Chapter Nine

Handmaid of Ethics: Corporate Social Responsibility

INTRODUCTION

We live in an age in which companies have grown so large that they control much of the earth’s
resources, and intervene in so many areas of social life, that they must be held responsible
towards society and the environment. In India, as in the rest of the world, there is a growing
awareness that capital markets and corporations are, after all, created by society and must
therefore serve it, not merely profit from it. In the age of globalization, corporations and other
business enterprises are no longer confined to the traditional boundaries of the Nation-State. One
of the key characteristics of globalization is the spread of the market and the change in the mode
of production—the centralized mode has given way to a highly decentralized one that has spread
across the world. In the last 20 years, multinational corporations have played a key role in
defining markets and influencing the behaviour of a large number of consumers. Globalization
and liberalization have provided a great opportunity for corporations to be globally competitive
by expanding their production-base and market share. The situation poses a great challenge to
the sustainability and viability of such mega-businesses, particularly in the context of the
emerging discontent against these multinational corporations in different parts of the world.1
There has been a widespread protest against the dominance of multinational companies.

The developments in information technology and the effectiveness of knowledge-based

economies have led to the creation of a new model of corporate governance. Business leaders are
now concerned about the responses of the community and the sustainability of the environment.
We need to analyse the new trends in corporate social responsibility (CSR) against the backdrop
of these changes.

The issue of social responsibility of business evokes varying—and often extreme—responses

from both the intelligentsia and businessmen. Economists like Adam Smith and Milton Friedman
were of the opinion that the only responsibility of business was to perform its economic
functions efficiently and provide goods and services to society and earn for themselves
maximum profit and that it was better to leave social functions to other institutions of the society
like the government.

To Adam Smith, “It is the profit-driven market system, also called price mechanism that drives
business firms to promote social welfare, though they work for private gain.” He observed
further: “Every individual endeavours to employ his capital so that its produce may be of greatest
value. He generally neither intends to promote the public interest, nor knows how much he is
promoting it. He intends only his own security, only his own gain. And he is in this led by an
invisible hand to promote an end, which was no part of his intention. By pursuing his own
interest, he frequently promotes that of society more effectively than when he really intends to
promote it.”2 Likewise, Prof. Milton Friedman does not give much credit to the concept of social
responsibility. To Friedman, the advocacy of social responsibility of business is the green signal
to pure socialism.3 He argued that business has no other social responsibility excepting making
profits within legal and moral rules set by society. “Few trends could so thoroughly undermine
the very foundations of our free society as acceptance by corporate officials of a social
responsibility other than to make as much money for their stockholders as possible”.4

However, those holding the opposite view have criticized this highly materialistic viewpoint on
several grounds. In their perception, governments cannot and need not be the sole repository for
promoting the welfare of masses. It is an area where the corporate sector can play a significant
role. They assert that it is imperative for business to be socially responsible. Prof. Paul
Samuelson, for instance, advocates a spirit of social responsibility as an inherent feature of a
modern business firm. This view is based on the argument that business organizations, corporate
or otherwise, are part of the society and have to serve primarily its interests rather than work for
the narrow economic gains such as making of profit.

T. F. Bradsha, a past president of the Atlantic Richfield Company in the United States, was of
the view that Friedman ignored the fact that as a human being, a businessman is under pressure
to fit within the social pattern to do something for society, more than making profit for himself.
Further, Friedman has not taken into consideration the fact that in an explosively fast changing
world, a businessman is judged on two counts—the social goals he meets, apart from the profits
he makes.5

Further, Dr Clark C. Abt, the president of the Abt Associates Inc., Cambridge, in the United
States, felt that business organizations while determining the socially responsible behaviour
should first analyse its impact on short-term and long-term profitability of the organization.

