 to recharge groundwater and has been supplying water to people in summer, in addition to instituting water supply schemes in some villages. All these CSR efforts of the company have been integrated with its business strategy and have helped it to earn the goodwill of village folks, apart from reducing absenteeism at the workplace. An IT company for instance could help educate school or college students in its neighbourhood, who could become their potential employees. Likewise, a BPO can create its future workforce by providing vocational and soft skills training to the children in neighbouring communities. This symbiosis between corporations and the surrounding communities will go a long way in integrating CSR and business strategy for mutual benefit.

Evaluation of CSR Activity

How to evaluate CSR activities of corporations? Experts suggest three basic principles to measure the impact of CSR—sustainability, accountability and transparency.26 Sustainability of CSR activity implies that there must be a clear linkage established between use of resources and their regeneration, like the soft drink industry that uses plenty of water trying to maintain water tables through rain harvesting and recycling; or a paper manufacturing company that destroys thousand of trees to make paper pulp replacing an equal number of saplings. Accountability lies in an organization assuming responsibility for the effects of its action that have impacted the external environment. This will call for the organization compensating for the cost of damages caused by its actions, by creating benefits that exceed costs to all affected stakeholders; and transparency means that the organization reports the impacts of its action to all stakeholders truthfully without misguiding them in any manner. This will enable stakeholders to have a full and fair view of the situation.

Why a Lukewarm Response to CSR in India?

In spite of such strategy-based advantages, why does the Indian industry lag behind those in advanced countries in socially responsible investment? A survey conducted by Indianngos.com27 shows that the major obstacles to CSR in India are lack of awareness and conviction amongst the managers, and lack of impact analysis, that is, a system of measuring the impact of social activities. Absence of a clear linkage between CSR and financial success is another barrier to CSR. Besides, there are not enough trained managers and experienced advisers available to overcome these obstacles and support the process.

ADVANTAGES OF CSR

There are several advantages to corporations when they exhibit a sense of CSR and implement it. These advantages are the following:

  1. Improved financial performance: Sometime ago a Harvard University study (www.risc.org.uk/read-ingroom/csr/csr_mainconcepts.pdf) has found that ‘stakeholder balanced’ companies showed four times the growth rate and eight times the employment generation when compared to companies that focused only on shareholders and profit maximization.
  2. Enhanced brand image and reputation: A company considered socially responsible can benefit both by its enhanced reputation with the public, as well as its reputation within the business community, that would enhance the company’s ability to attract capital. Studies have found that excellent employee, customer and community relations are more important than strong shareholder returns in earning corporations a place in Fortune magazine’s annual ‘Most Admired Companies’ list.
  3. Increased sales and customer loyalty: A large number of studies have suggested an increase in the sales of companies considered to be socially responsible. Customers have shown a desire to buy products based on value-based criteria such as ‘sweatshop-free’ and ‘child labour-free’ clothing, products with minimal environmental impact, and absence of genetically modified materials or ingredients.

    A 2001 Hill & Knowlton/Harris Interactive Poll showed that 79 per cent of Americans take corporate citizenship into account when deciding whether to buy a particular company’s product; 36 per cent of Americans consider corporate citizenship an important factor when making purchasing decisions.

    A 2002 Cone Corporate Citizenship Study found that 9 per cent of the American consumers, on knowing that a firm follows anti-corporate citizenship practices, would think of shifting to another firm; 85 per cent would communicate the information to friends and family; 83 per cent would stop investing in the firm; 80 per cent would refuse employment and more than three-fourth of the respondents would not buy the company’s products.28

  4. Increased ability to attract and retain employees: Companies perceived to have strong CSR commitments often find it easier to recruit employees, particularly in tight labour markets. Retention levels may be higher too, resulting in a reduction in turnover and associated recruitment and training costs. Tight labour markets as well the trend towards multiple jobs for shorter periods of time are challenging companies to develop ways to generate a return on the resources invested in recruiting, hiring, and training.
  5. Reduced regulatory oversight: Companies that demonstrate that they are engaging in practices that satisfy and go beyond regulatory compliance requirements are being given less scrutiny and freer reign by both national and local government entities. In many cases, such companies are subject to fewer inspections and paperwork, and may be given preference or ‘fast-track’ treatment when applying for operating permits, licenses or other forms of government permission.
  6. Innovation and learning: Innovation and learning are critical to the long term survival of any business. Corporate responsibility stimulates learning and innovation within organizations helping to identify new market opportunities, establish more efficient business processes and to maintain competitiveness. Eighty per cent of European business leaders believe that responsible business practice allowed companies to invigorate creativity and learn about the market place. The long-term survival of organizations is dependent upon its ability to understand and act on societal and technological change. Many organizations are co-innovating with business partners to identify new approaches that deliver business benefits whilst tackling a social or environmental issue.
  7. Risk management: Sir Robert Smith, Chairman of Weir group has stated, “Many corporations are broadening their definition of risk to encompass wider and longer-term risks that incorporate social and environmental issues. They are engaging with a wider external audience to understand needs and expectations and take action, where appropriate”.29

    Over the past few years, there have been a number of guidelines and initiatives to encourage business to manage risks across their business. Morley Fund Management based in London has worked out a sustainability matrix on the basis of which companies are ranked and listed on FTSE 100 Index. The index is based on the social and environmental performance of the concerned companies. Companies now recognize the long-term financial risks they face by ignoring environmental and social impacts.

  8. Easier access to capital: The Social Investment Forum30 reported that, in the United States in 1999, there was more than US$2 trillion in assets under management in portfolios that use screens linked to ethics, the environment, and corporate social responsibility. It is clear that companies addressing ethical, social, and environmental responsibilities have rapidly growing access to capital that might not otherwise have been available.
  9. Reduced operating costs: Initiatives like the reduced use of agrochemicals and efforts to reduce the emission of greenhouse gases can reduce operating costs as well as improve environmental performance. Companies can reduce waste disposal costs as well as gain additional income by selling recycled materials. Effort like flexible scheduling and other such programmes increase productivity in the company by reducing absenteeism and attrition.
SCOPE OF CSR

Three levels of social responsibility can be identified (evolution of areas of social responsibility)

  • Market forces: Responding to the demands of the market. Managerial decisions may involve business responding to the economics of the market by efficiently and effectively using resources. The greatest impact of business on society comes form ‘normal’ operations, which therefore shows greatest social responsibility.
  • Mandated actions: Government mandates or negotiated agreements (regulatory requirements and guidelines, contracts/agreements with stakeholders). Managerial decisions may reflect business responses to government-mandated requirements and/or pressure group stakeholders (e.g., unions)
  • Voluntary actions: Managerial decisions may be undertaken without outside pressure, such as in voluntary social programmes.

CSR addresses the following issues:

  • community, assistance in solving community problems;
  • health and welfare;
  • education;
  • human rights;
  • natural environment; and
  • culture (i.e., music, arts, sports, etc.).

Understanding Social Responsibility of Business

The social status which people enjoy, the social groups to which they belong and within which they have grown and from which they have initially received their value system, deeply influence, and not infrequently, determine their understanding of social responsibility. This is true of the business world as well. J. R. D. Tata in his key note address at the inauguration of the Tata Foundation for Business Ethics some years ago, outlined the ethos/tradition of the Tatas in these terms: ‘The Tata Industrialist Ethos inherited from the great Jamsetji himself, tried to combine high standards and quality production with sincere concern for ethical values such as fair and honest management, product quality, human relations in industry and industrial philanthropy.’31

The scope of social responsibility is wide and could be considered in terms of different viewpoints, some of which are given as follows.

Protecting and Promoting Stakeholders’ Interests

Some consider social responsibility in terms of services rendered to claimants or stakeholders, who could be both insiders and outsiders. The insiders are employees and shareholders while outsiders include consumers, suppliers, creditors, competitors, government and the general public. Consumers expect quality goods and services at fair prices. Workers expect fair wages without being exploited. Shareholders expect reasonable dividends and fair return on investments. Managers expect challenging jobs with attractive salary. Government and the general public expect them to add to the wealth and welfare of the country without polluting the environment. In short, business organizations have to consider themselves the custodians of public welfare, by rendering such services to the various sections of society. Some of the corporate social responsibilities to different groups of stakeholders are given below:

  1. To consumers and community
    • Goods must meet the requirements of different classes, their tastes and purchasing power.
    • Goods must be reasonably priced, must be of dependable quality and of sufficient variety.
    • Provision of after-sales service advice, guidance and maintenance.
    • A fairly widespread distribution of goods and services among all sections of consumers and community.
    • Provision of free competition and prevention of concentration of goods in the hands of a limited number of producers or purchasers or groups.
    • Present a ‘good image’ in the minds of the public for honesty and integrity of character.
    • Advertising policy should be based on moral/ethical principles. It should not mislead by false, misleading and exaggerated advertisements.
    • Support to educational, charitable and other programmes for the benefit of the community.
    • Social accountability to consumers and public regarding the business conditions.
    • Avoidance of social and moral dangers of ‘high spots’ and ‘social tensions’.
    • Prevention of the growth of slums, improvement of housing conditions, elimination of crimes in industrial areas by providing training and job counselling for youth in situations where they may take to crime, and meeting the heavy costs of pollution and waste disposal.
    • Business should have a progressive outlook.
    • Proper training should be offered to the existing employees.
    • Should be a law-abiding citizen of the State.
    • To pay its dues and taxes to the state fully and honestly.
    • Maintain impartiality towards political affairs, that is, to abstain from direct political involvement; and not to support political parties.
    • To follow honest trade practices, and avoid activities leading to restraint of trade and commerce.
    • To try not to contact public servants for selfish ends.
    • To sell commodities without adulteration.
  2. To employees
    • Promote a spirit of cooperative endeavour between employees and employers through participation in decision making and in improving production and administration.
    • To pay fair and reasonable wages to labourers and fair salaries to executives.
    • To develop and adopt a progressive labour policy based on recognition of genuine trade union right; settlement of disputes and conciliation; to create a sense of belonging to the business, and improving human qualities of labour by education, training, living conditions, housing, leisure and amenities.
    • To provide reasonable and just work conditions.
    • To recognize the labourer as a ‘human being’ and respect his dignity, and to preserve his or her individual liberty.
    • Provide facilities for joint consultation and collective bargaining.
    • Help development of proper leadership from among the employees.
    • Guarantee religious, social and political freedom to workers to take part in civic activities.
  3. To owners and inter-business establishments
    • To provide a fair return or dividend on the capital invested.
    • Give fair and impartial treatment to all.
    • Develop healthy cooperative business relationship between different businesses.
    • Check the advance of such unfair practices as price-rigging, undercutting, patronage, unfair canvassing and unethical advertisements.
    • Help in the control of monopoly and promotion of healthy competition.

