Latest News

In the latest installment of the Salzburg Questions for Corporate Governance, Kiran Somvanshi, chief manager at ET Intelligence Group, explores the advantages and disadvantages of "forced philanthropy"

This article is part of the Salzburg Questions for Corporate Governance series by the Salzburg Global Corporate Governance Forum

Governments across the world increasingly expect companies to be socially responsible citizens, and some of them are becoming more stringent about these expectations. China recently began a campaign of “common prosperity” wherein companies have been strongly encouraged to focus on working for the common prosperity, focusing on social value. The latest crackdown on the technology firms is prompting Chinese companies to toe the official diktat to avoid regulatory clampdowns.

Seven years ago, India became the first country in the world to make it mandatory for large companies to spend two percent of their annual net profit towards social welfare initiatives as part of their corporate social responsibility (CSR). The country’s corporate affairs ministry has laid down detailed guidelines on what’s eligible and not an expenditure towards CSR. Over time, non-compliance has come to attract penal provisions.

Though not a welcoming move, businesses have come around to comply with the provisions. Indian rating agency CRISIL estimated that Indian companies have spent around $13.6 billion since it was made mandatory. In addition, according to data compiled by Bloomberg News, seven Chinese billionaires have directed a record five billion US dollars to charity so far this year. 

With the magnitude of corporate profits invested for social purposes being significant, it raises several questions about companies made to undertake social welfare or philanthropic initiatives:

• Should businesses be compelled to be socially responsible?
• Shouldn’t it be enough that companies pay the taxes due to them and conduct their business fairly and ethically?
• Are businesses capable of understanding what is best for communities?
• Can companies be expected to compensate for the shortfall of government efforts to provide necessities to a region?
• Is such a move justified in the case of a poor, developing country?

To be sure, compelling companies to become socially responsible does have some obvious advantages:

• Companies becoming more socially conscious of their business decisions;
• A new stream of funding available for social welfare purposes;
• Improvement in processes and governance standards of the non-profit sector;
• A complementary force to public administration;
• Corporates becoming aware of the needs of the societies they function in;
• Higher transparency in the areas of social welfare through corporate disclosure;
• And the corporatization of the social sector comprising of non-profit organizations and charitable societies.

However, the policy of “forced philanthropy” has some clear drawbacks:

• There is a half-hearted effort in complying with legislation that is imposed upon;
• The compliance often remains restricted to the letter and not essentially followed in spirit;
• There is often duplication of efforts in case of the community having the presence of many companies;
• Compulsory CSR becomes a tick-the-box exercise;
• Corporates adopt shortcuts to undertake their responsibility and “pretend” to be responsible rather than being one;
• And despite the compulsions, there is always room for discretion in what to fund and whom to fund that can be abused.

There is an argument emerging that rich companies should pay their taxes duly instead of philanthropy or social welfare. Companies, while doing philanthropy, continue to have registered offices in tax haven destinations. Socially responsible conduct implies responsible action towards stakeholders such as employees, customers, and vendors. It means that companies adopt fair labor practices, produce products, provide safe and good services for the customers, and have practices that do not short-change their suppliers or vendors.

When the concept of philanthropy is adopted perforce, companies tend to treat it like a proxy tax to be paid in kind rather than in cash. As a result, it tends to get narrowed down to companies spending a token amount of money on a pet social cause and keenly publicizing the effort – effectively greenwashing their images. In other cases, philanthropic activities have more of a business or strategic objective than a noble one.

In an increasing disclosure-oriented corporate world, where companies are bound to disclose most aspects of their business dealings, philanthropy becomes the gray area for the management to use discretion in donating funds without disclosing every transaction. In a nutshell, philanthropy provides the much-needed opaqueness for founders and companies to donate to support vested interests discretely.

The companies that are seriously interested in doing good for their societies tend to do so without it being made a compulsory task. There is a clear business case for companies to act socially responsible. CSR should ideally constitute the “S” aspect of the ESG norms that companies comply with to attract a better class of responsible investors. However, when a business case logic is replaced with a regulatory diktat – it only ends up converting the non-spenders into spenders. It doesn’t necessarily motivate companies to take up social welfare as a business agenda for a better planet and better investment prospects. 

Besides, for companies to make a meaningful impact through spending a small proportion of their profit on social welfare initiatives, the presence of an effective ecosystem of qualified agencies that implement, undertake an assessment, and measure the impact becomes pertinent. In the absence of an enabling environment, a genuine philanthropic initiative can be ill-targeted, ill-designed, and badly implemented. However, the presence of such an ecosystem is not always possible and takes time to get established.

The success stories from India and China as they get their companies to be socially responsible may prompt other countries to follow suit. Businesses globally will have to guard themselves against any regulatory overreach in this regard while simultaneously exhibiting socially responsible conduct.

Have an opinion?

We encourage our readers to share your comments by joining in the discussion on LinkedIn.

Kiran Somvanshi works as a chief manager at ET Intelligence Group, the research wing of the Economic Times, India's largest business daily. With over twelve years' experience in business journalism, she has over 1200 published articles to her credit on Indian business and economy. She closely tracks and writes on the pharmaceuticals, healthcare and consumer goods sectors and has written extensively on Indian companies, their business, strategy and governance. Gender inclusion, corporate social responsibility and data protection are also areas of her interest and writing. Kiran is a 2017 Fulbright Humphrey fellow and a 2016 Chevening scholar. She holds a bachelor in Law and graduated in psychology with a gold medal and is a rank holder from Mumbai University. Kiran also holds a Ph.D. from the Tata Institute of Social Sciences, researching on corporate social responsibility in India. She is a qualified company secretary and cost accountant. She is a Fellow of Salzburg Global Seminar.

The Salzburg Questions for Corporate Governance is an online discussion series introduced and led by Fellows of the Salzburg Global Corporate Governance Forum. The articles and comments represent opinions of the authors and commenters, and do not necessarily represent the views of their corporations or institutions, nor of Salzburg Global Seminar. Readers are welcome to address any questions about this series to Forum Director, Charles E. Ehrlich: cehrlich@salzburgglobal.org. To receive a notification of when the next article is published, follow Salzburg Global Seminar on LinkedIn or sign up for email notifications here: www.salzburgglobal.org/go/corpgov/newsletter