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The Role of Corporate Social Responsibility (CSR) in Enhancing Corporate Performance

Written by Sandhra S.

Research Associate at Law & Order (June-July 2020)

Fourth Year, BA. LLB. The National University of Advanced Legal Studies (NUALS), Kochi



Disclaimer: Please note that the views expressed below represent the opinions of the article's author. The following does not necessarily represent the views of Law & Order.


Abstract

Corporations are amongst the most important social organizations. Just like they are accountable to their clients, and to the economy at large, they are at the same time morally responsible to the society as well. Corporate social responsibility (CSR) in plain terms means an approach adopted by companies to comply with their legal obligations towards society and the environment.[1] In this article, the author would be dealing with the concept of corporate social responsibility, highlighting its role in enhancing the performance of corporations.

The Relationship between Corporate Social Responsibility (CSR) and the Performance of the Corporation

There is no doubt that profit-making is the first and most important objective of any corporation. But in the modern era, contribution to society and the environment is as important as the contribution made to the economy. CSR commitments of corporations have a direct correlation with their performance. By corporate performance, we mean the health of the organization, which is otherwise calculated in terms of their financial performance.[2]

One of the main reasons why corporations engage in CSR activities is to receive some enhancements for their business in the long run.[3] However, not all corporations share this opinion.[4] This is because CSR activities take up a portion of the funds of the company which for many, seems like an expenditure with no return. Looking at it from a short-term perspective, it may prove to be true. But in the long run, these expenses would eventually benefit the corporation itself. Just like market forces dictate the rise and decline of corporate growth, social factors also play a very important role in this matter.[5] In fact, CSR should be treated as an investment that could fetch them success in the future.

In a way, CSR is similar to the expenses made by corporations for Research and Development (R&D). [6] It is a known fact that investments in R&D will prove beneficial to the company only in the long run. A positive outcome in any manner cannot be expected within a short span of time. [7]

However, most well-established corporations keep a part or portion of their finances for undertaking R&D activities, which would reap benefits after continued efforts over the years. For instance, when a company undertakes CSR activities for the benefit of the environment, they may be knowingly or unknowingly cutting on the expenses which they would otherwise derive in the form of fines paid to the government.[8] Further, making investments in social activities would enhance customer relationships and goodwill[9] of the company which is another positive aspect of CSR.

CSR also plays an important role as it influences customer behavior.[10] Some customers even differentiate goods and services on the basis of the social commitment of the producers and suppliers. It is also to be noted that, sometimes corporations also use CSR as a marketing strategy. The investments made by corporations for carrying out CSR activities would receive public attention. Hence, they could easily convince their customers to make contributions through them. In this way, after a point of time, the corporations would be able to meet their CSR goals without incurring any additional costs.

At the same time, they would also benefit through reputation, goodwill, and customer satisfaction. A company that actively participates in CSR activities would have the image of a responsible company.[11] This would help to boost the reputation, and in turn, would also serve as an advantage in the competitive market. The best example of this is the ‘Book a Smile’ campaign of ‘Bookmyshow’.[12] The campaign mainly works on the idea of collecting contributions from their users to improve the lives of the less fortunate.[13]

Google is one of the best examples for corporations profiting from CSR activities. In the year 2000, the company established Google.org, which works as its charitable wing.

The organization has committed roughly US$100 million in investments and grants to non-profits annually.[14] Further, it has also created a project by the name ‘Google Green’ with the objective of using resources more efficiently and supporting renewable energy sources. It has led to an overall reduction in power requirements for Google data centers by 50 percent[15].

However, recent developments have highlighted that limiting CSR activities as a mere marketing strategy will do more harm than good. After the death of George Floyd and the resurgence of the Black Lives Matter movement, there was a general uproar for uplifting the minority communities in America, especially black people.