Promotion of Common Welfare Programmes

Another way in which the scope of social responsibility could be viewed is in terms of social concern and promotion of common welfare programmes for the benefit of the poor and the indigent public. Companies have highlighted social issues and brought them to the notice of the public through hoardings and other means of drawing the attention of people to the issue in question and generate public awareness. There had been occasions, though limited in number, where corporations have joined hands to sponsor advertisements promoting public causes or issues of social concern such as drug addiction and smoking. Business organizations could also consider social responsibility in terms of relatedness to their own activities. Producers of dental or eye care products organize mass clinics in villages and semi-urban areas, where surgeons attend to the medical needs of the poor and indigent. Such attempts greatly relieve the burden on the finance-strapped State in a developing country like India where people, due to poverty and for historical reasons, depend solely on the government to render every type of service.

Philanthropy

There are others who view social responsibility as philanthropy.

‘Philanthropy has always been the reflection of a class society because it has depended on a division between rich givers and poor recipients. The wealthy have not only given because they have more; but because by alleviating distress they have secured their own position against those who might displace them” Philanthropy by big business is generally exercised through, ‘foundations’. Such philanthropic activity not infrequently adds to the prestige of an organization, builds up a humanitarian image among the public, and, more importantly, widens the organization’s influence to fields which often are of vital importance to the business world.’

Ford, Rockefeller and Carnegie Foundations have been key investors in the growth and development of higher education institutions, think tanks and research centres around the world. Indeed, The Ford Foundation has been described as the world’s largest investor in new ideas. They are architects of international networks of scholars and agencies involved in the production and dissemination of knowledge. Through these institutions and networks they have been in a unique position to influence cultural and social policies on an international scale.

In India, it is a widely recognized fact that the House of Tatas is known for its acts of philanthropy for more than a century. Recently, the Tata family has been chosen for the internationally acclaimed Andrew Carnegie Medal of Philanthropy by the Carnegie Corporation of United States. The Tata family has been chosen along with three other families, all of them American, in recognition of its ‘long standing commitment to philanthropic causes’ which has contributed to ‘beneficial changes in the lives of millions of people’. The award was instituted in 2001 and for the first time an Indian family (Tatas) received the award at a ceremony in Pittsburg on 17 October 2007. Ratan Tata, Chairman of Tata Group companies, received the award from India’s former President, Dr A. P. J. Abdul Kalam.32

J. R. D. Tata in his keynote address at the inauguration of the Tata Foundation for Business Ethics some years ago said: ‘The Tata industrialist ethos inherited from the great Jamshetji himself, tried to combine high standards and quality production with sincere concern for ethical values such as fair and honest management, product quality, human relations in industry and industrial philanthropy.’33 However, in a strict sense, the concept is restricted to the observance of rules and regulations that govern business transactions, and in a way facilitates a smooth running of business. ‘In a wider sense, it demands conformity with accepted norms and interpretations of the laws dealing with business activity. Moreover, in a business world, where cut-throat competition and survival of the fittest dictate the law and have the upper hand over humanity, philanthropy also means a display of humanity which will manifest itself in some form of benevolent activity among the larger public. It undoubtedly benefits some individuals or communities in need.34

Take the instance of how industrialists came to the rescue of the quake-devastated people in Gujarat. When Gujarat was shattered by the fury of the worst earthquake in recorded history over the past 50 years, a free phone facility set up by Care India, Bharti-BT and CISCO provided the most immediate emotional relief for people anxious for news of their families, as well as access to medical assistance and advice. Industrialists through the Confederation of Indian Industry (CII) and the Federation of Indian Chambers of Commerce and Industry (FICCI) have committed large funds that have enabled several NGOs adopt villages that were most severely hit and provided several others a great deal of relief measures.35 Likewise, when disaster struck New York and Washington in the aftermath of terrorist attacks on 11 September 2001, American MNCs played their part as good corporate citizens. Most have donated substantial amounts towards the disaster relief funds and made serious gestures towards their social responsibility. While the US food giant McDonalds had offered food for the rescue workers at different locations across the country in addition to a donation of US$ 2 million, General Motors, General Electric, Ford Motor and Unocal also did their best to alleviate the sufferings of those affected by the tremendous human tragedy.

Good Corporate Governance

Some social thinkers view that in the context of emerging economies good corporate governance itself is an ingredient of CSR. Indian corporations, for instance, have insulated themselves for too long from wholesome developments evolving elsewhere. A closed economy, a sheltered market, limited need and access to global business/trade, lack of competitive spirit, a regulatory framework that enjoined mere observance of rules and regulations rather than realization of broader corporate objectives, marked the contours of corporate governance for well over 40 years.

Corporate democracy, professional management and maximization of long-term shareholder value are attributes of good corporate governance.

Corporate governance has acquired a new urgency in India due to the changing profile of corporate ownership, increasing flow of foreign investment, preferential allotment of shares to promoters, gradual unwinding of the control mechanism by the State that had hitherto provided protective cover to even poorly managed corporations and the increasing role of mutual funds since 1991.36

Render Social Service

Some industrial houses have been promoting activities that supplement the efforts of public authorities in certain areas that are important for all-round human development. The Tatas have contributed to the growth of fundamental and social sciences by building and nurturing institutions of higher learning in these areas. The Birlas have been building and maintaining beautiful and monumental places of worship in several cities in addition to popularizing science through planetariums. Some corporations like Britannia Industries and MRF Tyres have been sponsoring sports events and helping sportspersons attain international standards. TISCO has made several contributions in such diverse areas as community, especially tribal area development, rural industrialization, etc., SAIL has done its mite in agriculture, health care, drinking water supply, dairy and poultry farming. ITC Ltd is socially active in agriculture, sports and pollution control, while Brooke Bond has interests in animal welfare, providing veterinary services and improvements in animal breeding. Down south, several corporations have contributed to the field of education and related areas and have also rendered social service.

The Loyola Institute of Business Administration (LIBA) has instituted The Mother Teresa Award for Corporate Citizen to showcase as role models corporates that have rendered social services far beyond the call of their duty and responsibility for others to emulate. It has so far identified Titan Industries, Tamil Nadu Newsprints and Papers Ltd, Polaris Lab, TVS Motors and Orchid Chemicals and Pharmaceuticals for the Award in recognition of several socioeconomic projects they have been running for the welfare of the disadvantaged sections of society in and around the places where their factories are located. Some studies have shown that there are several others too who have done yeoman services to the people at large. Some of them are as follows: Bajaj Auto, Balmer Lawrie, Bank of America, Business Standard, Coca Cola India, Dr Reddy’s Laboratories, Forbes Marshall, L&T, NTPC, Nicholas Piramal, Excel Industries, Hindustan Machine Tools, Amar Jyothi Industries, Hindustan Lever and IBM, to mention a few major corporate players. While some of them work for the welfare of the poor, handicapped and the marginalized sections of society in and around their plants, facilities and offices, the others go beyond their locations and reach out to those who are in dire need.

Abiding by Rules and Regulations

In common practice, generally the concept of ethical responsibility is restricted to the observance of rules and regulations that govern business transactions. Such a concept is widely accepted since it facilitates a smooth running of business. It demands conformity with accepted norms and interpretations of the laws dealing with business activity. When we stress that corporations should abide by rules and regulations, it implies that they should observe them not only in letter, but also in spirit. They should abide by the law of the land in every respect, comply with the rules and regulations imposed on them by SEBI, stock exchanges, Department of Company Affairs, pay taxes in full and on time and protect the fair name of the country if they are engaged in external trade.

Creation of Wealth

Rev. John Mahoney S. J., Dixon Professor of Business Ethics and Social Responsibility at London Business School tends to see in the very activity of a business organization something beneficial in itself for society and truly praiseworthy from an ethical and social point of view. He explains ‘Developing the earth’s resources to produce goods and services to satisfy the needs and aspirations of the increasing millions of its inhabitants not only adds value in economic terms. It enhances the value and quality of human living’. The quality of human life can be improved by expanding human freedom and culture, and by providing a social environment in which human dignity too can develop and prosper. Within this line of reflection the business of creating wealth in and for society is then seen to be a positive and constructive occupation for men and women.37

Therefore, social responsibility has to do with much more than producing goods and services thus increasing the earth’s wealth. Social responsibility has to do with the type of goods and services which are offered. Social responsibility lies in wanting to know for whom the goods are produced and whether these goods respond to the real needs of the majority of the population inclusive of its poor. It has to do with a concern for the needs of the generations to come; it has to do with such things as ‘sustainable development’ and ‘safeguard of the environment’. Unfortunately, on all these accounts the performance of business in the past few decades has been most distressing.

Ensure Ecological Balance

Most corporations while producing goods have allowed the environment to be polluted, atmosphere and water bodies to be poisoned. They have, therefore, a moral responsibility to restore the ecological balance.

Reducing harmful environs, low pollutants and harmony with nature are important elements in corporate social responsibility.

Many Indian corporations such as NTRC, Tata Steel, ITC, Sakthi Masala Pvt. Ltd., TVS Motors Ltd. (Srinivasan Services Trust), Sundaram Clayton, and Pricol Industries are already doing this.

