Big picture
A business uses society's resources (labour, raw materials, infrastructure) and affects many people beyond its owners. Social responsibility is the obligation of business to make decisions and act in ways that are desirable for society, not only profitable for itself.
Business ethics is closely linked: it is about doing what is morally right in business. A firm can't be socially responsible without being ethical. This chapter covers the arguments, the kinds and beneficiaries of social responsibility, India's legal requirement for corporate social responsibility (CSR), environmental protection and business ethics.
Learning goals
Explain the concept of social responsibility and how it differs from legal responsibility.
Explain the arguments for and against social responsibility.
Explain the four kinds of social responsibility.
Explain the responsibility of business towards different interest groups.
Explain CSR under the Companies Act, 2013.
Explain the role of business in environmental protection.
Explain business ethics and its elements.
Core ideas
1. Concept
Social responsibility is the obligation of business to pursue policies, make decisions and follow actions that are desirable in terms of the objectives and values of society. It goes beyond legal responsibility (obeying the law) to doing what society expects, voluntarily.
2. The case for and against social responsibility
Arguments for | Arguments against |
|---|---|
Justification for existence and growth: business exists to serve society and prospers only if it does | Violation of the profit maximisation objective: business exists to make profit; social spending reduces it |
Long-term interest of the firm: a good public image brings long-term success | Burden on consumers: the cost of social programmes is passed on through higher prices |
Avoidance of government regulation: responsible behaviour reduces the need for regulation | Lack of social skills: business managers are not trained to solve social problems |
Maintenance of society: irresponsible business leads to social unrest | Lack of broad public support: the public may not want business to handle social issues |
Availability of resources with business: business has finance and talent to help solve problems | |
Converting problems into opportunities: solving social problems can become profitable (for example, waste recycling) | |
Better environment for doing business: a healthy, educated society is better for business | |
Holding business responsible for social problems: business has created some problems (pollution) and should help solve them |
On balance, the modern view is that business should accept social responsibility, since its long-term success depends on society's well-being.
3. Kinds of social responsibility
Kind | Meaning | Example |
|---|---|---|
Economic responsibility | Producing goods and services society wants and selling them at a profit | A company making affordable medicines |
Legal responsibility | Obeying the laws of the land | Following labour laws and paying taxes |
Ethical responsibility | Behaviour expected by society but not required by law | Respecting religious sentiments in advertising |
Discretionary responsibility | Purely voluntary contributions | Donating to schools, running health camps, disaster relief |
4. Responsibility towards different interest groups
Interest group | Responsibilities of business |
|---|---|
Shareholders or owners | A fair return on investment; safety of investment; regular, accurate information about the company's performance |
Workers | Fair wages; safe and healthy working conditions; opportunities for growth; respect for their rights, such as forming unions |
Consumers | Quality products at fair prices; no adulteration, poor quality or misleading advertisements; after-sales service; respect for their right to information and to be heard |
Government and community | Obeying laws and paying taxes honestly; protecting the environment; contributing to community welfare; providing employment |
5. CSR under the Companies Act, 2013
Section 135 of the Companies Act, 2013 makes CSR spending mandatory for certain companies. It applies to a company that, in the preceding financial year, had:
a net worth of ₹500 crore or more; or
a turnover of ₹1,000 crore or more; or
a net profit of ₹5 crore or more.
Such a company must spend at least 2% of its average net profit of the three immediately preceding financial years on CSR activities listed in Schedule VII of the Act, such as eradicating hunger and poverty, promoting education, health care, gender equality, environmental sustainability, protection of heritage, rural development and contributions to specified relief funds.
Example. A company's net profits for the last three years were ₹90 crore, ₹100 crore and ₹110 crore. Average = ₹100 crore. Minimum CSR spending = 2% of 100 = ₹2 crore.
6. Business and environmental protection
Causes of pollution by business: industrial waste and effluents released into water; smoke and gases into the air; noise from factories and vehicles; and solid and hazardous waste on land.
Types of pollution: air pollution, water pollution, land pollution and noise pollution.
Need for pollution control
Reduction of health hazards for workers and the public.
Reduced risk of liability: firms may be held legally responsible for damage.
Cost savings: efficient processes reduce waste and costs.
Improved public image: customers prefer environmentally responsible firms.
Other social benefits: cleaner surroundings, conservation of resources for future generations.
Role of business in environmental protection
Top management must be committed to creating a culture of environmental protection.
Adopting cleaner technology and processes, and reducing waste.
Complying with laws on pollution prevention.
Participating in government programmes on hazardous waste and water and air quality.
Periodically assessing pollution-control programmes.
Educating employees, dealers and customers about protecting the environment.
7. Business ethics
Business ethics refers to the socially determined moral principles that should govern business activities, such as honesty, fairness, avoiding harm, and respecting the rights of others. Examples of ethical conduct: charging fair prices, honest advertising, paying taxes, not exploiting workers, respecting the environment.
Elements of business ethics (how to build ethics into an organisation)
Element | Meaning |
|---|---|
Top management commitment | Senior managers must lead by example and openly support ethical conduct |
Publication of a code | A written code of ethics covering fundamental honesty, product safety and quality, health and safety at work, conflicts of interest, fairness in selling, and financial reporting |
Establishment of compliance mechanisms | Systems to ensure decisions follow the code: careful hiring, training, and channels to report unethical behaviour |
Involving employees at all levels | Employees at every level should take part in ethics programmes, since they carry out the policies |
Measuring results | Monitoring and auditing ethical performance, though results are hard to measure exactly |
A reliable approach to case-based questions
Identify the kind: profitable production (economic), following law (legal), expected but not required (ethical), purely voluntary (discretionary).
Identify the beneficiary from the case: owners, workers, consumers, or government and community.
For CSR, check the thresholds and calculate 2% of the average of the last three years' net profit.
For ethics, match the action to the element: leaders setting an example (top management commitment), a written code (publication of code), reporting systems (compliance mechanisms).
Connections that matter
Evolution and fundamentals of business lists social responsibility among business objectives.
Class 12 consumer protection expands on responsibility towards consumers.
Class 12 economics: sustainable development links environmental protection to the economy.
Common mistakes
Treating social responsibility as the same as legal responsibility. It goes beyond law.
Saying all companies must spend on CSR. Only those meeting the thresholds.
Calculating CSR on the last year's profit alone. It is 2% of the average of the preceding three years.
Mixing up ethical and discretionary responsibility. Ethical is expected behaviour; discretionary is purely voluntary giving.
Revision checklist
I can explain social responsibility and argue for and against it.
I can explain the four kinds with examples.
I can explain responsibilities towards each interest group.
I can explain CSR under the Companies Act, 2013 and calculate the minimum spend.
I can explain the need for pollution control and the role of business.
I can explain business ethics and its five elements.