Saturday, December 28, 2013

Friedman, CSR and Coal India Limited

Milton Friedman, the Nobel Laureate wrote a piece entitled 'The Social Responsibility of Business is to Increase its Profits' in the New York Times Magazine dated September 13, 1970. It is still relevant and an interesting reading. Throughout the article, Friedman argues against corporate social responsibility (CSR). Most authors and experts believe that  his arguments against CSR are not relevant in the present day context. I do not subscribe to their views. Even today, it is true that the social responsibility of a business is to increase profits.

Friedman says  "in a free society there is one and only one social responsibility of business - to use resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud." He also said that owners (shareholders) generally desire to make as much money as possible while conforming to the basic rules of society both those embodied in law and those embodied in ethical custom.

Thus, Friedman says that a company should comply with the law, adopt ethical practices and be transparent while making profits. It should be able to defend its position and actions against legal and ethical norms.

Friedman says that the purpose of business is to earn profits. I am sure that he does not mean short-term profits. He uses the term profits to refer to what is called 'shareholder value'. What Friedman says is that whatever activities a business undertakes, all should aim at creating shareholder value. There cannot be any activity that is de-linked to shareholder value.

Friedman says "Of course, in practice the doctrine of social responsibility is frequently a cloak for actions that are justified on other grounds rather than a reason for those actions". He illustrates the point with an example. It is in the long run interest of a corporation that is a major employer in a small community to provide resources to providing amenities to that community or to improving its government. That may make it easier to attract desirable employees, it may reduce wage bills or lessen losses from pilferage or sabotage or have other worthwhile effects.

Friedman observes "in the present climate of opinion, with its wide spread aversion to 'capitalism', 'profits', the 'sole-less corporation and so on, this is one way for a corporation to generate goodwill as a by-product of expenditures that are entirely justified in its own self-interest." 

Is the present day perspective on CSR different from the perspective presented by Friedman? It is not. Even the perspective of the Indian government, which has mandated CSR spending of two per cent  of average net profit of the previous three years by profitable and large companies, is not different from that developed by Friedman.

Section 135 of the Companies Act 2013 stipulates that CSR fund should be spent preferably in the local area and areas around it where it operates. This implies that the government wants companies to take up projects in the local community to ensure that they benefit the company and help increasing profits.

The Board's CSR Committee that is to be constituted under the Companies Act 2013 should go by the thesis presented by Friedman, that is, 'the social responsibility of business is to increase its profits'. In formulating CSR policy it should abide by that philosophy. It should evaluate each CSR project applying the same principles that the Board applies in evaluating investment proposals and in allocating resources to capital expenditure, except that it cannot quantify return on investment (ROI) or net present value (NPV). This will take time. Therefore, in the first year, many companies will not be able to spend the amount allocable to CSR activities and shall transfer the same to the CSR corpus.

Should speed take precedence over identification of projects and judicious allocation of resources? A recent news on the displeasure of the 'Parliamentary Committee on Coal and Steel' on Coal India Limited's (CIL) inability to spend CSR funds is disturbing. CIL accounts for eighty per cent of the domestic coal production. It is a listed public sector enterprise (PSE). During the year 2011-12, CIL could spend only Rs 82 crores (US $ 13 million), which is just 15 per cent of the total fund allocated for CSR spending as per the guidelines issued by the Department of Public Enterprises (DPE), government of India. The Committee said it was a failure on the part of the officials responsible for CSR spending. We do not know the reasons for that failure. But this public rebuke by a political committee should not be construed as a signal that speed of spending is more important than other aspects of CSR spending. Slow CSR spending is a much lesser crime than squandering shareholders money in the name of CSR.

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