Focus on the Human Element

Companies committed to CSR would improve quality of work-life; reduce hazards, offer equality in employment opportunities and wages.

They would settle industrial disputes within the legal framework, collective bargaining and minimum economic disruption. While relocating plants, they would ensure employees are being assisted in adjusting to new arrangements. Job and retirement security of a reasonable nature would be provided. Bonded labour, slavery, etc. are ills that would be scrupulously avoided.

Improve Productivity

Organizations committed to CSR would ensure that employees are made creative and their treatment humane. Working costs would be reduced and new technology would be inducted,while being alert to negative impacts. They would, even while adopting superior technology and expertise ensure job security of employees. Workers would be offered training so that they could be deployed to increase productivity.

Sponsor Social and Charitable Causes

Some entrepreneurs had not only built industrial empires, but also contributed individually to certain social and charitable causes. J. R. D. Tata’s contribution to the growth of the Indian airlines industry, population-related research, education of the underprivileged, etc. had been exemplary. The late D. C. Kothari, with his wide-ranging interests, had been the moving spirit behind several charitable trusts and institutions of higher learning, apart from being the prime mover of the Standards Movement in the country and earned the rare distinction of becoming the president of International Organization for Standardization (ISO) from a Third World country. There are several other captains of Indian industry who have done themselves and the country proud.

Supplement State Efforts

There are several areas where corporations can effectively supplement the ever growing welfare activities that the State is expected to undertake, but lacks the resources. Corporations can run schools, either in their own areas or in any other adopted village of their choice, providing good quality primary education. If each of the more than 2,00,000 corporations the country has adopts three villages, we will be able to cover the entire country and provide better primary and elementary education to our children. It will go a long way in promoting literacy and overall development of the country. In this context, the Asian Tigers like Thailand, Philippines, Indonesia, Malaysia and Singapore have achieved much higher growth rates, since the 1950s, before the currency crises overshadowed their achievements.

Corporate resources can also be allocated to run family planning clinics, medium sized hospitals in villages, literacy campaigns and adult education programmes, campaigns against smoking, pollution, AIDS, caste discrimination and communalism and to provide housing, sports and recreational amenities for slum-dwellers and the deprived sections of the society. Corporations can also contribute effectively towards urban management as has been done in places like Jamshedpur.

Another area where their concern for social welfare can be shown is in the maintenance of the public health system. Corporations cannot be mute spectators to the deterioration in public health. Besides the moral and social aspects involved, they have to appreciate the fact that all their activities, business or otherwise, will come to a stand-still, if any disease of epidemic proportions breaks out. In 1999, there emerged a unique government–industry participation to improve public health in Tamil Nadu. In the first phase of the programme, 57 primary health centres (PHCs) and 6 Government Hospitals were adopted by 19 industrial groups based in the state. According to official sources, another 40 more PHCs were to be adopted in the second phase with more industries joining in due course. The then Chief Minister, while inaugurating the programme, commended the industrial houses, whose whole-hearted and voluntary participation would go a long way in enhancing the welfare of the people.38

STEPS TO ATTAIN CSR

The International Chamber of Commerce recommends the following nine steps to attain CSR:

  1. Confirming CEO/Board commitment to prioritize responsible business conduct;
  2. Stating company purpose and agree on company values;
  3. Identifying key stakeholders;
  4. Defining business principles and policies;
  5. Establishing implementation procedures and management systems;
  6. Benchmarking against selected external codes and standards;
  7. Seting up internal monitoring;
  8. Using language that everyone can understand; and
  9. Seting pragmatic and realistic objectives.

Corporations exist because they, in a sustainable fashion, enable people to constructively practice their craft and create jobs, economic value, and wealth for the society and the enterprise, especially free societies.

EXTERNAL STANDARDS ON CSR

The ever-increasing interest in CSR has been matched by substantial growth in the number of external standards produced for business by governmental, non-governmental, advocacy organizations, with a view to supporting, measuring and assisting in implementation, and to create a platform for accountability for performance on CSR issues. These external standards developed and evolved over a period of time is found necessary as companies do not have a clear vision and focus about what constitutes CSR, how their investment quantum on it is decided, how to evaluate the outcome and so on. Some of the standards are meant to address single-issue (e.g. focused on environmental performance or corporate governance) while others address a range of CSR issues.

Most of the CSR-related standards produced in recent years require corporations to voluntarily develop and implement policies and practices in consonance with suggested performance standards on various CSR issues. In recent years, a limited number of standards has been developed, which instead of providing substantive recommendations for implementation of specific CSR policies and practices, are designed to provide guidance for companies which seek to report on their social, environmental, and economic performance. In many cases, these performance standards and reporting standards are complementary in nature.

  1. The Caux Round Table (CRT): Founded in 1986, CRT promotes principled business leadership and the belief that business has a crucial role in identifying and promoting sustainable and equitable solutions to key global issues impacting the physical, social and economic environments. The CRT consists of senior business leaders drawn from Europe, Japan and North America, and is based in Caux, Switzerland. The CRT has produced a document called Principles for Business, which seeks to express a worldwide standard for ethical and responsible corporate behaviour for dialogue and action by business and leaders worldwide. The CRT principles include the social impact of company operations on the local community, a respect for rules and ethics, support for multilateral trade agreements that promote the ‘judicious liberation of trade’, respect for the environment and ‘avoidance of illicit operations’, including bribery, money laundering and other unethical, corrupt practices.
  2. Organization for Economic Cooperation and Development (OECD): OECD’s guidelines are recommendations by governments to multinational enterprises and are voluntary principles and standards, which are not legally enforceable. Governments adhering to the guidelines encourage companies operating within the countries to observe the guidelines wherever they operate. The guidelines were first published in 1976, and updated in June 2000.
  3. United Nations Global Compact: The UN Global Compact (UNGC) was formally launched in September 2000. The then UN Secretary-General, Kofi Annan called on world business leaders to voluntarily “embrace and enact” a set of nine principles in their individual corporate practices and to support complementary public policy initiatives. The standard includes specific practices that endorsing companies would commit to enact, as well as a section describing the benefits to business for embracing each principle. Tata Steel is a member of UNGC. In April 2006, Kofi Annan appointed B. Muthuraman, Managing Director, Tata Steel, along with 19 others representing business, labour and civil society leaders from around the world to serve on the Board of the UNGC. With more than 2,500 participating companies in over 90 countries, UNGC is the world’s largest voluntary corporate citizenship initiative.
  4. Asia-Pacific Economic Cooperation (APEC) business code of conduct: APEC is an international organization established with the view to promote open trade and economic cooperation among 21 member economies around the Pacific Rim.39 The code, issued as a draft in 1999, is an inspirational standard that draws significantly on a variety of other internationally recognized codes and standards. The drafting of the code similar to the one by OECD was initiated by business leaders from companies functioning in APEC countries. The code was prepared to supplement the supporting companies’ existing codes of conduct. In addition to providing recommendations for specific ‘company action’ on a range of issues, the code addresses policy recommendations to APEC member governments.
  5. The Global Reporting Initiative (GRI): It is more of a reporting standard rather than a performance standard. It was established in 1997 with the objective of designing globally applicable guidelines for preparing enterprise-level sustainability reports that include social and environmental indicators. The GRI was convened by CERES (Coalition for Environmentally Responsible Economics), and called for the active participation of corporations, NGOs, United Nations’ agencies, consultants, accountancy organizations, business associations, universities, international organizations and other stakeholders from around the world. The GRI released in 1999 its Sustainability Reporting Guidelines. It is now a permanent, independent, international body with a multi-stakeholder governance structure. Its core mission is to maintain, enhance and disseminate the Guidelines through a process of ongoing consultation and stakeholder engagement. The GRI has begun to add sector-wise supplements, beginning with financial services and tour operators.
  6. AA1000 accountability: Instituted in 1999, AA1000 is an accountability standard created with a view to complementing the GRI Reporting Guidelines and to improve accountability and performance through stakeholder engagement. The standard has been designed to help the users establish a systematic stakeholder engagement process that generates the indicators, targets, and reporting systems needed to ensure its effectiveness in overall organizational performance. The AA1000 Series has added a set of specialized modules, including the AA1000S Assurance Standard, the first of its kind for social and sustainability reporting.
  7. Social accountability 8000: It is another standard that specifies requirements for social accountability to enable a corporate to develop, maintain, and enforce policies and procedures in order to manage those issues which it can control or influence; and demonstrate to interested parties that policies, procedures and practices are in conformity with the requirements of this standard and are applicable to corporations regardless of their geographic location, industry sector, or company size. The standard is human resource based and is maintained by Social Accountability International. It covers standards and monitoring programmes for child labour, forced labour, disciplinary practices, non-discrimination, wages and benefits, working hours, health and safety, freedom of association and collective bargaining and management systems.
  8. Principles for global corporate responsibility: This is not a standard but a ‘collective distillation of the issues of concern’ to religious-oriented institutional investors developed by groups in the United States, Canada, and the United Kingdom. The Interfaith Center on Corporate Responsibility (ICCR) has published these Principles for Global Corporate Responsibility The ICCR comprises more than 275 religious institutions that use their investments to promote social change. The principles cover a wide spectrum of CSR issues, including workplace, community, environment, human rights, ethics, suppliers and consumers, and are published as a reference tool that companies (and investors) can use to benchmark or monitor their own policies, or those of the companies in which they invest.
  9. The Global Sullivan Principles: The Global Sullivan Principles introduced in 1999 were meant to expand upon the original Sullivan Principles, which were developed by the late Rev. Leon. H. Sullivan in 1977 as a voluntary code of conduct for companies doing business in apartheid South Africa. ‘The objectives of the Global Sullivan Principles are to support economic, social and political justice by companies where they do business; to support human rights and to encourage equal opportunity at all levels of employment, including racial and gender diversity on decision-making committees and boards.’ The objectives also include training and helping the growth of poor workers, providing them opportunities in technical, supervisory and management areas. The Global Sullivan Principles are also meant to help the promotion of greater tolerance and understanding among peoples of the world. By doing all these, the principles would help in the enhancement of the quality of life, with dignity and equality to all concerned—communities, workers and children.40
  10. The Keidanren Charter for good corporate behaviour: Nippon Keidanron, the Japan Business Federation initiated a 10-point charter, which states: ‘Corporations, in addition to being economic entities engaged in the pursuit of profit through fair competition, must be useful to society as a whole.’41 Keidanren members agree to follow the spirit of the charter as the criterion of their corporate behaviour. The charter was revised in October 2002 to emphasize roles and responsibilities of corporate executives in an attempt to prevent the recurrence of corporate misconduct.42
PRESTIGIOUS AWARDS FOR CSR

It is often felt by those who are engaged in CSR activities that while companies are berated both by the public and the media for any of their misdemeanour, they are hardly commended for the good social work they do, and for the time, efforts and resources that go into them. Such commendation of their work will not only encourage them to do more and be committed to the service, but showcasing of corporations that do exemplary work in this field will also inspire other passive corporations to emulate them. Table 9.2 illustrates some of the awards that have been instituted both in developed countries like the United States and the United Kingdom and in a developing country like India.