According to Prof. Robert Dahl, a well-known political theorist, it is obligatory on part of

business organizations to be socially responsible as they primarily exist to benefit society. He
expressed his view thus: “Today, it is absurd to regard the corporation simply as an enterprise
established for the sole purpose of allowing profit making. We, the citizens, give them special
rights, powers and privileges, protection and benefits on the understanding that their activities
will fulfill our purposes”.6 Corporations cannot exist without our letting them to do so. From our
part we let them to exist only because they are beneficial to us.

Notwithstanding all these controversial thoughts, the concept of corporate social responsibility
has come to mean that the responsibility of a corporate to the society is an inalienable part of its
operations and strategy. CSR is about how companies manage the business process to produce an
overall positive impact on society. Let us consider Fig. 9.1.

Companies need to answer two questions relating to their operations:

1. The quality of their management—both in terms of people and processes (the inner
circle)
2. The nature and quality of their impact on society in various areas.

Outside stakeholders are taking an increasing interest in the activity of the company. Most look
to the outer circle—what the company has actually done, good or bad, in terms of its products
and services, in terms of its impact on the environment and on local communities, or in how it
treats and develops its workforce. Out of the various stakeholders, it is financial analysts who are
predominantly focused on the quality of management as an indicator of likely future
performance.

Fig. 9.1 The Business in Society in Relation to Its Responsibility

Source: Mallen Baker, Corporate Social Responsibility—What Does It Mean?, 2007, available at
www.mallenbaker.net/csr/CSRfiles/definition.html. Courtesy: Mallen Baker

WHY SOCIAL RESPONSIBILITY OF BUSINESS?

‘The Business of Business is Business’ was the motto of businesspersons in early times.
Narrowly interpreted, it would mean that corporations have only one responsibility, the single-
minded pursuit of profit. To economists like Adam Smith and Milton Friedman, in a capitalist
society profit maximization by the continued increase of efficiency is the most socially
responsible way of conducting business. This implies making quick money, with utter disregard
for the responsibility of business towards society. This limited view of business would prove to
be counter productive in the long run. But on the other hand, the long range view of business,
which would imply an aim at the long term gains rather than at quick returns, would take into
account the important dimension of social responsibility.

The ethical and social behaviour of corporations is essential for the generation of profit, owing
its source to the reputation the corporation would acquire in view of its social behaviour.

James Burke, the chairman of the well-known consumer product and pharmaceutical company,
Johnson & Johnson said this: “I have long harboured the belief that the most successful
corporations in this country, the ones that have delivered outstanding results over a long period
of time, were driven by a simple moral imperative, namely serving the public in the broadest
possible sense better than their competitors”.7

If we are to compete effectively in the global market, corporations must take a long, hard look at
their values, practices and assumptions. They need to question their accepted modes of
behaviour, promulgating new values and set up new standards of conduct which are openly held
and shared within the corporation, while proclaimed to the outside world.

Accountability to Society

There is yet another reason why corporations should be conscious of their ‘social responsibility’.
In a democratic society any kind of enterprise exists for the sake of society. If private enterprise
is justified and allowed to exist it is because it is seen to contribute better than public enterprise
to the common good. It produces better goods and functions more efficiently, thanks to the
encouragement given to individual initiatives. At the same time, private enterprise is not
encouraged because individuals may accumulate wealth for their own exclusive and selfish
benefit at the expense of the public.

Industries are allowed to exist because they are perceived by the public to be useful in the
attainment of the personal, social and material goals of the people. It is because of this ethical
perception that the employees of TISCO and the general public protested in 1977 when the then
Union Minister for Industry, George Fernandes attempted to nationalize TISCO. On the other
hand, when the public perceives that certain corporations do not function in the general interest
of the nation it does not object to their take-over by the government, as it happened in the
nationalization of the coal fields, the oil industry and the Indian Copper Corporation. Since
corporations exist for the sake of the public, they are accountable to the public and have a social
responsibility.

Corporations’ Debt to Society

Corporations, whether public or private, draw much from society. No corporation is an island in
itself. It depends on society for a developed infrastructure such as roads, water supply, electricity
and an educated work force. It also depends on society for the maintenance of law and order,
public health, transport facilities and for reaching out to its customers through the mass media.
Finally, all consumers of its finished products are drawn from society.

