Paper: 12, Business Environment

Module: 36 Social Responsibility of Business

 QUADRANT-I

Items Description of Module

Subject Name Business Environment
Paper Name Business Environment
Module Title Social Responsibility of Business
Module Id Module no.-36
Pre- Basic knowledge about the meaning of Social obligations
Requisites
Objectives To study the meaning of social responsibility in general and specifically in the
Indian context
Keywords Corporate Social Responsibility, Social Obligation, Stakeholders

QUADRANT-I

Module 36: Social Responsibility of Business

Learning Outcome
1. Introduction
2. Why do organizations get involved in social responsibility
3. Factors that affect the orientation of a company towards social responsibility
4. Different Stakeholders of an organization
5. Measuring and evaluation social performance of a company
6. Arguments for and against social responsibility
7. What limits the organizations from being socially responsible
8. Barriers to social responsibility
9. Social responsibility in the Indian context
10. Summary
 Learning Outcome: After completing this module the students will be able to:
 Understand the concept of Social Responsibility of Business
 Understand the different stakeholders of a business
 Understand the provisions for social responsibility under the Companies Act, 2013

SOCIAL RESPONSIBILITY OF A BUSINESS

1. INTRODUCTION

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

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

(a) The manner in which a business carries on its business activity and
(b) The welfare activity that it takes upon itself as additional function

While there is no universal definition of corporate social responsibility, it generally refers to

transparent business practices that are based on ethical values, compliance with legal
requirements, and respect for people, communities, and the environment. Thus, beyond making
profits, companies are responsible for the totality of their impact on people and the planet.
“People “constitute the company’s stakeholders: its employees, customers, business partners,
investors, suppliers and vendors, the government, and the community. Increasingly, stakeholders
expect that companies should be more environmentally and socially responsible in conducting
their business. In the business community, CSR is alternatively referred to as “corporate
citizenship,” which essentially means that a company should be a “good neighbor” within its
host community.

2. WHY DO ORGANISATIONS DECIDE TO GET INVOLVED IN SOCIAL

RESPONSIBILITY AND HOW DO THEY BENEFIT FROM IT?
Considering the growing completion in today’s time, more and more companies are realizing that
in order to remain productive, competitive and relevant, they have to be socially responsible.
Further, globalization has blurred national borders, and technology has accelerated time and
masked distance. Given this sea change in the corporate environment, companies want to
increase their ability to manage their profits and risks, and to protect the reputation of their
brands. Because of globalization, there is also fierce competition for skilled employees,
investors, and consumer loyalty. Thus, CSR has become a determinant of the sustainability and
success of an organization. The various benefits that an organization derives from its CSR
activities are as follows:
o Satisfied stakeholders, viz., employees, distributors, shareholders and the
society at large
o Positive public relations
o Improved public image of the business
o Positive word of mouth
o Cost reductions through efficient staff hire and retention, implementation
of energy savings programs, effective management of potential risks and
liabilities more effectively, less investment in traditional advertising etc.
o More business opportunities (through an open, outward approach)

3. FACTORS THAT AFFECT THE ORIENTATION OF A BUSINESS TOWARDS

SOCIAL RESPONSIBILITY

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

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

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

3.3 Stakeholders and Internal Power Relations: The attitude of various stakeholders
and the internal power relations affect the social orientation. Social responsibility involves
attempting to unite the diverse interests of stakeholders to form a workable coalition, engaged in
creation of value for distribution among the members of the coalition.
 3.4 Societal Factors: The societal orientation is affected by the nature, compulsions and
the expectations of the society. For example, a resourceful firm operating in a poor community
may be required to facilitate education or engaged the local laborers.

3.5 Government and Law: Social responsibility of business may be a manifestation of

the law. The business in such a circumstance has to fulfill the social responsibilities by virtue of
them being codified in law

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

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

4. DIFFERENT STAKEHOLDERS OF A BUSINESS

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

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

4.1 Primary Stakeholders (Internal Stakeholders) - They are usually the internal
stakeholders who engage in economic transactions with a business. These stakeholders
are the ones who directly affect a business organization and are also directly affected by
it. For example stockholders, employees, owners, mangers, board of directors etc. are a
firm’s primary stakeholders.
 4.2 Secondary Stakeholders (External Stakeholders) –These stakeholders although do
not engage in direct economic exchange with an organization, they, however can affect or
be affected by its action. For example the customers, suppliers, creditors, employees,
general public, communities, activist groups, business support groups, and media.