The number of CSR-related awards has grown in the last decade. While a handful of awards, listed below, cover general CSR performance and leadership, many more awards cover specific areas, such as environmental responsibility, workplace practices, ethics and community involvement. These awards can be found in other CSR reports on those subjects.

THE INDIAN PERSPECTIVE

India has had a strong tradition of philanthropy. Business and corporate philanthropy can be traced to the pre-independence days in India, when companies funded education and other social welfare activities. But there is a fine line of distinction between CSR and philanthropy. CSR essentially means a more integrated and proactive action towards all the stakeholders while philanthropy could be a charitable donation to the people in and around the area of operation of the company even without ethical values. An organization needs to take a balanced view of the components of CSR and implement the strategies in coherence with the vision, mission and values of the organization.

 

TABLE 9.2 Prominent and Prestigious Awards for Corporate Social Responsibility

 

While companies in the United States and Europe are pressured by the stakeholders to adopt CSR practices, the Indian companies so far have not experienced any such pressures. Indian companies are still not legally bound to formally report CSR activities unlike the developed countries which adhere to the Global Reporting Initiative (GRI). India ranks last in terms of the level of social responsibility demanded from companies. But according to the survey conducted by Centre for Social Markets, there has been a growing change in the attitude of Indian firms towards CSR.

Reasons for Change in CSR Attitudes

There is increasing evidence to suggest that we need to explore innovative ways of doing business so that all the stakeholders are able to participate; when differences are valued, policies are inclusive and the impact on the society is positive. There are no indicators of measurement to help evaluate the CSR initiatives but increasingly the companies are building an integrated model that is in alignment with the business processes and functions.

Social responsibility is not the exclusive domain of the government and ‘passive philanthropy’ alone no longer constitutes CSR. Most of the corporations perceive ethical conduct including compliance and transparency of business and nation building as the closest definition of CSR. Many global surveys have revealed that three of the most important factors that impact social reputation of a corporation are: business ethics, compliance with regulatory requirements and consistency in value delivery. Only 12.4 per cent of Indian companies pursue strategic philanthropy as compared to 48 per cent of the multinationals. Charity is pursued by 35 per cent of Indian companies and 62 per cent of the multinationals. Both Indian and multinational corporations give money primarily to support education services, environment, health services and uplifting the living condition. Support for art and culture, employee volunteerism, event sponsorship and matching grants are some important activities of the multinationals but not Indian companies. The most responsible companies in India are the following:

  • MNCs—Unilever, Sony, Johnson & Johnson, Coca-Cola, P&G. The main reason stated was that these were trusted brands. Coke was mentioned because of its sponsorship of sports events. However, the factors of environmental care, human rights, transparency were not mentioned.
  • Indian—Tatas, Reliance, Birlas and BHEL. The reasons mentioned were ethical care, environmental practices and social work. MNCs were rated lower than Indian companies.

India is moving from corporate philanthropy to the stakeholder model. For example, the Tatas are known for their work in Tatanagar (Jamshedpur) and have set up a Tata Council for Community Initiatives. But by and large, Indian companies have a long way to go in imbibing corporate responsibility as a business strategy. Corporate philanthropy is only a part of corporate responsibility.

INDIA ON THE ETHICAL/CSR MATRIX

There is a difference in approach towards CSR in India vis-a-vis the developed nations. Companies in India exert considerable influence on the government to shape favourable business policies and have regulatory frameworks in place. But barring a few—Bajaj, Godrej, Tata, Infosys, Dr Reddy’s Labs, etc. most companies do not seem to display a social conscience.

But every year, Indian companies are putting in more money in community activities. There are several reasons for this—one, it is an ideal tool for building ‘reputation capital’. Second, it stems from the concept of optimization of profits as against maximization of profits.

A number of recent surveys have been conducted in India to understand what CSR means in the Indian context, what the expectations of different stakeholders are and what drivers and barriers face the companies.

As per ‘The Corporate Social Responsibility Survey 2002, by UNDP, British Council, CII and PwC’43 the perception of CSR among the Indian corporations is that of ethical conduct including compliance and transparency of business and nation building. They consider business ethics, compliance with regulatory requirements and consistency in value delivery as the three of the most important factors that impact social reputation of a corporation. In the absence of a structured approach to defining CSR and systems for its deployment, companies are often unaware of the nature of CSR-related initiatives undertaken, the magnitude of their investments in CSR related initiatives and since the investments are not systematically deployed, these at times prove to be ineffective. The survey also indicated that many companies (nearly 42 per cent) deploy CSR by instituting a certified management system but only few (19 per cent) have a periodic performance monitoring mechanism in place. This may be a manifestation of the fact that in the absence of mechanisms and guidelines for assessment of outcomes of CSR initiatives, the companies are restricted in undertaking performance monitoring and evaluation.

There is a transition from the ethical-statist model emphasizing philanthropy and employee relations to the liberal-stakeholder concept. Ethical model constitutes a significant portion with 48 per cent of the companies having delineated policies for charitable contributions. The shades of statist model in the current perception and practice of CSR are visible with concerns like employee welfare (66 per cent), labour practices (61 per cent) and customer relations (64 per cent).

Wider adoption of CSR in Indian companies will be enabled by

  • provision of tax, duties and custom benefits;
  • inclusion of CSR performance of promoters as a parameter in according fast track clearance to projects;
  • decreased government interventions;
  • depreciation benefits where asset investments are made; and
  • development of guidelines on estimation of socioeconomic impacts.
CORE-BCSD INDIA

There are several organizations now emerging on the Indian scene that focus on issues of CSR. Corporate Roundtable on Development of Strategies for the Environmental and Sustainable Development (CORE) and Business Council for Sustainable Development (BCSD) India Information Security, Control & Audit of Business Information System is a unique grouping of corporate organizations that, for instance, are trying collectively and individually to build in sustainable development concepts in their operations. CORE-BCSD India includes some of the most innovative, largest and also the most forward looking organizations in the country. The objectives of sustainable development rest within the principles of CSR, because unless the needs of the society, both present and future, are served, sustainable development would remain only a myth. And the most significant step in pursuing CSR Information Security, Control & Audit of Business Information System is to proactively protect the environment.

The principal deterrent to the adoption of CSR is the lack of linkage between it and financial success. Since no direct relationship is evident, companies find it difficult to assess how much to invest in CSR, where to stop and how to achieve the right balance between financial performance and CSR. Also, explicit commitment to CSR often lays the corporation open to demands from vested interests. The CSR investments have a very long gestation period and lack visible results making it impossible to assess the effectiveness of investment.

The lack of comprehension and capacity to implement CSR acts as a major hindrance to its adoption on a wider scale. Potential political interference in implementation of CSR-related activities and the lack of tools and mechanisms to measure, evaluate and report CSR practice and performance also act as a hindrance.

Some other concerns perceived by corporate India are an anticipation of increased demand from the interested communities and also an increase in operating cost on the adoption of CSR. Increased interventions from regulatory bodies and a potential adverse impact on quality of goods and services are other potentially important concerns in implementation of CSR.

The ‘Altered Images: The 2001 State of Corporate Responsibility in India Poll’44 was conducted by TERI-Europe in collaboration with New Academy of Business and Commonwealth Science Council to assess the existing practices and their fitness to the evolving global corporate responsibility. The poll focused on four dimensions of corporate responsibility, namely, worker health and safety, community relations, environmental sustainability, and accountability to stakeholders.

It was designed to capture perceptions and expectations (related to corporate responsibility) of the stakeholders. The survey found that there is more trust in the Press and NGOs than in business. The IT sector is regarded as the most responsible and alcohol and tobacco industries as the least.

Government-controlled sectors like pharmaceutical and financial sectors are perceived to be more socially responsible than the private sector. One of the major issues is gender discrimination. It was felt that hiring policies and age restrictions were against women’s interests, especially among workers.

Public expectations from corporations in social and environmental matters are rising. Environmental pollution is being regarded with great concern. The main expectation of the companies by the public was that they provide good quality products at low prices, treat employees well without discrimination, protect the environment, help bridge the gap between the rich and the poor, and help in social and economic development.

Corporations think that NGOs are the most trustworthy to work with in the interest of the country. Employees and the public believe the media and religious groups. The government is not regarded with much favour when it comes to CSR. Similarly, companies are not trusted to report fairly on their performance. External verification is trusted. Hence, there is a great role that NGOs and media can play in moving the agenda forward.

