ETHICS AND VALUES IN MANAGEMENT

PGDM BATCH : 2013-2015

SECTION 135 COMPANIES ACT, 2013: ETHICAL OR UNETHICAL?!
STATUS : INTERIM REPORT

SUBMITTED TO PROF. GOVINDA SHARMA

BY GROUP NO C7 DATE: 10-02-2014

SECTION 135 - COMPANIES ACT, 2013: ETHICAL OR UNETHICAL?!

Comment [NRGS1]: Pl see me

Contents
INTRODUCTION ........................................................................................................................ 32 ETHICAL ISSUES WITH SECTION 135, COMPANIES ACT 2013 ........................................ 43 CSR AS AN ETHICAL DILEMMA ............................................................................................ 54 THEORIETICAL APPROACH ................................................................................................... 65 CONCLUSION ............................................................................................................................. 65 BIBLIOGRAPHY ......................................................................................................................... 87

INTRODUCTION
The concept of corporate social responsibility (CSR) has a long history associated with how it impacts on organizations' behavior. The term CSR was coined by Howard Bohen in 1953 through his famous article Social responsibilities of Business. (Bohen, 2014) First reports on the lines of Corporate Social Responsibility are attributed to Ben & Jerrys as well as Shell. (Townsend, 2011) The evolution of corporate social responsibility in India refers to changes over time in India of the cultural norms of corporations' engagement of corporate social responsibility (CSR), with CSR referring to way that businesses are managed to bring about an overall positive impact on the communities, cultures, societies and environments in which they operate. The fundamentals of CSR rest on a thesis that not only public policy but even corporates should be responsible enough to address social issues. The objective of Section 135 of the Companies Act, 2013 has evolved over a period of time through debate, discussion and consultation between Corporates, Government, Parliamentarians, Civil Society, NGOs etc. Companies having net worth of at least Rs.500 crore or having minimum turnover of Rs.1,000 crore or those with at least net profit of Rs.5 crore, have to spend at least 2% of their three-year average annual net profit towards CSR activities. Schedule VII of the draft rules specifically mention a list of eight activities which may be included by companies in their CSR policies, along with a customary line such other matters as may be prescribed.: 1. 2. 3. 4. 5. 6. 7. 8. 9. Eradicating extreme hunger and poverty, Education, Gender equality and women empowerment, Reducing child mortality and improving maternal health, Combating HIV, malaria and other diseases, Environmental sustainability, Provision of vocational skills, Social business projects, Contribution to PMs National Relief Fund and such other funds set up by Government.
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This Schedule can be amended by the government and need not go back to Parliament for any change. The government has not set up any audit mechanism as to keep a check on how the mandated 2% of the profits are being spent. The corporates have the liberty to maintain to do internal auditing or third party auditing. The Companies Act, 2013 also has provision through which companies can exempt themselves from exercising section 135. They have to give written explanation as to why the company should be exempted from this regulation. One of the interesting things about Section 135 is that it does not lay out any penalties for non-compliance. (cuts-international.org, 2013)
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ETHICAL ISSUES WITH SECTION 135, COMPANIES ACT 2013

Since the law enforces that 2% of the average net profits made by the company during every block of three years, be utilized for CSR activities, it creates a wrong incentive for the company to act upon as they very often try various means to look ethical by performing unethical activities and camouflaging them as CSR activities. (Vijayaraghavan, 2011) On the other hand, the question over here seems to be that whether it is really right on part of the government to impose such a restriction of 2% on companies towards CSR. Since many a companies like PepsiCo are already looking to enhance potato procurement through its tie up with farmers by around 20 per cent to 65 per cent in India in the next five years. Under this collaborative farming model they procure around 45 per cent of its current total requirement of 2.40 lakh tones of potato per annum by working with farmers, in the process they provide technical and financial support to farmers. (The Economic Times, 2013) Competitive aspirations of a company are itself acting as a boon for the potato farmers in case of PepsiCo. In their normal course of business they are doing socially responsible activities which should be taken into account as part of CSR. The next issue to delve on is that if it is right that shareholders money is used by the company to perform CSR activities. It is equivalent to saying that you want to do good for someone but at the expense of someone elses money. It should be left to the free will of a company to help society and if they want they shall help the societies is something that cannot be imposed on someone just to prove that good is being done for society. Companies almost always tend to look for their benefits, even if it is spending for CSR, for example if they do a project for a particular village, it could be that the actual need in the village is to educate the children of the village, instead companies know that by educating the village children they may not gain as much as they would. So they decide to set up system through which they create an infrastructure to help farmers in their produce and indirectly create a proper source of supply for themselves and call it CSR. Many companies tie up with NGOs and gain access to target markets that they could not reach out to easily. With the help of their efforts in the NGO, they portray themselves as an organization that cares for society and does well for them, thus creating a very strong image for themselves in the mind of the people. At times what they mention in public about their projects and what they actually say to the NGOs are very different behind closed doors when it is lobbying government or through industry mouthpieces.
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Comment [NRGS4]: This is central question.