Figure 1: Internal and External Stakeholders of a Company

Table 1: Different Stakeholders of a Business and their Concerns

Stakeholders Stakeholder's concerns

Government Taxation, VAT, legislation, employment, truthful reporting, legalities,
externalities.
Employees Rates of pay, job security, compensation, respect, truthful communication.
Customers Value, quality, customer care, ethical products.
Suppliers Providers of products and services used in the end product for the customer,
equitable business opportunities.
Creditors Credit score, new contracts, liquidity.
Community Jobs, involvement, environmental protection, shares, truthful communication.
Trade Quality, worker protection, jobs.
 Unions
Owner(s) Profitability, longevity, market share, market standing, succession planning,
raising capital, growth, social goals.
Investors Return on investment, income.
(Source: Certo & Certo (2005). Modern Management (10th ed.). Pearson)

Table 2: Difference between Internal and External Stakeholders

Basis for Internal Stakeholders External Stakeholders
Comparison
Meaning The individual and parties that The parties or groups that are not a part
are the part of the organization of the organization, but get affected by
is known as Internal its activities is known as External
Stakeholders. Stakeholders.
Nature of impact Direct Indirect
Who are they? They serve the organization. They get influenced by the
organization's work.
Employed by the Yes No
entity
Responsibility of the Primary Secondary
company towards
them
Includes Employees, Owners, Board of Suppliers, Customers, Creditors,
Directors, Managers, Investors Clients, Intermediaries, Competitors,
etc. Society, Government etc.
Source:http://keydifferences.com/difference-between-internal-and-external
stakeholders.html#ixzz4Ev8bvMtS

5. RESPONSIBILITIES TOWARDS DIFFERENT STAKEHOLDERS

There is no unanimity of opinion as to what constitutes social responsibility. The various
important generally acceptable responsibilities of the business towards various stakeholders are
discussed below:
5.1 Responsibility towards Shareholders: Shareholders are the owners of a firm. The
primary responsibility that a business has is towards its shareholders. The fact that the shareholders
take a great risk in making investments in the business should be adequately recognized.
In order o protect the interests of the shareholders the “primary business of the business is
to stay in business. The business should therefore fulfill its ‘economic objective/s’. To protect the
interests of the shareholders, it should safeguard capital, earn reasonable dividend and maintain a
successful competitive position. Having said this, the business should realize that shareholders are
interested not only in the wealth creation but also in the societal performance o the company. It
shall therefore be the endeavor of the company to make and improve its public image.
5.2 Responsibility towards Employees: The success of the organization depends upon
the morale and dedication of its workforce. The responsibilities of an organization towards its
workforce include the following:
o Payment of decent wages
o Decent working conditions
o Fair work standards
o Provision of labour welfare facilities
o Arrangements for proper training and development
o Reasonable chances and fair method of promotions
o Proper recognition, appreciation and encouragement
o Installation of efficient grievance handling mechanism
o Opportunity to participate in management decision making
It may be pointed out here that the expenditure on employee development and welfare should
have relevance to the financial position of the company and the economic conditions of the
nation. Such expenditure should not exceed the economically and socially warranted limits and
not pose any burden on the ultimate consumer.
5.3 Responsibility towards Consumers: According to Peter Drucker, “there is only one
valid definition of business purpose, and that is to create a customer”. It has been widely
recognize that customer satisfaction shall be taken as the key to the satisfaction of organizational
goals. The responsibilities of a business towards customers are as follows:
o To engage and spend adequately on research and development to improve the
quality of products and services
o To supply products/services at decent prices
o To provide after sale services
o To ensure that an appropriate customer grievance management system is in place
o To provide necessary information for the usage of products/services
o To not engage in misleading advertisements
o To understand customer needs and respond adequately to them
 5.4 Responsibilities to the Community: A business owes the following responsibilities
to the community:
o Prevention of environmental pollution
o Rehabilitating the population disturbed by the business
o Assisting the overall development of the society
o Improving the efficiency of the business operation
o Contributing to research and development
o Development of economically backward areas
o Promoting small scale industries
o Promoting indigenous industries
o Contributing towards social causes like promotion of education and population
control
5.5 Responsibility towards the environment: A business damages the environment by
causing pollution in the following ways:
o Emission of gas and smoke from manufacturing plants
o Use of machines, vehicles etc. contributing to noise pollution
o Deforestation due to acquisition of forest lands for setting up plants
o Growth of urbanization and industrialization
o Disposal of wastes and effluents into rivers and canals
o Disposal of solid wastes in the open space
o Mining and quarrying activities
o A business can discharge its responsibilities towards the environment by assuming the
following roles:
o Preventive Role: It means business should take all possible steps to ensure that no
further damage is done to the environment. For this, business must follow the rules and
regulations laid down by government to control pollution at the very inception.
o Curative Role: It means business should rectify whatever damage has been done to the
environment. In addition, if it is not possible to prevent pollution then simultaneous
curative measures should be taken. For example, planting of trees (afforestation
programmes) can substantially reduce air pollution near the industrial area.
 o Awareness Role: It means making people (both the employees as well as the general
public) aware about the causes and consequences of environmental pollution so that they
voluntarily try to protect rather than damage the environment. For example, business can
undertake public awareness programmes to sensitize people about environmental
degradation and pollution.