ETHICS AND SOCIAL RESPONSIBILITY OF BUSINESS

Business Ethics in India Today

In a recent international survey of levels of honesty in government and business, countries were ranked by giving them points out of 10 for their honesty: Singapore was number one in the world with 9.7 points while India was seventh with 3.1 points. Clearly, our country’s ethical image badly needs furnishing.45

In 1992, XLRI, Jamshedpur conducted a highly successful conference of company directors on business ethics. It was attended by over 100 participants and the proceedings were published under the title Corporate Ethics, the first book on the subject in India. Till 5 years ago, XLRI was the only management school which had ethics as a 3-credit core course. Now LIBA and the IIMs too have introduced Ethics in their curriculum. Why this upsurge of interest in ethics today? It is interesting to trace the crests and the troughs traversed by the concepts of ethics and social responsibility of business in India.

Indians are inclined to believe that they are a highly ethical nation, certainly more so than most others. Yet in 1964, Gunnar Myrdal,46 in his celebrated work Asian Drama, noted that in British days only petty corruption at lower levels was known in the Indian administration, whereas since independence corruption had spread throughout the system and indeed begun from the very top. It is this, says Myrdal, which is holding India back. Some years back, Time magazine47 reported that in the early years of independence, Indians bribed bureaucrats to do things which they were not supposed to do, but now they bribe them to do things which they are expected to do. India would now probably have become another Asian Tiger, if corruption was not endemic in the country.

Why So Much Corruption?

The common man is forced to ask what has happened to its leaders. There seems to be little doubt that the principal culprits responsible for corroding the ethical sense of the industrial and political leaders of India is first the type of governance ‘we, the people’ gave to ourselves and second, the type of economy that was imposed on us.48 First, we chose an electoral process in which the spending of millions of rupees to win a seat was forbidden, yet necessary. This single factor made corruption and black money a substantial part of the electoral process, and therefore of government and industry.

Secondly, thousands of faceless bureaucrats and venal politicians49 decided every aspect of the economy: what should be produced, how much, by whom, at what price, with what technology and raw materials. Thus economic decision making was taken away from economists and end-producers, from farmers, industrialists and from market forces and handed over to politicians and bureaucrats, who had a field day in making hay while the sun was shining.

The License Raj

As a result, a forest of permits, licenses and controls was set up, and the notorious ‘License Raj’ successfully dwarfed, stunted and made a ‘bonsai’ out of the economy of this enormous country. The government inspector had a field day and had a say in every aspect of Indian economy, from production to consumption, from distribution, to exchange. The ubiquitous Inspection Raj touched every aspect of the life of the Indian, dwarfed his freedom and destroyed his economic well-biding.50

Black Money

Obviously, bribes had to be paid in unaccounted cash to get licenses, permits and the like. To get such large amounts of unaccounted cash, taxes of all kinds were evaded, exports under-invoiced and imports over invoiced. Corruption is like cancer eating into the very vitals of the social, political and economic life of the country. Corruption at higher levels of the administration generates huge amounts of black money by way of dishonest businessmen and public servants. Since black money is so widespread and has become socially acceptable, it has corrupted every profession: teachers, doctors, lawyers, the judiciary, and it have spread its tentacles throughout every system of the country, from top to bottom.51

SOCIAL RESPONSIBILITY AND INDIAN CORPORATIONS—A SCORE CARD52, 53

The corporate world is now reaching to the community. And philanthropy is no longer limited to signing cheques. The commitment is getting much deeper as a large section of employees, including members of the top management, are now doing their bit for the causes close to their heart.

Sunil Rajshekhar of Times Foundation says that corporate contribution is now gaining a holistic approach where employees of big companies are encouraged to give back to communities which are responsible for their sustenance. And the initiative does not end with an odd blood donation. More companies are joining hands with NGOs to set up labs, adopt schools and even villages, educate kids and women in slums, and start welfare programmes for cancer and AIDS patients.

At GE, for instance, the initiative runs right from the top as Scott Bayman, president and CEO, GE (India) finds satisfaction in his endeavour to develop confidence among young school drop-outs and help restart their education and help them gain skills for employment. ‘About 60 of our employees are involved in voluntary programmes and at least 30 of these are very active,’ says Bayman and added ‘GE has implemented many such initiatives globally but I had some apprehension about how popular it would be in India. Thankfully, our people embraced it very fast’.

Indian industry is also equally aggressive in its drive to being socially responsible. North Delhi Power, a joint-venture of Tata Group and the Delhi government have joined hands to help out AIDS patients and improve awareness in industrial areas of Naraina.

The attempt to repay communities who sustain businesses are proving to be an effective HR measure too. Hewlett Packard’ subsidiary, Agilent boasts of an attrition level of about 8 compared to over 30 seen by competitors and attributes it to their employee’s satisfaction level achieved from social causes. Venkatesh Valluri, the Managing Director of Agilent India asserts that people feel good about working for communities when they see the results themselves. Though this is a difficult initiative to take, it may soon be adopted as a movement by the people.

For others like HSS, adopting villages, helping physically and mentally challenged kids comes as naturally as forming a cricket club. The company has created an NGO called Jagriti within the company. Social responsibility is among corporations’ top priorities today. According to Scot Bayman, a socially responsible company is a respected and successful company.

A large number of Indian companies discharge their social responsibilities quite satisfactorily. There are many companies which have excelled in such activities but when seen in the light of the country’s vast needs, the achievements fall short of requirements. The money spent for social causes by companies is generally a significant proportion of their turnover.

Here are a few illustrations of the different social responsibility functions that Indian companies typically perform:

  • AMM Foundation of the Murugappa group provides assistance to communities in education, medical care and research in rural development.
  • Asian Paints funded a large-scale community development project to enable farmers to use local resources effectively.
  • The AV Birla group is involved in social and economic development of communities.
  • BHEL has contributed to the development of quality of life in rural areas, health care and family welfare, adult education, etc.
  • Brittannia Industries promote sports, especially tennis.
  • Brooke Bond has been interested in animal welfare, providing veterinary services, and improvements in animal breeding.
  • Colgate Palmolive did pioneering work in the promotion of sports, dental health, and small industry development.
  • Dr Reddy’s Laboratories promotes education, livelihood and community development.
  • Escorts Ltd has worked for farm mechanization, agricultural development, health care, etc.
  • Ford India Ltd runs education and training programmes in local schools near the factory; has set up research chairs in two IITs in safety and environment; has introduced measures to eliminate, recycle or treat waste products; and has started several community welfare programmes.
  • Gas Authority of India Ltd provides through its CSR initiatives environment protection and horticulture care, infrastructure development to villages, drinking water and sanitation, health care and medical facilities, educational aids and literacy enhancement.
  • The Godrej group focuses on environment and conservation.
  • Gujarat Ambuja Cement has been helping communities around its facilities.
  • Hindustan Lever focuses on health, empowerment of women, and education of special children.
  • ICICI Bank’s focus areas are elementary education, and universal access to financial services.
  • Infosys through its Infosys Foundation, provide assistance to social development, art and culture, schools, libraries, higher education and research.
  • ITC Ltd is socially active in rural development especially in the areas of agriculture, culture, sports and pollution control.
  • MRF Tyre industries promote sports activities, especially cricket.
  • NTPC Ltd is actively involved in community development of villages, resettlement and rehabilitation, and enrichment of human rights and environment.
  • Orchid Chemicals and Pharmaceuticals through its Trust promotes job-based education in villages, self-employment amongst women and health services to the needy, organizes capacity-building programmes and undertakes infrastructure development programmes in adopted villages.
  • Pricol Industries is environmentally active in promoting afforestation, water harvesting and preservation of water bodies.
  • Raymonds’ focus area is combating malnutrition and rehabilitation of school children.
  • SAIL contributes to the sectors of agriculture, industry, education, health care, dairy, poultry, fisheries, and drinking water supply.
  • Satyam Computers is involved in several social welfare programmes.
  • Tata Steel has been a pioneer in discharging social responsibility and has made several contributions in areas such as community development, social welfare, tribal area development, agriculture and related activities, rural industrialization, etc.
  • The Times of India group has set up a Relief Fund to organize relief and rehabilitation measures at times of calamities (floods, cyclones, fires, earthquakes drought, famine, etc.) to alleviate human sufferings, distress and losses, in any part of India.
  • Thermaux has been focusing on education.
  • Titan Industries has been training women and handicapped people in making ornaments. Several other Tata Group companies are training local communities in water harvesting, storage and recycling.
  • TVS Group companies through their Srinivasan Services Trust is passionately involved in rural/tribal development, primary and technical education.
  • Wipro Technologies are involved in spreading quality primary education through its Azim Premji Foundation.
FUTURE OF INDIAN CSR

There is clear need to develop a more coherent discourse on CSR. It is often seen as a strategy to clean the sins of pollution, or to provide a facelift to the company’s public image. But it should be more of a tool to give a cleaner reputation and socially responsible identity to companies, involving them and their employees in the long term process of positive social transition.

Most of the organizations in India have not instituted structured systems for approaching or deploying CSR. The organizations need to structure the CSR initiatives through articulation of policies and guidelines, allocation of resources, and performance evaluation and reporting as followed by the institution of management systems.

Nearly 90 per cent of the corporations recognize that there is a paradigm shift occurring wherein investors of the future shall demand greater transparency in disclosure of both financial and non-financial information to better understand companies, and most of the corporations are gearing up to respond to such requirements from investors as most (88 per cent) believe that they shall benefit from such transparency.

Corporations of tomorrow see themselves as entities that earn profits but through ethical practice, complying with regulatory requirements, with a specific substantial focus on protecting the environment and improvement of employee safety and health. Many corporations expect to listen more to the concerns of the stakeholders, provide equal opportunity, avoid child labour, pay taxes and create jobs.

Given the current perception of CSR and in view of the increasing expectation of the stakeholders on transparency, ethics and professional integrity, it becomes imperative that managers of tomorrow be ethical team players, sensitive to the developments in the surroundings. Corporations predominantly continue to believe that CSR will be compliance centric. Several companies are transitioning from compliance to stakeholder engagement, and attributes such as handling public, community work, etc., which have thus far been accorded low importance are currently being accorded greater priority.