Comment [NRGS5]: This is contestable.

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CSR AS AN ETHICAL DILEMMA

The road to hell is paved with good intentions St Bernard of Clairvaux (Wikipedia, 2014) An argument that revolves around the effect of you cannot do so-and-so and yet you must do so-and-so is a perfect case of an ethical dilemma. And when it comes to the case of Corporate Social Responsibility (CSR) the ethical dilemma it hold is to spend or not to spend. Whether to give up 2% of companys net profit into CSR activiti es with an expectation of attaining good will of the society, boost up their PR front or to reinvest this 2 % net profit and establish a self-sustaining business. This is the dilemma that every company is finding itself in. A company that decides to be a part of the CSR activity as mentioned in Section 135 of the Companies Act, expects itself to be not only seen as an ideal corporate in the eyes of the common public but also desires to acquire an edge over other companies in the same business line in being socially concerned and responsible. Does abiding by Section135 of Companies Act give a clean chit to companies like Monsanto? Can they expect not to be referred to as the most hated company in the World if they take up CSR activities? (Planes, 2013) If a company chooses not to spend on CSR, apart from the goodwill ones loses from not being a part of CSR, they also would have government on their back and this would give a great chance for the media to paint them black. They would not only lose the edge over their competitors just because they would be seen as socially irresponsible but also would fail in building a strong PR subsequently. The dilemma is to be a part of this or stay away from it. When a company decides to stay from this, all it desires to do is to reinvests its entire profit in the business itself and ensure its stakeholders are benefited which also includes its customers and indirectly benefiting the society with the goods and services its providing. When a company is asked to part with its net profit all it would be instigated to do is to fill in this gap in the profit that the company had to give up by asking the consumers to shell more than what they used to spend on the same commodity or services. An organization which idealistically prioritizes on promoting social benefits is no better or worse, in itself, than a company which benefits society by concentrating its entire focus on creating wealth and providing employment through the pursuit of profitable activities. (Klempner, 2009) You can be an ethical person and pursue a life of service to the community, or be an ethical person and devote yourself to self-improvement and self-fulfillment, and pursuing your own personal goals and projects.

Comment [NRGS6]: With a government mandate, this is no more a dilemma but a statutory requirement. See comment 7 Formatted: Highlight

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Comment [NRGS7]: See comment 6

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THEORIETICAL APPROACH
Principle of Fairness: This theory was developed by Robert Philip which formed a normative argument for various other theories that claim for ethical obligation in corporate social responsibilities. The Principle of fairness says that if a group of people works together to provide some benefits at some cost of them, then anyone who takes the advantage of those benefits has an obligations to contribute his or her share to the groups. (Velasquez, 2014) Stakeholder Theory: This view was put forwarded by R. Edward Freeman that says manager should give all stakeholders a fair share of the benefits a business produces. (Shareholder Theory)This theory claims that a companys stakeholder work together to secure the conditions the company needs to operate successfully and they do this at some cost to themselves. Shareholder Theory: The shareholder view of Friedman says a managers only responsibility is to legally and ethically make as much money as possible for shareholders. According to this theory, a manager has no right to give company money to social causes when doing so will reduce shareholders profit, because the money does not belong to the manager but to shareholders. (Velasquez, 2014) Companies should be responsive to all its stakeholders and that would include making the economic and discretionary contributions society expects, as well as behaving ethically and legally towards its stakeholders.

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CONCLUSION
To be or not to be is not a question of compromise. Either you be or you dont be-Golda Meir (Golda Meir, 2013) Every single business stays in the market and sustains itself only because it is providing its fellow beings something that is of utility. This act of providing something of utility in itself is a social work. Prices are only a mechanism to guide resources to where it has the most optimum use and profits are an incentive for people to work. The primary objective of a business entity is to maximize value for both its shareholders and customers and CSR hinders the same. There is a whole lot of difference between spending your own money voluntarily and spending shareholders money. The current stipulation from the government through Section 135 of the Companies Act, 2013 runs contrary to dreams and desires of millions of shareholders who put their hard earned money in various companies through stock markets. Spending 2% of profits in activities other than in the natural course of business is required to term it as a CSR activity. In real life it is not the same, as every other company helps its fellow

