Role of the state in driving responsible corporate behaviour (Part 3)

Having examined a company's purpose and the interlinkages between responsible corporate behaviour and financial performance, I now briefly address the pressing questions regarding the role of the state in driving this behaviour.

Q1) Would the state also ensure a corporation's responsible behaviour?

?

A1) During the multinational rise after WW-2, companies were always looking for the jurisdiction where they could achieve the most unhindered growth. This has led to the "race to the bottom" regarding environmental regulations and today's problem of climate change. Any government that increased environmental protection, almost always lost access to the opportunity to get another corporate in their jurisdiction.?(Magnuson, Chapter 6 - The multinational, 2023). This is also what played a big role in a lot of the MNC's of the developed shifting to clothing sweat factories, non-regulated mining facilities and

?

Given this recent history, the role of the state in creating the right framework, guidelines, incentives and platforms for responsible corporate behaviour gains further traction. In addition, Govt statutes are most effective in ensuring responsible corporate behaviour, if they let citizens have transparent access to emissions and have legal standing to sue the polluters and have resources to support these activities. (D.S.Grant, 1996), (S.Grant, 1997).

?

Hence, in this context, the state does have a role to play in reversing this trend. But, what’s important to remember is that the trend has to be reversed, and not a culture of permanent regulatory environment to be created – which has been known to constrain innovation, lead to rent-seeking, creative accounting & just cause more unintended consequences in general.

?

Q2) Do companies have any comparative advantage and multiplication effect in delivering social impact projects? Would we benefit from the company’s pooling that funds better into a central pool, focused on an activity or two?

?

A2) There are ways in which corporates can indeed create a comparative advantage and multiplication effect even in their responsible business interventions. Where they certainly will lack it, would be un-connected to their core business expertise or industry resources kind of external facing social interventions, such as education and health – which is currently at the core of CSR spends by corporates in India.

?

The aspect of the need of “corpus of funds” aggregated by corporates for external experts to implement, is a suggestion which comes up in cases where the same corporates indulge in similar activities around the same industrial hubs or regions – but, somehow it never gains a scalable effect due to each corporate carrying out these activities in their own siloes. This is also mainly anyway carried out by external NGO or implementation partners. In such areas, the need for collaboration between corporations is of high priority, but the state here cannot play a productive role by adding another layer. Inherently, it is also a convoluted approach, given that the government is already collecting taxes and using a pool of collected taxes for welfare work. So, a need for another corpus would end up complicating and stressing out an already overstretched state institutional capability.

?

Q3) If the aim is to ensure the state does not become too overbearing while the company is also naturally self-correcting itself, does it mean that the state should focus on creating a framework for these economic activities, have independent regulators and a strong rule of law drive both penalties and incentives instead?

?

A3) My recommendation would for the state to define “minimum standards of corporate responsibility” as a guiding framework (its BRSR guidelines is a step in the right direction for the same – just that, it is too comprehensive and hence maybe too complicated also for a smaller sized corporate or a low profit potential corporate to be embracing all at once). There is a framework I am putting in place to pick the top areas of interventions for embracing standards by corporates and for the govt to either having the regulatory environment or letting the corporates self-regulate that implementation across industries. More on that in a later post.

?

In addition, the existing institutional strength of the respective country plays a big role in ensuring such state guidance/interventions work out. In countries that are more amenable to associative governance and that have property rights in place that are more supportive of collective business activity, such as the UK and Germany, the courts are more likely to back up industrial self-regulation. The Nuclear Regulatory Commission (NRC) is one such case in point (Campbell, 2007). And this is why our institutional framework in India for corporate self-regulation must first improve, before the union govt can off-load all of this off itself directly on the corporates.

?

Q4) And the most topical question for us in India is: Does the mandatory CSR spending law in India actually induce more responsible behaviour?

?

A4) Studies have shown that firms (especially large ones) who engaged in voluntary CSR before the mandate kicked-in, reduced their CSR spending afterwards (or had a plateauing of their prior spending patterns). The high CSR-spending firms reduced their spending from 10.8% of their profits to 3.6% of it, after the 2% mandate kicked in. Instead, unconstrained or voluntary CSR, gave corporates a much better signaling effect of being ethical, responsible and virtuous. It is also argued that the imposition of a mandatory CSR law could lead to other unintended consequences such as less spending on disaster relief once CSR spend is achieved, increase in advertising expenses to compensate for the loss of signaling virtue of CSR as also the undesirable consequence of just reducing overall CSR spends in the longer-term (Shivaram Rajgopal, 2022).

The law certainly has induced medium-sized firms to spend more, but at a cultural level, the question to ask is if it is currently driving more of a reporting and accounting-based checklist activity or if is it actually inducing inherent changes in how companies look at their businesses and their relationship with their material stakeholders? My practitioners' experience tells me that is more of the first one. And this I believe that probably a more inside-out perspective to corporate responsibility needs to be looked at – More in that in the later of this series, which I initially wanted to limit to a three-part series, but, I will keep going with more articles in this time, and see where it takes us.

?

Keep probing! Keep progressing!

?

Bibliography

Campbell, J. L. (2007). Why would corporations behave in socially responsible ways? An institutional theory of corporate social responsibility. Academy of Management Review, Vol 32, No 3, Pages 946-967.

D.S.Grant, L. (1996). Regulation through information: An empirical analysis of the effects of state sponsored right-to-know programs on industrial toxic pollution. Policy Studies Review, 339-352.

Magnuson, W. (2023). Chapter 6 - The multinational. In W. M. corporations, For Profit (pp. 214-215). London: Basic Books UK.

S.Grant, D. (1997). Allowing citizen participation in environmental regulation: An empirical analysis of the effects of right-to-sue and right-to-know provisions on industry's toxic emissions. Social Science Quarterly.

Shivaram Rajgopal, P. L. (2022). Does A Government Mandate Crowd Out Voluntary Corporate Social Responsibility? Evidence from India.

?