The vision of holistic stakeholder approach to CSR is now getting firmer. There is an all round desire to be a good corporate citizen. However, transition from the present compliance centric approach to the new paradigm requires creation of an enabling environment and an array of support measures. A suitable strategy based on the barriers and drivers for change need to be developed. This process will be facilitated by the business schools in the country teaching CSR as a part of the course curricula. Industry associations will also play a critical role in sharing of experiences and rewarding best practices. Also, there is a need to incorporate the public policies that are being developed globally into the Indian CSR. International agencies have a role to play in the cross-country sharing experience.

Social responsibility is not an exclusive domain of the government and ‘passive philanthropy’ alone no longer constitutes CSR. A majority of the corporations in India perceive CSR as a mechanism to proactively approach and address the significant regulatory requirements. Accordingly, in pursuit of CSR, systems and policies/guidelines are delineated for concerns such as health, safety and environment.

Box 9.1 Gives details of how the Gov of India likes to give a legal position to corporate spending about 2 per cent of their netprofit on CSR activities

BOX 9.1 THE NEW COMPANIES’ BILL ON CSR SPENDING

The Ministry of Corporate Affairs that has finalized the new Companies Bill has accepted the recommendations of the Parliamentary Standing Committee headed by former Finance Minister Yashwant Sinha that companies with a turnover of INR 1,000 crore or net profit of INR 5 crore or more should earmark 2 percent of their net profit for the preceding three years on Corporate Social Responsibility (CSR) activities. While deciding on the CSR spend, the government had decided against policing corporates on how they carry it out. If a company fails to meet the prescribed spending, however, it will have to explain the reasons for the shortfall to its share holders.

 

 

The concept of CSR has come to mean that the responsibility of a corporation to the society is an inalienable part of its operations and strategy. CSR is about how companies manage the business process to produce an overall positive impact on society. It is qualitatively different from the traditional concept of corporate philanthropy. It acknowledges the debt that the corporation owes to the community within which it operates.

Corporations, whether public or private, draw much from society. If a corporation draws so much from society it has to make its own contribution to society.

Social scientists have formulated several theories that justify the importance of corporations engaged in promoting social welfare of the society in which they operate. These theories are as follows: the trusteeship model that adopts a realistic and descriptive perspective in viewing the current governing situation of a publicly held corporation, as a social institution with a corporate personality. The social entity theory regards the company not as a private association united by individual property rights, but as a public association constituted through political and legal processes and as a social entity for pursuing collective goals with public objectives. The pluralistic model supports the idea of multiple interests of stakeholders, rather than shareholder interest alone. It argues that the corporation should serve and accommodate wider stakeholder interests in order to make the corporation more efficient and legitimate.

When CSR is adopted as a business strategy for sustainable development, it goes to improve corporate performance. It offers manifold benefits to corporations, both internally and externally.

The scope of CSR is wide and could be considered in terms of different viewpoints. These include protecting and promoting all stakeholders interests such as those of employees, consumers, creditors, business associates, dealers, government and environment; social concern and promotion of common welfare programmes including those meant for the benefit of the poor and indigent public; taking up issues such as drug addiction, drinking and smoking and helping NGOs fight against them; corporate philanthropy which manifests itself in some form of benevolent activity at times of natural calamities such as earthquakes, tsunami, etc.

KEY WORDS
  • Era of globalization
  • Sustainability of business
  • New Economy framework
  • Image merchandising
  • Private initiatives
  • Conflicting perspectives
  • Profit maximization
  • Controversial thoughts
  • Impact on society
  • Accountability to society
  • Integral part
  • Wealth creation
  • Ethical responsibilities
  • Philanthropic responsibilities
  • Stakeholders
  • Interests
  • Environmental concerns
  • Systematic implementation
  • Global role
  • Trusteeship model
  • Social entity theory
  • Pluralistic model
  • Statist model
  • Risk management
  • Operating costs
  • Mandated actions
  • Vanguard
  • Creation of wealth
  • Social and charitable causes
  • Indian perspective
  • Ethical matrix
  • Scorecard
DISCUSSION QUESTIONS
  1. Why should corporations engage themselves in social welfare projects?
  2. Would you justify the view of economists like Milton Friedman that corporations have no other responsibility other than making profits for their shareholders?
  3. To what extent have Indian companies zealously espoused CSR in their activities? Will it be correct to think that whatever has been done in this area is good, but yet there is a lot more to be done in a poor and developing country like India?
  4. Discuss in detail, CSR as a business strategy for sustainable development.
FURTHER READINGS

Arun, K. N., “A Double Honour for India,” The New Indian Express, Chennai, 18 August 2007.

Fernando, A. C., “Corporate Governance: Time for a Metamorphosis,” The Hindu Business Review, 9 July 1997.

Fr. Paul De La Gueriviere, S. J. and Fr. Louis Xavier, S. J. Social Responsibility of Business (Chennai: LIBA Publications, 1996).

Fr. Peter Hans Kolvenbach, Superior General of the Jesuits, at the Fifth J. R. D. Tata Oration on Business Ethics, Jamshedpur, 18 October 1995.

Friedman, M., “The Social Responsibility of Business is to Increase Its Profits,” New York Times Magazine, 13 September 1970.

————, Capitalism and Freedom (Chicago, IL: University of Chicago Press, 1962).

Mittal, K. M., Social Responsibilities of Business—Concepts, Areas and Progress (New Delhi: Chanakya Publications, 1988).

Shrivastava, H. and Venkateswaran, S., The Business of Social Responsibility—The Why, Where and How of Social Responsibility of India (Bangalore: Books for Change, 2001).

Singh, S., “India Inc. Shuns Mana Mask, Wears Human Face,” Economic Times, 5 July 2001.

Smith, A., An Inquiry Into the Nature and Causes of Wealth of Nations (New York: Random House/ Modern Library, 1937).

(This case study is based on reports in the print and electronic media, and is meant for academic purpose only. The author has no intention to sully the image either of the corporate or the executives discussed.)

COMPANY PROFILE

Dr Reddy’s Laboratories (DRL) was established in 1984 in Hyderabad by Dr Anji Reddy, a graduate in pharmacology and a doctorate holder in chemical engineering. Dr Reddy who had worked as a scientist in Indian Drugs and Pharmaceuticals Ltd. (IDPL) established DRL to create and deliver innovative pharmaceutical healthcare solutions. DRL became a public limited company in 1985. In the following year, DRL had floated an IPO of equity linked debentures totalling INR 24.6 million. In the 1990s, the company strengthened its position in the domestic formulations market by launching several new products and by acquiring a couple of companies. For instance, in 1999 DRL acquired a controlling stake (45 per cent) in American Remedies Ltd. (ARL). With this acquisition, DRL expanded its product line to include Mucolite, Antoxid, BioE, Becozine and Optisulin, all of which constituted 60 per cent of ARL’s sales. The newly acquired company, ARL had two manufacturing facilities, one each at Pondicherry and Chennai. With its own expansion and acquisition of ARL, DRL developed itself with research and drug development as its core competencies, and its sights fixed at the global pharmaceutical market.

Today, the company develops, produces and markets a wide range of pharmaceutical products not only in India, but also in the United States and elsewhere overseas, that include finished dosage forms, generic finished dosage, active pharmaceutical ingredients and biotechnology products. DRL’s research programme focuses on the discovery of medicines to cure cancer, cardiovascular diseases and diabetes. The company’s research centre makes use of cutting-edge technology and has discovered breakthrough pharmaceutical solutions in select therapeutic areas. In a short span of operations, the company has filed for more than 75 patents. Dr Reddy’s is the first Indian pharmaceutical company to out-license an NCE (New Chemical Entity) molecule for clinical trials. Moreover, with a view to strengthen the company’s research capabilities, DRL has set up a research subsidiary, Reddy US Therapeutics Inc. in Atlanta, USA.

Dr Reddy’s Lab is emerging as a global pharmaceutical company with proven research capabilities. The company, true to its founder’s vision, is focused on creating and delivering innovative and quality products to help people lead healthier lives at an affordable cost. Their technologies and expertise in the development and manufacture of quality products have been critical to their success in offering life-saving medicines to customers worldwide.

Since its inception in 1984, DRL has chosen to walk the path of discovery and innovation in health sciences. The company’s competencies cover the entire pharmaceutical value chain active pharmaceutical ingredients (API) and intermediates, finished dosages (generic and branded) and new chemical entity (NCE) research. The company aims to become a discovery-led global pharmaceutical company. Presently, there are 300 researchers actively involved in various drug discovery and clinical developing programmes at the company’s discovery research strategic business unit (SBU). In all its endeavours, DRL is driven by values of quality, innovation, truth and integrity, respect for the individual, social responsibility and collaboration.

DR REDDY’S NEW CORPORATE IDENTITY

Within a short span of 15 years, DRL had advanced considerably towards its goal of becoming a global pharmaceutical company. Satish Reddy, Managing Director and COO, of the company observed: ‘In 1999, we got the critical mass and the feeling within the company that we had arrived. We were close to the INR 1,000 crore (10,000 million) mark in turnover, which called for a new way of looking at things and taking the message to the stakeholders.’1 The management felt that with the company’s push for a world-wide presence, there was a need for a new corporate identity in tune with its global profile. A new corporate identity was also found necessary after the merger of DRL with American Remedies Ltd. and Cheminor Drugs Ltd. into a homogenous corporate entity in 2000, and the company’s listing on New York Stock Exchange (NYSE) in 2001.