If a corporation draws so much from society it has to make its own contribution to society. It has
a debt to pay to society. In the first place, a corporation has to behave as a good citizen. This is to
be shown in the faithful and full payment of taxes, the observation of all local and national laws
and perhaps even going beyond the law in matters of pollution, of standards of operational and
product safety, and energy and resource conservation. The corporation has to donate generously
towards causes of public welfare and must get itself directly involved, in social welfare
programmes.

It is because of these aspects of social responsibility and public accountability that corporations
have to consider not only the interests of its shareholders but also those of the workers,
consumers, suppliers, the government and the general public who are its stakeholders. In short,
corporations because of their social responsibility have to consider themselves as the ‘custodians
of public welfare’.

DEFINITIONS OF CSR

What is corporate social responsibility? It is not as simple as it sounds. The definitions differ
vastly according to the perception and sensitivity of the analyst. The World Business Council for
Sustainable Development defines CSR thus: “Corporate Social Responsibility is the continuing
commitment by business to behave ethically and contribute to economic development while
improving the quality of life of the workforce and their families as well as of the local
community and society at large”.8 The same report gave some evidence of the different
perceptions of what this should mean, from a number of different societies across the world.
Definitions as different as “CSR is about capacity building for sustainable livelihoods. It respects
cultural differences and funds the business opportunities in building the skills of employees, the
community and the government” from Ghana, through to “CSR is about business giving back to
society” from the Philippines.9

In the United States, CSR has been defined traditionally much more in terms of a philanthropic
model. Companies make profits unhindered except by fulfilling their duty to pay taxes. Then
they donate a certain share of the profits to charitable causes. It is seen as tainting the act for the
company to receive any benefit from the giving.

The European model is much more focused on operating the core business in a socially
responsible way, complemented by investment in communities for solid business case reasons. It
is believed that this model is more sustainable because

1. Social responsibility becomes an integral part of the wealth creation process—which if

managed properly should enhance the competitiveness of business and maximize the
value of wealth creation to society.
2. When times get hard, there is the incentive to practise CSR more and better—if it is a
philanthropic exercise which is peripheral to the main business, it will always be the first
thing to go when push comes to shove.

But as with any process based on the collective activities of communities of human beings (as
companies are) there is no ‘one size fits all’. In different countries, there will be different
priorities and values that will shape how business acts.

Today, leading practitioners of CSR believe that CSR is an integral part of the wealth creation
process and that it should enhance competitiveness of business and help the company in times of
crisis.

The stakeholder theory of CSR stresses that it is a manager’s duty to balance the shareholders’
financial interests against the interests of other stakeholders, such as employees, customers and
the local community.
Nobel laureate, economist Milton Friedman, says: “There is one and only one social
responsibility of business—to use its resources and engage in activities designed to increase its
profits so long as it engages in open and free competition, without deception or fraud”.10

Some experts look at “CSR as the golden mean between capitalist and communist ways of
thought as far as business is concerned”.11

To Henry Ford, “The purpose of business is to do as much good as we can, everywhere for
everybody concerned … and incidentally to make money”.12 Going one step further, Kenneth
Dayton, former chairman of the Dayton-Hudson Corporation, insisted: “We are in business to
make maximum profit for our shareholders. We are in business … to serve society. Profit is our
reward for doing it well. If business does not serve society, society will not long tolerate our
profits or even our existence”.13

The meaning of the concept of CSR seems to differ from person to person according to his or her
own sensitivity. To Dr Manmohan Singh, Prime Minister of India, “Corporate social
responsibility is no philanthropy. It is not charity. It is an investment in our collective future”.14

The simplest and the most significant definition of CSR was given by Mahatma Gandhi who
said: “Wealth created from society has to be ploughed back into society”.15

The sum and substance of all these definitions can be put into the following propositions:

1. It is an attempt made by companies to be voluntarily responsible to ethical and social

considerations.
2. It is not a legal binding for the company, unlike corporate accountability (which makes
company adhere to legal and social norms).
3. It is a set of obligations to pursue those policies, to make those decisions, or to follow
those lines of action which are desirable in terms of the objectives and values of our
society.16
4. The set of obligations an organization has to project, enhance, and otherwise work with to
the betterment of the society in which it functions.
5. It is the overall relationship of the corporate with all of its stakeholders. These include
customers, employees, communities, owners/investors, government, suppliers and
competitors. Elements of social responsibility include investment in community outreach,
employee relations, creation and maintenance of employment, environmental stewardship
and financial performance.
6. The social responsibility of business will cover the economic, legal, ethical and
environmental expectations society has placed on organizations at a given point of time.17
This could be explained by the following equation:

Total corporate social responsibility = economic responsibilities + legal responsibilities +

ethical responsibilities + philanthropic responsibilities

 
 7. The socially responsible firm should strive to:
o make a profit,
o obey the law,
o be ethical, and
o be a good corporate citizen
8. Social responsibility of business is temporal and society-based, that is:
o it differs from society to society, and
o it changes over time
9. Societal differences exist, such that
o Each society has a unique history, culture and institution. Some societies have few
strong, formal institutions (government, business, organized religion) and rely
more on informal institutions (family, clan, custom)
o Each society demands and receives different roles and actions from particular
institutions. Most societies have strong roles and behavioural expectations for
some institutions and weaker roles/expectations for others. What may be the
responsibility of the family in one society may be the responsibility of
government, religion, or business in another (income, security). For instance, in
countries like India, governments become loco parentis for school-going children
and provide them food, clothes, bicycles, footwear and free tuition to encourage
literacy and empowerment amongst the poor.

Therefore, the responsibilities of business organizations for social purposes vary

considerably.

10. The concept of social responsibility for business is probably most advanced in the United
States and in ‘Western’ societies than in the developing and emerging economies.
11. Today there is an even more expansive view: “To protect, enhance, and otherwise work
to the betterment of society…”. Thus, broadly, the views governing corporate social
responsibility may be classified into: classical economic model and socioeconomic
model.

The Classical Economic Model

 Adam Smith, father of the classical economic model, believed that an ‘invisible hand’
promoted the pubic welfare.
 Smith believed that the public interest was served best by individuals pursuing their own
self-interests.

The Socioeconomic Model

 Business is seen as one sub-system among many in a highly interdependent society.

 Recognizes that companies have stakeholders other than their stockholders.
 A stakeholder audit allows companies to systematically identify all parties that could
possibly be impacted by the company’s performance.
  Business has an obligation to respond to the needs of all stakeholders while pursuing its
profit.

TODAY’S CORPORATE SOCIAL RESPONSIBILITY

Today’s corporate social responsibility is to ensure the betterment of the society in which it
functions.

Possible reasons for CSR achieving such importance may be

 the result of greater acceptance of business as linked to its external environment

 greater professionalism of management, and
 drawing of managers from all levels of the general society.

The concept of corporate social performance includes a business organization’s

o configuration of principles of social responsibility,

o process of social responsiveness, and
o policies, programmes, and observable outcomes as they relate to the firm’s
societal relationships.

Corporate social performance is not only acceptance of the idea of social responsibility, but a
proactive approach (seeking out needs and implementing projects).

CSR and the Stakeholder

CSR is essentially a concept whereby companies integrate social and environmental concerns in
their business operations and in their interaction with stakeholders on a voluntary basis.
Stakeholders are those organizations and individuals who have taken an interest or ‘stake’ in the
business or corporation and its success. That includes clients, the population of small business
people, other business assistance organizations, other economic development organizations,
legislators at the country, federal, and state levels, executive branches of government, executive
departments and agencies, the staff and contracted consultants and trainers, vendors and
taxpayers. The list is very broad and inclusive.

