Corporate social responsibility (CSR) has caught on in the general climate of opinion. It holds the view that a business enterprise has economic, environmental and social dimensions, and it should therefore practise multiple stakeholder engagement to meet society’s expectations. The CSR approach regards profits as a vehicle for virtuous conduct rather than as an indicator of an enterprise’s contribution to the welfare of people.
Officially favoured by the Mauritian government, CSR has been embodied in the Finance Act 2009. All onshore companies are now legally bound to endorse CSR and give effect to it by setting up in every year a CSR Fund equivalent to 2% of their book profit derived during their preceding year. Even a micro enterprise that makes a profit of some thousand rupees is a contributor. More worryingly, the general adoption of CSR by businesses has undesirable implications on their role, aims and conduct, thus heralding a change in the relations between government and the private sector.
Since CSR contribution is an income tax, it is not deductible. In effect, the corporate tax rate has been raised from 15% to 16.7%. Given that the personal income tax rate remains at 15%, this will give rise again to tax planning at best and will impair the signalling function of profits at worst. While liberalisation is advancing with conspicuous success in developing and transition economies, it matters that Mauritius does not get perceived as moving one step backward.
Running a business, like other forms of activity, has a moral dimension. The ethics of business does not imply that enterprises should do more harm than good to themselves, but rather that they should be more effective and efficient in the performance of their primary role as agents of economic progress. Profits are moral in that they are earned by providing consumers with products and services that they want. In so far as the CSR doctrine betrays a fixation on the purity of business motives and the unwarranted suspicion of profits, it downgrades the claims to legitimacy and recognition of profit-oriented private business.
Admittedly, businesses cannot ignore social and environmental pressures: they have little choice but to embrace CSR, in the interests of survival. There is not much cause for concern as long as firms are able, on their own initiative and commercial judgement, to devise their codes and practices, to determine their goals and strategies, and to change them at will. Only then could the adoption of CSR be part of a competitive strategy based on the premise that people would prefer to buy from, invest in or work for a socially responsible firm.
In so far as firms are denied the freedom to choose, because of their legal obligations, their performance will instead be weakened, market opportunities curtailed, and competitive pressures reduced. Adoption of the CSR approach by businesses everywhere rather than just by vanguard firms will have an economy-wide impact. Clearly, a genuine commitment to CSR will entail additional costs and hence narrow prospective profitability. It is ill-timed precisely when all firms are engaged into a cost-cutting exercise to ward off the economic slowdown.
To take up the role of vanguard firm is not costless, and it is not riskless either. Three main sources of enterprise risk can be identified. One relates to the performance of management. CSR extends managerial tasks and responsibilities to take account of concerns external to the enterprise. Alongside this dilution of energies, managers are called on in time-consuming consultations with outside groups that are unconcerned with the commercial success of firms, let alone hostile to private business.
A second source of risk is that CSR requires developing new systems for recording, monitoring, reporting and evaluating the firm’s performance against a set of environmental and social goals. To operate such systems can be costly.
The third one is that firms are supposed to insist on the observance of the same norms and standards by their suppliers and contractors, with the result that all compliance costs will be passed on to the final customers. This may preclude mutually advantageous deals, contracts and working arrangements. Since circumstances vary among enterprises, insistence on common company practice may limit the scope for mutually beneficial market-based transactions.
It cannot be taken for granted that CSR actions undertaken by businesses would outweigh these costs and have a positive balance on the general welfare. Social goals that are voluntarily chosen by the enterprise or imposed by the government may not necessarily reflect public opinion at large. The interests of big firms in showing that they act fairly may not be representative of the population.
In spite of the outcry of private sector representatives against the mandatory nature of the CSR Fund, Mauritian businesses have to share the blame for contributing in their own account to the further regulation of economic life. They have become so dependent on handouts from the state that they have lost their bargaining power. Their influence over determining policy-making has waned for being at times obsequious to the political masters.
In the face of the global financial crisis, the government has been dishing out billions of rupees for the benefit of enterprises. This money could have been used for social targets. In return for the stimulus package, businesses are expected to be socially responsible. It is a tacit and unwritten deal, one among many others witnessed under the heading of “public-private collaboration”.
Mauritian businesses now pay a high price for failing to draw a distinction between profits that are related to performance and those that are not. For too long, some corporates have enjoyed a monopoly rent that is not linked to performance. Abnormal profits have created a misleading disjunction between the core activities of a business and its contribution to the public welfare.
To build a business case for voluntary CSR, our corporate sector must depart from the age-old anti-market mentality of the socialisation of losses coupled with the privatisation of gains. There is only one condition for making enterprises free to decide on CSR: that they operate within a competitive market economy. Market distorsions could then serve as a trigger to enforce CSR on the firm punished by the Competition Commission. The sole norm that can be applied uniformly is true and dynamic competition.
By Eric Ng Ping Cheun
Director of PluriConseil Ltd
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