Many organizations have come up with endorsing the theme ‘black lives matter’. However, what is to be understood is that these endorsements are mostly limited to social media platforms. Organizations that have a history of racist behavior from their employees towards their customers have tried to follow this ‘trend’, but they received backlash for the insincerity sensed by the public in their CSR policy. [16]

Corporate Social Responsibility in India: A Way Forward

India is the first country in the world that has made CSR mandatory after an amendment to the Companies Act in April 2014.[17] In India, the Companies Act 2013 mandates every company having a net worth of INR five hundred crores or more, or turnover of INR one thousand crores or more or a net profit of INR five crore or more during any financial year to constitute a corporate social responsibility committee.[18]

According to the Act, the committee shall be responsible for formulating policies and guidelines in this respect, and also for allocating funds for the purpose of carrying out the CSR activities of the company.[19] The Act further lays down a list of activities that the companies may include in their Corporate Social Responsibility Policies.[20] The Ministry of Corporate Affairs has also launched a data portal with the name Corporate Social Responsibility data portal to disseminate data related to CSR and information filed by the companies registered with it.[21]

Indian Companies have received appreciations for their noteworthy contributions in the field of CSR. One good example of this is India Tobacco Company Limited (ITC). It is the only company in the world to be carbon positive, water positive, and solid waste recycling positive. Their CSR activities include educational programs, women empowerment programs, farm to food products value chain, diary development, and so on. These contributions have fetched them numerous awards and recognition. Moreover, they also hold top ratings among Asian companies for their CSR activities.[22]

Conclusion

To conclude, apart from benefiting the society and environment alone, CSR activities play a major role in the enhancement of the performance of the corporation itself. Even if these activities require major financial contribution in the beginning, in the long run, corporations could easily engage in CSR activities without any additional costs. Hence, these expenses could be interpreted as an initial investment that could bring out positive results for the development of the corporation.

On a different note, it is also to be noted that those corporations that do not engage in CSR activities also face negative consequences.

One obvious reason is that they would be left behind in the market if their competitors are active participants in CSR activities. The example of ‘Uber’ is worth mentioning in this context. The company made its first move for CSR activities as late as six years after incorporation. This is said to have negatively impacted the company for some years.[23] Further, since India has now made CSR mandatory, those companies that fail to comply with the regulations would have to face penal consequences as well. In short, CSR activities are not to be considered as a burden by corporations, but as an opportunity. Like India, which has become the first country to make CSR policies mandatory, every other country should make a move and encourage corporations to undertake such activities.