6. MEASURING AND EVALUATING AN ORGANISATION’S SOCIAL

PERFORMANCE

An organization’s social performance is an aggregate of its economic, legal, ethical and

discretionary responsibilities. Archie Carroll who defines corporate social responsibility as
the entire range of obligations to the society has proposed a multi-dimensional conceptual
model of corporate performance. According to him, a firm has the following four categories
of obligations of corporate performance. These have been individually discussed below:

6.1 Economic responsibilities: Each business unit is an economic entity, therefore the
primary responsibility it has is to be a successful economic unit for the society. It is
therefore, the responsibility of a business to produce economically viable goods and
services and maximize profits for the owners and the shareholders. However, if this is
carried to the extreme it is called the ‘profit maximization view’, as advocated by Nobel
economist Milton Friedman. This view argued that a company should be operated on a
profit-oriented basis, with its sole mission to increase its profits so long as is stays within
the rule of the game.
6.2 Legal responsibilities: Fulfilling the legal responsibilities is what is considered as
important with respect to proper corporate behavior. This means to ensure compliance
and adherence to the laid down rules, laws and regulations that a business unit is deemed
to follow. Such legal requirements are imposed by local councils; state and central
governments and even international laws in case of a multinational company.
6.3 Ethical responsibilities: Such responsibilities include behavior that is not necessarily
codified into law and may not serve the organization’s direct economic interests. To be
ethical, organization’s decision makers should act with equity, fairness and impartiality,
respect the rights of individuals, and provide different treatments of individual only when
 differences between them are relevant to the organization’s goals and tasks. Unethical
behavior occurs when decisions enable an individual or organization to gain expense of
society.
6.4 Discretionary responsibilities: Discretionary responsibility is purely voluntary and
guided by an organization’s desire to make social contributions not mandated by
economics, laws or ethics. Discretionary activities include generous philanthropic
contributions that offer no payback to the organization and are not expected.
Discretionary responsibility is the highest criterion of social responsibility, because it
goes beyond societal expectations to contribute to the community’s welfare.

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

presented below:

Figure 3: Archie Carroll’s Model of Business Responsibilities

(Source: Management, A competency-based approach, Edition 10, by Hellriegel, Jackson, Slocum;

Management, Pacific Rim Edition, by Danny Samson, Richard L.Daft)

7. ARGUMENTS FOR AND AGAINST SOCIAL RESPONSIBILITY

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

7.1 Arguments for Social Responsibility

o Business survives using the resources of the society, it, therefore owes a
responsibility towards it, in return
 o Business is an integral part of the social eco-system, it should therefore be
responsible towards it
o Social responsibility improves the image of the organization
o Social involvement fosters a harmonious and healthy relationship between the
society and business, to the mutual benefit of both
o Social responsibility also has an implication for reduction in unnecessary
government regulation and intervention
o It helps in spreading positive word of mouth
o It keeps the stakeholders happy and satisfied
o It improves the corporate reputation
o Is helps an organization in gaining a completive edge