The development of CSR reflects the growing expectations of the community and stakeholders
of the evolving role of companies in society and the response of companies to growing
environmental, social and economic pressures. By committing voluntarily to CSR initiatives
companies are making an investment in their future.18

Some of the driving forces behind the evolution of CSR are:

 concerns and expectations from citizens, consumers, public authorities and investors,
 decisions made by individuals and institutions influenced by social criteria,
 concerns about the impact of economic activity on the environment, and
  increased transparency of business activities because of the developments in information
technology.

Implementation of CSR

The systematic implementation of CSR means:

1. The adoption of strong organizational values and norms depicting behaviours that are
appropriate towards a variety of stakeholders.
2. The continuous generation of intelligence about stakeholder issues, along with positive
responses to these issues.

It is obvious that the pressure on business to play a role in social issues will continue to grow.
Over the last ten years, those institutions which have grown in power and influence have been
those which can operate effectively within a global sphere of operations. These are effectively
the corporations and the NGOs. Those institutions which are predominantly tied to the Nation
State have been finding themselves increasingly frustrated at their lack of ability to shape and
manage events. These include national governments, police, judiciary and others. There is a
growing interest, therefore, in business taking a lead in addressing those issues in which they
have an interest where national governments have failed to come up with a solution. That is not
to say businesses will necessarily provide the answers—but awareness is growing that they are
occasionally better placed to do so than any other actors taking an interest.

THEORETICAL JUSTIFICATION FOR CSR

Social scientists have formulated several theories that justify the importance of corporations
engaged in promoting welfare of the society in which they operate. These theories are described
next.

Trusteeship Model

The trusteeship model has been evolved on a realistic and descriptive perspective. It considers
the current situation of a public limited company reflecting that it is a social institution having a
corporate personality as envisaged by the European concept of what constitutes a corporation.

Further, several authorities on the subject reiterate the view and argue that a public corporation is
not the creation of a private contract and thus not owned by any individual. Ownership is, by
definition, where the owner has exclusive rights of possession, use, gain and legal disposition of
a material object. Yet shareholders merely own their shares in a company and trade their shares
with others in the stock market. They do not have rights to possess and use the assets of the
company, to make decision about the direction of the company, or to transfer the assets of the
company to others. The residual claims of the shareholders are determined by the company and if
the company’s performance does not satisfy the shareholders’ requirements, the shareholders are
left with a single option of ‘exit’ rather than ‘voice’, as shareholders in general are in no way
able to monitor the management effectively and neither are they interested in running corporate
business. In this sense, the assumption that the corporation is owned by the shareholders is in fact
meaningless. To Kay and Silberston,19 ownership rights are not important to business. Many
public institutions such as museums, universities, and libraries perform well without clear
owners.

In fact, the Indian Company Law does not overtly confer ownership rights on shareholders
because in its view the corporation is an independent legal entity different from its members. It is
also implied therein that share holders are merely the residual claimants of the company. The
company has its own assets, rights and duties, and has its own will and capacity to act and is
responsible for its own actions. Therefore, it is generally held that management is not the agent
of shareholders.

Instead, Kay and Silberston suggest that managers are trustees of the corporation. The trusteeship
model differs from the agency model in two ways. First, the fiduciary duty of the trustees is to
sustain the corporation’s assets, including not only the shareholders’ wealth, but also broader
stakeholders’ value such as the skills of employees, the expectations of customers and suppliers,
and the company’s reputation in the community. Managers as trustees are to promote the broader
interests of the corporation as a whole, not solely the financial interest of its shareholders.
Second, managers have to balance the conflicting interests of current and future stakeholders and
to develop the company’s capacities in a long-term perspective rather than focus on shortterm
shareholder gains. To establish a trusteeship model, they ask for statutory changes in corporate
governance, such as changing the current statutory duties of the directors, ensuring the power of
independent directors to nominate directors and select senior managers and appoint CEOs for a
fixed 4-year term and so on.