On 26 April 2001, DRL ‘unveiled its new corporate identity and philosophy, reinforcing its commitment to bring hope to life through meaningful research’. Of the new corporate identity that included a reiteration of the company’s philosophy, new logo, colours, a code of conduct for employees, a new anthem and a new base line—Life, Research, Hope, Dr K. Anji Reddy, Chairman, commented: ‘The new identity highlights the company’s ethos—a caring organisation that leverages its expertise in research for a healthier life.’2

FUTURE PLANS

DRL is moving fast to acquire companies overseas to make its global presence felt. The company looks for acquisitions in Spain, Italy and France. The company’s acquisition of Betapharm in 2006 has given it competitive strength in Germany.3 Apart from acquisitions in Europe, DRL has also tied up with the UK-based ClinTec International for the joint development of an anti-cancer compound, DR 1042. The compound could be a potential drug for the treatment of various types of cancer and it is expected to hit the market by 2010. Phase-I trials for this anti-cancer drug has been completed in India and the results of phase II trials just carried out are being evaluated. G. V. Prasad, CEO of DRL is very optimistic about the drug. According to him, ‘Our studies have showed that the compound has an advantage over other injectibles available for cancer treatment as it could be administered orally’.4

DRL, which acquired Group Pharmaceutical’s range of dental care products in December 2001 successfully negotiated with vendors to expand its oral care portfolio.

DRL had by that time seven products in this therapeutic area. Most of these were acquired from another company, which catered to the national market alone, along with a few products expected to be launched in 2003.

A source added that the company is looking keenly at the export market and for this, will more than double its product offerings in the category.

Another area of future growth of DRL lies in pharma outsourcing. The company expects that its Custom Pharmaceutical Services (CPS) division will record revenues of US$ 100 million in 2006–07 compared to $30 million in 2005–06. Globally, pharmaceutical outsourcing business is estimated around US$ 35 billion. India’s share in this outsourcing business presently is about US$ 400 million, but is set to grow to US$ 1 billion soon. DRL, which currently develops active pharmaceutical ingredients, intermediates and formulations for big and emerging pharma companies worldwide, is likely to grab a large chunk of business that comes to India.5

DRL’S COMMITMENT TO CORPORATE SOCIAL RESPONSIBILITY

The chairman of DRL, Dr Anji Reddy is an avid champion of CSR. His commitment for CSR is reflected in his observation: “Corporate houses have done very well for themselves. The government can’t act in seclusion. Why should we shy away from our responsibility toward the society? Against great odds, we have built up a capacity to make the nation proud. Over the next 50 years, let us shift our attention to the eradication of poverty from the nation. Let us innovate and do something for the poor”.6

DRL has been active in promoting CSR among its members. DRL always promotes and encourages its members to look beyond the corporate walls and has a CSR policy which is to improve quality of life of all stakeholders. DRL’s clearly defined CSR policy has provided intricate details and clear direction to plan CSR action for the company.

VISION AND VALUES
  • Well-defined purpose for existence.
  • Helping people to lead healthier lives through innovation in medical field.
  • Synchronized long-term vision among DRL’s family members for a common goal.
  • Identified boundaries, belief and guiding principles that facilitate the company’s journey towards the above visions.
  • Highest ethical standards of truth, integrity and transparency are the values of DRL for successful business practices.

As a company, DRL is committed to the principles of sustainability; DRL promises its stakeholders economic growth, it promises society to create a positive impact through its business activities as well as voluntary efforts; and finally, is committed to the creation of clean environment through its restorative activities. This is represented by the flow chart, which is taken from the company’s Annual Report, 2005.

DR REDDY’s FOUNDATION FOR HUMAN AND SOCIAL DEVELOPMENT

Commissioned in the year 1996, Dr Reddy’s Foundation for Human and Social Development (DRFHSD) focuses on the sustainable development of individuals, communities and society at large through projects that link learning and livelihoods in a healthy and sustainable way. Dr Reddy’s Foundation now catalyses sustainable public-private part-nerships specifically for children and youth at risk, through innovative programmes and application of pioneering ideas and practices across the three Ls (life, learning and livelihood) for a better society.

 

 

Source: Dr Reddy’s Sustainability Report 2005. Reproduced with permission from Dr Reddy’s Laboratories.

 

Dr Reddy’s Foundation identified various social problems and also has given solution to them through their commitment and involvement which is shown by the model of a cycle reproduced below from the Annual Report of DRL.

Out of the multifarious CSR activities of DRL, the following are worth mentioning here:

  • Livelihood Advancement Business Schools (LABS)
  • Naandi—The Beginning Project
  • Centre for Social Initiative and Management (CSIM)

 

 

Source: Dr Reddy’s Sustainability Report 2005. Reproduced with permission from Dr Reddy’s Laboratories.

 

Table 9.3 Proof of Success in the Year 2004–05

Livelihood Advancement Business Schools (LABS)

In 2000, Livelihood Advancement Business Schools (LABS) was commissioned with an objective of making youth from poor financial background employable. LABS has set a target of creating one million employable youth by 2010. Started with 10 centres in 7 states, LABS now has 74 centres in 11 states.

Achievements

  • Created 20,000 livelihoods in a year against a target of 10,000.
  • Without restricting its services to Andhra Pradesh, LABS has also entered the States of Uttar Pradesh, Chattisgarh, apart from Sri Lanka and Vietnam.
  • Recognized by the Indian government and various corporations for customized man power training.
  • Training includes e-training, micro-enterprise development, agro sales and marketing, machine tool operations and industrial garment manufacturing.
  • The beneficiaries of this project have reported considerable financial growth in their lives.
  • Thousands of youth have benefited from the j ob-oriented training they received from LABS. Tables 9.3 and 9.4 give the number of beneficiaries in various streams of training offered by LABS.

Naandi—The Beginning Project

Naandi is an autonomous non-profit Trust which means ‘The Beginning’ having Dr Anji Reddy as the Chairman. The trust was co-founded by Satyam Computers, the erstwhile Global Trust Bank, and the Nagarjuna Group of industries. The foundation works in areas as diverse as education of underprivileged children, provision of water to drought-hit farmers and support to marginalized tribals.

 

Table 9.4 Livelihood Created in the year 2003–2004

2003–04 2004–05 2005–06
5,000 25,000 100,000

Source: Dr Reddy’s Sustainability Report 2005. Reproduced with permission from Dr Reddy’s Laboratories.

Achievements

The foundation is running primary schools in tribal Paderu, providing quality education to children attending government schools in Hyderabad, and managing creches for children of the rural poor, and daily wagers in Vizianagaram. The foundation has also launched income generation projects for the tribal poor in Araku.

Centre for Social Initiative and Management (CSIM)

Health Initiatives

DRFHSD conducts a lot of health camps. Among them a few are

  • Family planning programme in Kondmulagam village where 70 families benefited.
  • Super speciality health camp for villagers in and around Peddadevulapalli
  • Blood donation camp wherein 104 units of blood was collected from employees
  • Safety and personal hygiene programmes for employees and the neighbouring community
  • Eye camp for casual workers and their family members covering 176 persons
  • Education health awareness camp in Miryalguda on health and pollution
  • Drinking water camp at the weekly fair in Kandivalasa Gedda under the ‘Cheeyutha’ social initiative scheme

Educational Initiatives

Educational initiatives of DRFHSD included:

  • adoption of a government school in Puttaguda village, Medak district to provide books, stationery, and the sponsorship of a teacher’s salary;
  • funding distribution of notebooks to 250 primary school children in five mandals of Srikakulam district; and
  • Scholarships for 15 meritorious poor students from the tenth standard and intermediate level, covering five mandals of the Vizianagaram and Srikakulam districts.

Other Social Initiatives

DRFHSD organized the following social activities:

  • adopted Sambhipur village where an eye camp was organized benefiting 250 persons belonging to the village;
  • held health and sanitation camp to discuss the perils of open defecation;
  • conducted a formal course for the youth on leadership and technical skills in association with the ‘Art of Living’ group; and
  • motivated the formation of ‘self help’ groups by the youth to embark on village developmental issues.
IMPACT OF DRFHSD’s CSR EFFORTS

DRL through their CSR activities have come a long way in improving the life of the poor community. Their activities have helped many poor village people to see a ray of hope in their lives. DRL’s activities clearly subscribe to Gandhiji’s advocacy of trusteeship principle requiring a new ethical code to be followed by the owners of business.

The CSR efforts of DRL have been so inspiring and their impact so profound that others have started emulating them. Many corporations are eager to extend their support to the programmes initiated by Dr Reddy’s Foundation which has been promoting its welfare programmes since 2003 in the states of Tamil Nadu, Maharashtra and Kerala, apart from Andhra Pradesh. Earlier, Satyam Computers, Nagarjuna group of Companies and the now defunct Global Trust Bank have joined hands with DRFHSD to provide succour to the underprivileged.

To meet the challenge of training the youth to acquire soft skills such as communication, sales and customer service, Dr Reddy’s Foundation has tied up with Adecco, the staffing solutions firm. The foundation will find the trainable youth and impart training across the country. Adecco will help find placement for the suitable candidates.7

Likewise, The Tata Council for Community Initiative (Hyderabad regional group) and DRF have announced an initiative called Neev—The Foundation, for enhancing employ-ability skills among the underprivileged youth. The Tata Council will suggest addition of market-oriented training programmes to be disseminated among the youth through Livelihood (Centres) Advancement Business School (LABS) centres of DRF. These programmes consist of three months of class-room training followed by three months of on-the-job training. This includes academic, basic IT and spoken English skills. The sectors that are covered range from IT-enabled services and sales and marketing to micro entrepreneurship and finance and business.

LABS has its presence in about 85 districts in the country. Around 68,000 people have undergone training from LABS centres of which 85 percent have been employed. The Tata Council provides knowledge support to LABS through employee volunteership and participation in market research activities and group discussions for curriculum development.8

DR REDDY’s COMMITMENT TO BUSINESS ETHICS AND CORPORATE GOVERNANCE

Dr Reddy’s long-standing commitment to high standards of corporate governance and ethical business practices is a fundamental value shared by its board of directors, management and employees. The company’s philosophy of corporate governance stems from its belief that timely disclosures, transparent accounting policies, and a strong and independent board would go a long way in preserving shareholders’ trust while maximizing long-term shareholder value. Good corporate governance flows out of the commitment of the management and the board of directors. When commitment is backed by the fundamental beliefs of maximizing value for stakeholders, transparent actions in business, values of a corporate, and mutual trust amongst all constituents of the business, the organization transforms itself into an ethical business unit.