[1] Communication from the Commission to the European Parliament, The Council, The European Economic and Social Committee and the Committee of the Regions, European Commission, 2011. [2] Corporate Performance, https://whatis.techtarget.com/definition/corporate-performance. [3] Chin-HuangLin & Ho-LiYang & Dian-YanLiou, The impact of corporate social responsibility on financial performance: Evidence from business in Taiwan, 31 Technology in Society,Volume (2009). [4] A. Ullman, Data in search of a theory: a critical examination of the relationship among social performance, social disclosure, and economic performance, 10 Academy of Management Review (1985). [5] L.E. Preston, Corporate-society research: retrospect and prospect, Research in corporate society and research, JAI Press, Greenwich, CT (1990). [6] A. McWilliams & D. Siegel, Corporate social responsibility and financial performance: correlation or misspecification?, 21 Strategic Management Journal (2000). [7] Z. Griliches, Issues in assessing the contribution of R&D to productivity growth, 10 Bell Journal of Economics (1979). [8] J.B. McGuire & A. Sundgren & T. Schneeweis, Corporate social responsibility and firm financial performance, 31 Academy of Management Journal (1988). [9] R. Solomon & K. Hanson, It's good business, Atheneum, New York (1985). [10] Du, S. & Bhattacharya & C. B., and Sen, S. Reaping Relational Rewards from Corporate Social Responsibility: The Role of Competitive Positioning, 24 International Journal of Research in Marketing (2007). [11] Chris B. Murphy, Why Social Responsibility Matters to Businesses, https://www.investopedia.com/ask/answers/041015/why-social-responsibility-important-business.asp#:~:text=Being%20a%20socially%20responsible%20company,greater%20productivity%20in%20the%20workforce. (June 19, 2020) [12] Rusen Kumar, BookASmile believes in the Power of 1: Farzana Cama Balpande, Head, BookASmile, https://indiacsr.in/bookasmile-believes-in-the-power-of-1-farzana-cama-balpande-head-bookasmile/ (June 16, 2020). [13] #BookMyShowCares, https://in.bookmyshow.com/donation (June 19, 2020). [14] Google.org, https://en.wikipedia.org/wiki/Google.org (June 16, 2020). [15] Corporate Social Responsibility: What it is, Why it Matters, & How it Impacts Business in 2016, https://www.mondo.com/corporate-social-responsibility-2016/#:~:text=Besides%20the%20potential%20loss%20of,satisfaction%20levels%20and%20retention%20rates.&text=Businesses%20that%20don't%20prioritize,companies%20that%20are%20doing%20so. (June 16, 2020). [16] Tracy Jan & Jena McGregor & Renae Merle & Nitasha Tiku, As big corporations say ‘black lives matter,’ their track records raise skepticism, https://www.washingtonpost.com/business/2020/06/13/after-years-marginalizing-black-employees-customers-corporate-america-says-black-lives-matter/?arc404=true [17] Corporate Social Responsibility in India, https://www.india-briefing.com/news/corporate-social-responsibility-india-5511.html/#:~:text=India%20is%20the%20first%20country,part%20of%20any%20CSR%20compliance. (June 16, 2020). [18] S.135 (1), Companies Act, 2013. [19] S.125, Companies Act, 2013. [20] Schedule VII, Companies Act, 2013. [21] About: National CSR Data Portal, https://www.csr.gov.in/about-us.php (June 16, 2020). [22] CA Hemraj Kumawat, Impact of CSR on Financial Performance of Company, TaxGuru (2014). [23] Dylan Rees-Williams, Uber is late to the party - corporate responsibility should come first, https://www.kksadvisors.com/blog/uber-corporate responsibility#:~:text=Uber's%20introduction%20of%20a%20corporate,negative%20and%20unsustainable%20corporate%20culture. (June 16, 2020). Bibliography

1. Chin-HuangLin & Ho-LiYang & Dian-YanLiou, The impact of corporate social responsibility on financial performance: Evidence from business in Taiwan, 31 Technology in Society,Volume (2009).

2. Ullman, Data in search of a theory: a critical examination of the relationship among social performance, social disclosure, and economic performance, 10 Academy of Management Review (1985).

3. L.E. Preston, Corporate-society research: retrospect and prospect, Research in corporate society and research, JAI Press, Greenwich, CT (1990).

4. McWilliams & D. Siegel, Corporate social responsibility and financial performance: correlation or misspecification?, 21 Strategic Management Journal (2000).

5. Z. Griliches, Issues in assessing the contribution of R&D to productivity growth, 10 Bell Journal of Economics (1979).

6. J.B. McGuire & A. Sundgren & T. Schneeweis, Corporate social responsibility and firm financial performance, 31 Academy of Management Journal (1988).

7. R. Solomon & K. Hanson, It's good business, Atheneum, New York (1985).

8. Du, S. & Bhattacharya & C. B., and Sen, S. Reaping Relational Rewards from Corporate Social Responsibility: The Role of Competitive Positioning, 24 International Journal of Research in Marketing (2007).

9. Tracy Jan & Jena McGregor & Renae Merle & Nitasha Tiku, As big corporations say ‘black lives matter,’ their track records raise skepticism, https://www.washingtonpost.com/business/2020/06/13/after-years-marginalizing-black-employees-customers-corporate-america-says-black-lives-matter/?arc404=true

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