7.2 Arguments against Social Responsibility

o Business should confine itself to business operations. Social organizations should

carry out social works
o The ultimate cost of social responsibility is to be borne by the consumer in terms
of heavy pricing
o Involvement in social activities may adversely affect the economic health of an
organization.
o Companies engage in social activities for seeking tax exemptions rather than
focusing for the societal welfare
o Social involvement causes an increase in the price of a company’s
products/services, and severely affects the competitiveness of the it
o Social involvement of a business can unnecessarily lead to an increase in the
dominance or influence of the business over the society.

8. WHAT LIMITS THE ORGANISATIONS FROM BEING SOCIALLY

RESPONSIBLE?

The various factors which limit the social responsibility actions of a business are the
following:
 o Cost: Every social action requires money for its fulfillment; for example, donations to a
village, hospital, educational institute; expenditure for organizing a campaign, adoption
of a village etc. At time, a business may want to engage in such activity, but paucity of
funds acts as a major impediment in this regard.
o Efficiency: An effort towards social responsibility may bring down the efficiency ad the
competitiveness of a business. Social activities are not the core business activities; hence,
a business may not have an adequate idea about it, and thus indulge in over-spending.
Also, this may act as a distraction for the employees, which may result in loss of business
efficiency.
o Relevance: Some critics are of the view that ‘business has no obligation towards the
society’. According to Friedman “there is only one social responsibility of a business; and
that is to use its resources appropriately to increase profits, so that it stays within the rules
of the game …. And engages in open and free completion, without deception and fraud”
o Scope: A business has a number of complex problems which are to be solved and
concentrated upon. It is thus, unfair to expect from a business to solve other complex
problems that are beyond d its operational ambit.

9. BARRIERS TO SOCIAL RESPONSIBILITY

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

o The Manager: It is the manager who is ultimately responsible for the action programmes
of any organization. In the absence of a policy for achieving social obligations, the
managers may not insist actualization of the social objectives as it may distract the
employees from achieving the business objectives for which they and the manager may
be held accountable.
o The Organization: The main objective of any organization is profit maximization.
Profits are to be earned to provide the shareholders adequate dividend, to provide salaries
and incentives to the employees and to use the profits for further growth and expansion of
the business. Thus, social action projects need to be evaluated very carefully in terms of
cost and benefit.
 o The Industry: Indulgence in social activities by one company may cause distrust of
others, operating in the same industry. It thus, becomes difficult for a company to survive
in the industry
o The Division There are number of divisions in the organization which are competing
among themselves and also strive towards main goal of organization i.e. profit. Any
social responsibility decision and project which affects or reduces the profit might
threaten the existence of that particular division. This is one of the main reasons that most
of the divisions feel hesitant in initiating and implementing social responsibility
programmes unless & until there are clear guidelines and instructions from the people at
top level.

10. SOCIAL RESPONSIBILITY: INDIAN SCENARIO

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

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

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

o CSR Committee and Policy: Every qualifying company requires spending of at least 2%
of its average net profit for the immediately preceding 3 financial years on CSR
activities. Further, the qualifying company will be required to constitute a committee
(CSR Committee) of the Board of Directors (Board) consisting of 3 or more directors.
The CSR Committee shall formulate and recommend to the Board, a policy which shall
indicate the activities to be undertaken (CSR Policy); recommend the amount of
 expenditure to be incurred on the activities referred and monitor the CSR Policy of the
company. The Board shall take into account the recommendations made by the CSR
Committee and approve the CSR Policy of the company.
o Definition of the term CSR: The term CSR has been defined under the CSR Rules
which includes but is not limited to:

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

o Projects or programs relating to activities undertaken by the Board in pursuance

of recommendations of the CSR Committee as per the declared CSR policy
subject to the condition that such policy covers subjects enumerated in the
Schedule.