The forward-looking approach of Dr Reddy’s has always helped it in achieving the desired results. This approach has transformed the company’s culture to one that is relentlessly focussed on the speedy translation of scientific discoveries into innovative products. Dr Reddy’s commitment towards ethical business and corporate governance started well before the law mandated such practices. The company has identified and established its core purpose, mission and core values for achieving corporate excellence. DRL believes in crafting an environment where the parameters of conduct and behaviour of the company and its management is constantly aligned with the business environment.

The highlights of Dr Reddy’s corporate governance systems are an independent board of directors following international practices, committed management team, internal control systems and dissemination of information to various stakeholders. To reflect their continued commitment to the highest standards of truth, integrity and transparency, the board of directors of the company has adopted a Code of Business Conduct and Ethics. This code applies to everyone at Dr Reddy’s, across the world. The code at Dr Reddy’s has been designed to comply with the provisions of the Sarbanes–Oxley Act of 2002 and its implementing regulations. It is a general statement of goals and expectations for individual and business conduct. The Code and an Ombudsman Procedure have been chalked out to provide information, education and resources to help employees make good, informed business decisions and to act on them with integrity. DRL has also encouraged whistle blowing as a means of promoting ethical practices by allowing employees to communicate unethical practices in the organization to the top management and yet safeguard themselves from being victimized.

Sharing of information has a two-fold benefit to Dr Reddy’s systems. They use the information and data for strengthening business operations as well as to help stakeholders make better decisions in their dealings with the company. The company has established systems and procedures to disseminate, in a planned way, relevant information to its stakeholders, including shareholders, analysts, suppliers, customers, employees and the society at large. During the last few years the company has executed a comprehensive disclosure plan through various means for the different stakeholders. Though the primary source of information for stakeholders regarding the Company operations is the corporate Web site, the company has also initiated and developed other Web sites like vikreta2drl.com, customer2drl.com, mydrreddys.com, insider, drlintouch.com, and an HR portal for dissemination of information.

Dr Reddy’s is the first Indian pharmaceutical company to be listed on the NYSE in April, 2001. Companies listed on the NYSE must comply with certain standards regarding corporate governance as codified in Section 303A of the NYSE’s Listed Company Manual. Among those listed, companies that are foreign private issuers (as such term is defined in Rule 3b-4 under the Exchange Act) are permitted to follow home country practice in lieu of the provisions of this Section 303A, except that such companies are required to comply with the requirements of Sections 303A.06, 303A.11 and 303A.12(b) and (c), which are as follows:

  • Establishing an independent audit committee that has specified responsibilities.
  • Providing prompt certification by its chief executive officer of any material non-compliance with any corporate governance rules; provide periodic written affirmations to the NYSE with respect to its corporate governance practices; and provide a brief description of significant differences between its corporate governance practices and those followed by US companies.

As an Indian company listed in NYSE, Dr Reddy’s Lab has complied with the above stipulations.

DR REDDY’S BRUSH WITH SOME QUESTIONABLE PRACTICES

Case 19

Even as the controversy over the safety of non-steroid anti-inflammatory drug (NSAID) Nimesulide raged on, Dr Reddy’s Labs and Nicholas Piramal India—two of the leading manufacturers of this drug in India—have decided to withdraw their brands of Nimesulide from the market. While DRL withdrew all fixed-dose combinations of Nimesulide—Nise Spas and Nise Spas DS, Novigan N, NIAP and Nise MR—Nicholas Piramal India will withdraw its Nimesulide tablets for adults from the market. Dr Reddy’s Nise brand was the market leader in the Nimesulide-based NSAID segment, which is estimated to have had a total size of nearly INR 2,000 million. Dr Reddy’s informed the Drugs Controller General of India (DCGI) about its decision to discontinue the marketing of its four Nimesulide brands.

Case 210

Dr Reddy’s Laboratories Ltd. suffered a setback in its legal battle with Pfizer over patent infringements on its hypertension drug. In a significant ruling, the US Court of Appeals for the Federal Circuit reversed a lower court ruling and determined that the patent extension covering Pfizer’s Norvasc (amlodipine besylate) is applicable to Dr Reddy’s AmVaz (amlodipine maleate). The Appeals Court also said that allowing Dr Reddy’s drug would be exploiting an unintended loophole in the law. Norvasc is the world’s top-selling hypertension drug from Pfizer, with the global drug major holding patent rights till 2007. Dr Reddy’s had filed with the United States Federal Drug Authority (US FDA) to obtain approvals for its variant of Norvasc, for marketing Am Vaz using the 505(b)(2) route of the US law.

Though Dr Reddy’s had not spelt out the total loss it had suffered owing to the legal battle, it was clear that the company had a tough time since it had not seen a big product launch for close to two years. According to the spokesperson of Dr Reddy’s, the legal expenses over the issue ‘could be in the range of $10 million, while the market opportunity lost has not been determined’.

Responding to the development, Dr Reddy’s CEO G. V. Prasad, said, ‘We are clearly disappointed by the court decision and had expected that the views expressed by the Chief Judge in the dissent would have been the position of the majority’. However, in spite of this ruling, the company remains committed to investing the resources to create a sustainable US-based business of specialty products and new chemical entities as well as generic medicines.

Case 3

Suspended Diabetes Drug Trials11

As many as 2,500 diabetic patients in over 30 countries were subjected to clinical trials of the controversial anti-diabetic drug, DRF 2725 that had been licensed to the Danish drug major, Novo Nordisk by Dr Reddy’s Laboratories Ltd.

The detection of urine bladder tumours in rats treated with DRF 2725 forced Novo Nordisk to suspend clinical trials. Asked as to why the clinical trials were continued till July 2006 when the tumours in rats were detected in February 2006 itself, DRL’s CEO, Prasad said that there are many pharmaceuticals in the market that have shown tumours in trials involving rats and these findings are not alarming. He also informed that the American and European health authorities, including the Danish Laege mid-dlestyrelsen, did not ban the clinical studies though being informed of tumour findings in the rats by Novo Nordisk.

It was only after finding tumours in mice also that Novo Nordisk decided not to continue trials in humans. According to Prasad, generally investigators who conduct the trials alone are allowed to contract trial participants directly.

The detection of tumours in rats during trials in February 2006 was informed to all the stakeholders concerned, including patients, through investigators and the patients were asked to re-assess their continued participation in clinical trials. Stating that the process of informing the patients and the ethics committees was currently under way and was being followed closely by Novo Nordisk, Prasad said ‘it takes a year to know whether any of these patients suffered any harm due to DRF 2725’. According to him the risk, if present is very small as ‘majority of patients were exposed to DRF 2725 for less than six months and only very few were exposed for a period of seven months’.

According to Prasad, DRF 2725 falls under the category of non-genotoxic carcinogens which require many years of exposure time to pose a risk to humans. Novo Nordisk would suggest the patients to have a urine test sample taken one year after they stop taking the drug to determine whether they suffered any harm. The Deputy Drug Controller General of India, Dr M Venkateswarlu, when contacted, told newsman that the regulatory framework for conducting clinical trials simultaneously on both animals and human beings varied from country to country and there were no universal guidelines on the issue. There is no single global regulatory body to approve clinical trials across the world and the drug discovery companies will have to obtain approvals from the regulators of individual countries. Further, according to him, the development of adverse effects on rats during the clinical trials need not necessarily indicate human relevance. Whenever a drug research company finds such developments in rats, they suspend the clinical trials on human beings and initiate risk benefit analysis. They proceed for clinical trials on intermediate species such as cats, monkeys and chimpanzees based on the results. This process enables them to decide whether the findings in rats detected at the initial stages would be of any human relevance later, Dr Venkateswarlu said.

CONCLUSION

The detailed study of Dr Reddy’s Lab clearly reveals the fact that the company has been growing exponentially and that it has been true to the vision of its founder, Dr Anji Reddy, ‘to create and deliver innovative pharmaceutical healthcare solutions at an affordable cost’ and to have a global presence in healthcare industry. At the same time, DRL has also shown an unwavering commitment to ethical business, corporate social responsibility and corporate governance. However, the three cases mentioned above bring out certain grey areas that lie scattered between what is ethical business and what is not in such a life-saving and sometimes life-threatening industry like pharmaceutical industry. Only time will tell whether what Dr Reddy’s Lab did under these circumstances were ethical or not. Moreover, in such matters as the justification of clinical trials of some drugs on humans when found to be harmful in mice and rats, the final word may lie interred deeply in the womb of time, for want of credible evidence one way or the other.

DISCUSSION QUESTIONS
  1. Trace the establishment and growth of Dr Reddy’s Laboratories. What type of business strategy has DRL adopted to achieve the fast-track growth it has registered over the years?
  2. Dr Reddy’s Lab is well-known and acknowledged countrywide for its commitment to CSR. Explain how DRL established its reputation in this field?
  3. Answer the question in the context of Dr Reddy’s Lab. Even organizations committed to ethical business and better corporate governance practices could be drawn into situations that may expose them to ethical pitfalls. What are the causes and how would you mitigate them?
FURTHER READINGS

http://pmindia.nic/speech/content.asp?=12

The sustainability reports of Dr Reddy’s Lab for the years2003–2004 and 2004–2005.

www.businessworldindia.com/nov0804/coverstory_mrc_no6.asp

www.contentlinks.asiancerc.com/ib/DetailNews.asp?newsid=1139237www.csrwire.com/article.cgi/1487.html

www.drreddys.com/coverview/cg_internalcontrolsystems.htm

www.drreddy.com/coverview/cgovernance.htm

www.drreddys.com/coverview/sd_sr_drrfoundation.htm

www.expressitpeople.com/20040607/cover.shtml

www.financialexpress.com/fe_full_story.php?content_id=41521

www.themanagementor.com/kuniverse/kmailers_universe/hr_kmailers/hrp_Acut.htm

www.tribuneindia.com/2002/20021025/biz.htm