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beings in the very course of its normal business activities. CSR also hurts the consumers as the cost of being philanthropic is passed on to customers in terms of shoddy services and high prices. Efficiency in business reduces the cost, and the benefit of which is passed on to the consumers as low prices. The money that could have been re-invested in the business to either expand or to become more efficient would now be squandered away in the name of CSR. Mobile and Airline industry are prime examples of how increased efficiency can reduce the cost and bring social change. The responsibilities of a business towards its various stakeholders are: 1. 2. 3. 4. Maximize profits for the shareholders. Give maximum value for the price paid by the customers. Ensure suppliers are given commensurate to the services that they provide. Ensure employees are given salaries and benefits adequate to the skill sets that they provide. 5. Ensure dealers are given maximum value for the time they are investing in you. A company that should be focused on its core business activities and responsibilities stated above would now be cracking its head on how to spend 2% of its profits on philanthropy, which is not a responsibility of a responsible business entity. In the nutshell, mandating CSR seems to be nothing more than a despotic act of a growingly tyrannical government which asks people to spend what rightfully belongs to them on something that they voluntarily would never spend on. Moreover it is a loosely drafted law which can be easily taken for a toss. It would be better to see this section of Companies Act, 2013 getting repealed and this basic idea of social responsibility be left to corporates to decide and voluntarily work upon.

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BIBLIOGRAPHY
1. (2013, August 03). Retrieved from cuts-international.org: http://www.cutsinternational.org/pdf/Draft-CSR_Rules_2013.pdf 2. Golda Meir. (2013, March 24). Retrieved from Wikiquote.org: http://en.wikiquote.org/wiki/Golda_Meir 3. The Economic Times. (2013, Sep 25). Retrieved from economictimes.indiatimes.com: http://articles.economictimes.indiatimes.com/2013-09-25/news/42394669_1_drip-irrigationfarming-market 4. Wikipedia. (2014, feb 10). Retrieved from wikipedia.org: http://en.wikipedia.org/wiki/The_road_to_hell_is_paved_with_good_intentions 5. Bohen, H. (2014, February 08). University of Iowa Press. Retrieved from uiowapress.org: http://uiowapress.org/books/2013-fall/social-responsibilities-businessman.htm 6. Friedman, M. (1970, September 13). The Social Responsibility of Business is to Increase its Profits. Retrieved from colorado.edu: http://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html 7. Klempner, G. (2009, January 09). CSR AN ETHICAL DILEMMA. Retrieved from klempner.freeshell.org: http://klempner.freeshell.org/articles/dilemma.html 8. Planes, A. (2013, June 09). Daily Finance. Retrieved from dailyfinance.com: http://www.dailyfinance.com/2013/06/08/why-is-monsanto-the-most-hated-company-in-theworl/ 9. Shareholder Theory. (n.d.). Retrieved from rintintin.colarado.edu: http://rintintin.colorado.edu/~vancecd/phl306/share.pdf 10. Townsend, S. (2011, February 09). The Guardian. Retrieved from theguradian.com: http://www.theguardian.com/sustainable-business/blog/sustainability-csr-reporting 11. Velasquez, M. G. (2014). Business Ethics Concepts and Cases. Delhi: Pearson Prentice Hall. 12. Vijayaraghavan, A. (2011, july 26). Triple Pundit. Retrieved from www.triplepundit.com: http://www.triplepundit.com/2011/07/making-csr-mandatory-india/

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Criteria for evaluation Description of the ethical issues and dilemma Application of ethical theories and approaches to resolve the dilemma Quality of referencing Pl note that referencing is extremely important for an objective study. The quality of articles referred should be very good. Total Pl note that in the final report, I will be evaluating your report for the components mentioned under Basis for evaluation (see page 5 of the Course Hand out), most importantly resolution of the dilemma and suggestions for avoiding such dilemma in future (recommendation of systemic changes)

Max marks 3 4 3

Marks obtained 2.5 2.5 2.5

Comment [NRGS9]: This section needs improvement. Discussions are sketchy. Comment [NRGS10]: All references are to be built into body text. Adopt APA style. Fill in all fields of reference.

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7.5

The Friedman article could be contrasted with the 2005 article by Sumantra Ghoshal in Academy of Management Learning and Education on "Bad Management Theories Are Destroying Good Management Practices," which is a strong critique of the assumptions of neoclassical/institutional economists. Regulatory assumptions can be questioned from the two perspectives.