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

o Local Area: Under the Companies Act, preference should be given to local areas and the
areas where the company operates. Company may also choose to associate with 2 or
more companies for fulfilling the CSR activities provided that they are able to report
individually. The CSR Committee shall also prepare the CSR Policy in which it includes
the projects and programmes which is to be undertaken, prepare a list of projects and
programmes which a company plans to undertake during the implementation year and
also focus on integrating business models with social and environmental priorities and
process in order to create share value.
 Further, the company can also make the annual report of CSR activities in which they
mention the average net profit for the 3 financial years and also prescribed CSR expenditure but
if the company is unable to spend the minimum required expenditure the company has to give
the reasons in the Board Report for non compliance so that there are no penal provisions are
attracted by it.
(Source:http://www.mondaq.com/india/x/366528/Corporate+Governance/Corporate+Social+Responsibility+India
n+Companies+Act+2013)

10.2 CSR activities of Some Companies Operating in India

Table 7: Major Institutions Setup/Owned/Operated by some Companies in India

Company/Group Major institutions established

Tatas  Indian Institute of Science
 Tata Institute of Social Sciences
 Tata Agriculture and Rural Training
Centre for Blind, Gujarat
 Tata Memorial Centre for Cancer
Research
 Tata Institute for Fundamental
Research
 National centre for Performing Arts
Birlas  Birla Institute of Technology, Pilani
and Ranchi
 Birla Institute of Scientific Research
 Birla Eco. Research foundation
 Calcutta Medical Research Institute
 Birla Academy of Arts and Culture
Larsen and Toubro  L and T Institute of Technology,
Bombay
Thapar Group  Thapar Institute of Engineering and
Technology, Patiala
  Football Academy, Punjab
Modis  Shri Modi Eye Hospital and
Ophthalmic Research Centre
 MM Modi Degree College
 Sainik Bhawan
 Sanskrit Pathshala
Hero Honda  Bahadur Chand Munjral Arya Model
Senior Secondary School
MRF  MRF Football Academy
ITC  ITC Sangeet Research Academy
 ITC E-chaupals
Apeejay Surrendra  Apeejay Schools
Bajaj  Institute of Gandhian Studies
 Shiksha Mandal
 Gandhi Gyan Mandir
 Gitai mandir
 Gita Pratishthan
Shri Ram (DCM Group)  Shri Ram College of Commerce, New
Delhi
 Lady Shri Ram College of Commerce,
New Delhi
 Shri Ram Centre of Performing Arts
 Shri Ram Institute of Industrial
Research
(Source: Pushpa Sundar, Beyound Business, TMH, New Delhi, pp 368-377)
 Table 8: CSR Expenditure of India’s Top 15 Private Sector Companies (2013-14)

Company CSR Spending CSR Spending

(USD Millions) (% of Net Profits)
Reliance Industries Ltd. 119.88 3.24
Tata Motors Ltd. 2.84 5.17
Tata Steel Ltd. 34.7 3.31
Essar Oil Ltd. N/A* N/A*
Hindalco Industries Ltd. 5.28 1.81
Bharti Airtel Ltd. 6.62 1.46
Larsen & Toubro Ltd. 12.6 1.40
TCS Ltd. 15.06 0.48
ICICI Bank Ltd. 80.59 2.00
Mahindra & Mahindra Ltd. 5.35 0.87
Vedanta Ltd. 28.83 1.67
Adani Enterprises Ltd. 0.9 3.08
Infosys Ltd. 1.47 0.09
JSW Steel Ltd. 4.42 2.00
HDFC Bank Ltd. 11.52 0.83
(Source: http://www.kcgjournal.org/cm/issue13/alaka.php)

Table 9: CSR Expenditure of India’s Top 5 Public Sector Companies (2013-14)

Company CSR Spending CSR Spending

(USD Millions) (% of Net Profits)
Indian Oil Corporation 13.7 1.20
Bharat Petroleum Corporation 5.59 0.85
Hindustan Petroleum Corporation 3.86 1.37
State Bank of India 24.26 1.37
Oil & Natural Gas Corporation 55.49 1.55
(Source: http://www.kcgjournal.org/cm/issue13/alaka.php)

11. Summary

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