Commentary

CSR: A Cloak for Crooks

The government’s new Companies Bill will reportedly ask large companies to spend 2% of their net profit on CSR (corporate social responsibility). The theory is that corporates must aim for social goals, not just profits.

It’s unclear whether the 2% allocation will be compulsory or indicative. In either case, this misses altogether what corporate social responsibility actually is. It is an ethical attitude, a determination to observe the highest standards in dealing with all stakeholders — customers, suppliers, shareholders. CSR means observing the highest standards in dealing with health and environmental hazards, and in presenting corporate accounts accurately. If a company cheats its stakeholders, fiddles its accounts and ignores hazards, then it is grossly irresponsible whether or not it spends 2% of profits on some list of government-approved social activities.

Last week the Enforcement Directorate attached Rs 822 crore of fixed deposits of the erstwhile Satyam Computer Services. The Satyam scam was the biggest in corporate history. Promoter Ramalinga Raju made Satyam India’s third-biggest IT company. But in 2009 Raju confessed he had fiddled the books for years, and forged certificates of bank deposits. This helped inflate the share price and enable Raju and family to borrow huge sums for real estate speculation.

Raju was India’s biggest self-confessed crook. Yet he was much celebrated for CSR and won several awards. These included a UK government award for CSR in 2008.

His Byrraju Foundation took information technology directly to rural India. It set up a rural call centre, enabling villagers without college degrees to join the globalisation bandwagon. He took telemedicine to rural areas, enabling villagers to interact with specialist urban doctors. His foundation sought to build self-reliant rural communities, providing services like healthcare, education, water, sanitation and green awareness.

He ran an emergency ambulance service that reached sick and injured people within 30 minutes, ready with paramedics and equipment, and rushed them to hospital. This scheme attracted so much praise that many other states replicated it.

Lesson: a company that cheats shareholders, creditors and other stakeholders can parade as a paragon of corporate ethics, and win multiple awards. Allocating some profits for rural development and health is no indicator whatsoever of ethics. Rather, the CSR allocation can camouflage lack of ethics.

Many consumers have been duped by CSR awards. They are willing to pay more for products from such award winners. After the Satyam debacle, they should know better.

Worse than Satyam has been the oil multinational, BP. It caused the biggest environmental disaster in history when its Maconodo well exploded in the Caribbean Ocean after it failed to observe many safety procedures. This exposed as fraudulent its campaign to paint itself as a green saviour. Once called British Petroleum, it change its name to BP and launched a hugely successful image-building makeover calling itself “Beyond Petroleum”. It got a new logo of a green and yellow sun (representing solar energy) to emphasise its green credentials. It boasted it was among the world’s biggest producer of solar panels and windpower, although these accounted for barely 3% of its business, and actually represented public relations spending. “Beyond Petroleum” won two “Campaign of the Year” awards from PR Week, and an award from the American Marketing Association.

BP won the 2007 Prime Minister’s CSR award in Malaysia for aiding a turtle sanctuary. Fortune magazine has an annual corporate accountability rating for CSR. BP topped the Fortune list in 2004, 2005 and 2007, and came second in 2006. The Chinese were taken in too: in 2007 they gave BP the “The Most Responsible Enterprise” award organized by China News Weekly and the Chinese Red Cross Foundation. BP won the Corporate Citizenship Award for Chinese enterprises several times.

Yet behind this image-manship, BP had a horrendous record of cutting corners and neglecting safety. Its poorly maintained refinery in Texas exploded in 2005, killing 15 and injuring 180. In 2007, a BP pipeline got corroded through neglect and leaked 200,000 gallons of crude into the pristine Alaskan wilderness. BP was fined $303 million to settle an accusation of conspiracy to manipulate the price of propane gas. Between 2007 and 2010, BP refineries in Ohio and Texas ran up 760 “egregious, willful” safety violations, while rivals Sunoco and ConocoPhillips each had eight, Citgo had two and Exxon had one comparable citation. So, BP accounted for 97% of all corporate refinery violations.

Lesson: don’t get fooled by corporate spending on CSR. Far from being evidence of ethics, it’s often a cloak for gross misgovernance. If the Companies’ Bill mandates 2% spending on supposed CSR, corporate ethics will not improve. Rather, more Satyams will emerge.

Swaminathan Anklesaria Aiyar is a Research Fellow at the Cato Institute’s Centre for Global Liberty and Prosperity.