Social Entity Theory

This theory has, in recent years, been promoted by three major social thinkers—the democratic
political theorist, Robert Dahl (1985) using economic democracy, Paul Hirst (1994) using
associationalism, and Jonathan Boswell (1990)20 using communication notion of property. The
social entity conception of the corporation regards the company not as a private association
united by individual property rights, but as a public association constituted through political and
legal processes and as a social entity for pursuing collective goals with public objectives. The
social entity theory views the corporation as a social institution based on the grounds of
fundamental value and moral order of the community. Sullivan and others argue that
corporations are granted charter entity for a commercial purpose, but more importantly, as a
social entity for general community needs. The corporation-identified executives are
representatives and guardians of all corporate stakeholder’s interests. It is implied in the manner
in which corporations are formed and managed that their executives are guardians of the overall
interests of all stakeholders. The recent resurgence of the moral aspect of stakeholder
perspectives has been in general associated with the social entity conception of the corporation.

Pluralistic Model

The pluralistic model supports the idea of multiple interests of stakeholders, rather than
shareholder interest alone. It argues that the corporation should serve and accommodate wider
stakeholder interests in order to make itself more efficient and more legitimate.
It suggests that corporate governance should not move away from ownership rights, but that such
rights should not be solely claimed by, and thus concentrated in, shareholders; ownership rights
can also be claimed by other stakeholders, particularly employees. Stakeholders who make firm
specific investments and contributions and bear risks in the corporation should have residual
claims and should participate in the corporate decision making to enhance corporate efficiency.

It is asserted that if corporations practise stakeholder management, their performance such as

profitability, stability and growth will be more successful.

WHAT ARE CORPORATIONS EXPECTED TO DO?

In support of the view that corporations have a moral and social obligation towards society, some
economists argue that corporations depend on society for a number of facilities they enjoy such
as developed infrastructure, peace and tranquillity in the work place and a trained workforce.
They also depend on society for the maintenance of law and order, without which they cannot
carry on their productive or distributive activities, and also for reaching to their customers
through mass media. Consumers of products, without whom they have no raison de’tre, are all
drawn from society. If a business body draws so much from society, it has to make its own
contribution to the welfare of the latter. It has a debt to pay in the first place. It has to behave as a
good citizen inasmuch as it has to pay its taxes in full and on time, observe the laws of the land
and, going beyond it, ensure a clean and healthy environment, maintain standards of operational
and product safety and help in energy and resource conservation.

The corporations among the business community also have a moral responsibility to take a long
and hard look at their values, practices and assumptions. They have to ensure that the country’s
fair name is not compromised during their deals abroad, either as exporters or importers. They
have to ensure maintenance of the quality of their products, keeping up to the delivery schedule,
etc. In the Indian context, socially responsible corporations are expected to create employment
opportunities for the disadvantaged persons by directly setting up ancillaries; provide financial
resources in several ways such as financing customer-related marketing; share marketing,
technical and management skills; make available marketing support by purchasing both products
and services from disadvantaged communities; by sharing company facilities; and donating the
company’s products and services.21

Private Sector Needs Goodwill of the Society

For historical and other reasons, private enterprise is not favoured much in countries like ours
because they accumulate wealth for their own exclusive benefit at the expense of the public, and
is not generally seen to contribute to the common good. Corporations should, for their own good,
come forward to erase such perception in the minds of the common public. In an era of intense
competition accentuated by the advent of MNCs, it is necessary for them to generate and sustain
goodwill among their clients and the general public. Active participation in social welfare
projects will definitely improve their visibility and place them favourably in public esteem. They
should understand the fact that economic goals and social responsibility objectives need not be
contradictory to each other and that these could be achieved simultaneously. They should donate
generously towards public causes and must get themselves directly involved in social welfare
programmes, if they have to create goodwill among the public, and to avoid being branded as
profiteers and self-seekers.

To summarize,

 Private sector is generally seen as not favouring the society. The trend is accumulation of
wealth for its own cause and at the expense of the public.
 Corporations need to erase this perception, with the intense competition in mind.
 They should participate in social welfare projects which will improve public esteem.
 Participation in social welfare projects ensures the simultaneous achievement of
economic and social responsibility goals.
 The private sector also has to maintain the country’s fair name when they export and
import by maintaining the quality of products and sticking to delivery schedules.
 Corporations should create employment opportunities for the disadvantaged.

