India Finance Brief

After almost 5 decades of being tagged as the 'developing world', it is somewhere heartwarming to now be regarded as a part of the transition/emerging economies. Whether this is a result of the increasing investment in the country or whether investment is the outcome of this tag, is a topic whose scope we are not to deliberate at the moment. Today, instead the topic is all about investment - socially responsible investment. With increasing awareness on environmental threats that surround us, gain in knowledge about our own human and social rights, it is no longer in veils that companies have to be careful when treading the 'path of profits'. Recent sociological trends have also concluded that socially responsible firms receive more adulation and recommendation now than earlier. Also, it is this visibility of being a responsible entity that often helps them to create public equity markets.

Often the undertakings taken by the companies are voluntary ones and not mandated by the book of law. It is a step forward by the company to balance holistic growth by taking care of both its competitive interests and interests of the wider society. However, though philanthropic it may sound, corporate social responsibility (CSR) initiatives have ceased to be acts of charity. With communities growing up to be development partners, rather than passive receivers it has led to private sector partnerships and increased private capital flows/ equity in the transition economies.

The result has been adoption of strategies that call for complete over hauling of the pyramid of success and opened up new insights into including the impoverished masses that constitute upto 65% of the country under the umbrella. New techniques of CSR and private partnerships, have attempted to over haul the existing philanthropic image for it to be substitute with links where:

· the poor are not treated as liabilities that need to be addresses but instead are considered to be an untapped consumer base and potential business partners.

· the strategies are shifted from sustaining innovations in established market to low-end and new-market strategies where the prices, performance and functionalities of the products are re-assessed and re-invented in order to meet the needs of this new consumer base

· the value chains are being sifted through to make space for the emergent segment of distributors, suppliers, employees and producers in order to maximize their participation and include them in mainstream business.

However, it is wrong to think that CSR is all about re-alignment of strategies to just include a class impoverished for so long, for there is indeed a lot in for the corporate too. To make sense out of CSR and understand its profitability angle, it is important to recall the image of a man distributing his wealth. The first perception that crosses the mind is that of the man being wealthy and thus, arise the respect for his wealth and nobility. CSR does the same for companies. CSR activities that are often entailed to be pure 'waste; from a firm's perspective, can help pay off in marketing and advertising a firm's products. It helps to create a holistic picture of the firm before the consumers. It helps them realize that the firm enjoys a reasonable god financial position and thus is indulging in the activities out of nobility and its own sense of social welfare. Seldom will a firm take loans to support CSR and such is also the mindset of the consumers at large.

As Friedman put forward in his argument that "any use of corporate resources for purely social purposes would constitute abuse", is all set to change with investments in CSR though purely for social purpose, are yet again purely to meet the profit maximization objectives. The company through its brand perception and image make-over, can be hugely successful in tapping the skeptical consumer base and including them in the value chain.

Further, the concept of CSR goes to (a) reduce costs for the company and (b) create a notion of public equity.

The notion of a firm abating pollution reduces production costs and also increases productivity, as laid down through the Porter hypothesis. This method tagged as the 'no regret action' method, in turn goes to establish that the very image of a firm reducing the depletion of the natural resources leads consumers to accept its products with much open arms and thus increase profitability and reduce costs per volume. Also, consumers are willing to pay a premium for greener products and therefore by differentiating the products to be socially responsible in their production criteria, the company is able to demand that premium and thus increase its profit margin. It has also been noticed that often socially aware shareholders would accept a higher price for a share of a company with a CSR policy and this leads to a reduced cost of capital to the benefit of the company at large.

On the aspect of creation of public equity markets too CSR plays a large role. Often the top management of an organization is aware of the subsequent value destruction in capital markets, when deciding to implement CSR. However, with application of the recent trend of the "side sell analysis" through which companies are promoting CSR strategies to be value creating by an important information intermediary they are able to encash on public equity and thus show the entire corporate world that non profitability is a myth associated with CSR.
To conclude, there is an increasing set of people who debate on this profit maximization theory of CSR and say that companies in a mad rush to earn profits are letting go of the ethos on which CSR came to be built upon. They read literature in their defense and also point out as to how little social responsibility is actually being shown. They talk about balance of profit and philanthropy but forget to balance Adam smith and Milton Friedman who give a sense to this profitability angle of CSR. So while Adam Smith's metaphor of the invisible hand says that "In a free market, an economic agent pursuing his own self-interest also promotes the good of society", and exposes his fear of CSR being dangerous as it contains profit opportunities, Friedman's counter just fits in best when he says, "there is one and only one social responsibility of business-to use it 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."

About the author: The author is Sagarika Chakraborty. She can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it