MODELS FOR IMPLEMENTATION OF CSR

Though there are several theories to justify CSR activities of corporations, not all of them lend
themselves to be put into practice. A model for implementation of CSR is one that enables
organizations to apply a particular concept or theory as a workable proposition. Before managers
can apply the concept, they need a simple working definition of it, so that there is the required
conceptual clarity. For instance, CSR can be associated with philanthropy or a business strategy.
When several such alternatives are available, a company may choose a model that is suitable to
its core competence. There are four models of corporate responsibility globally (Table 9.1).

Table 9.1 Four Models of Corporate Social Responsibility

Model Emphasis Proponent

Ethical Voluntary commitment by companies to public welfare Mahatma
Gandhi
Statist State ownership and legal requirements determine corporate Jawaharlal
responsibilities Nehru
Liberal Corporate responsibilities limited to private owners (shareholders) Milton
Friedman
Stakeholder Companies respond to the needs of stakeholders—customers, R. Edward
creditors, employees, communities, etc. Freeman

1. Ethical model: In the ethical model, there is a voluntary commitment to public welfare. It
can be traced back to the pioneering efforts of 19th century corporate philanthropists such
as, Cadbury Brothers in England. In India, it has its roots in the Gandhian philosophy of
trusteeship. Examples of this model are found in the Tatas, Birlas, Infosys, Dr Reddy’s
Labs and Reliance Industries—who have provided cash for social welfare projects,
community investment trusts and schools. Many companies, particularly family-run
businesses, continue to engage in philanthropic activities based on this model.
 2. Statist model: This model is based on the state-owned public sector units (PSUs). It is
based on the socialist and Nehruvian mixed economy format that India had adopted for
its economy. Propounded by Jawaharlal Nehru, this model calls for state ownership and
legal requirements of CSR. The PSUs provide housing and schools to workers. They
have existed in India since 1947, such as in Bhilai and Bokaro. The inspiration has been
drawn from the labour laws and management principles. But this model is now being
challenged by the trend of disinvestment and privatization.
3. Liberal model: This is the liberal approach where the belief is that the free market would
take care of corporate responsibility. It is drawn from Milton Friedman’s view which
states that a company’s responsibility lies mainly in improving the economic bottom-line
and increasing the wealth of the shareholder. It is sufficient for the corporate to obey the
law and generate wealth, which can be directed towards social ends through fiscal policy
and charitable choices.
4. Stakeholder model: Since the late 1980s and through the 1990s, there has been an
increasing realization that business has a social responsibility. It is generally understood
that a stakeholder in an organization is an individual or a group of individuals who can
affect or is affected by the objectives and activities of the organization. This has come
about through public campaigns and pressure on the shareholders. Companies like Nike
have been sourcing raw material from developing countries. There were allegations of
sweatshops being run by Nike and it had to change its practices. Corporate responsibility
now means ethical and environment-friendly practices. Companies are expected to stick
to the triple bot-tomline of economic, social and environmental responsibility towards
workers, the shareholders and the community.

CSR AS A BUSINESS STRATEGY FOR SUSTAINABLE DEVELOPMENT

What is CSR strategy? To IBM, CSR strategy refers to enhancing stakeholder value and the
delivery of measurable results to society at large.22 In the context of developing societies, “CSR
is about capacity building for sustainable livelihoods”. When CSR is adopted as a business
strategy for sustainable development, it goes to improve corporate performance. It offers
manifold benefits to corporations both internally and externally. Externally, it creates a positive
image and goodwill among the public and earns a special respect amongst peers, customers,
government agencies, investors and media, all of which go a long way in promoting longterm
shareholder value and sustainable development. Internally, it cultivates a sense of loyalty and
trust amongst employees in organizational ethics. More significantly, it serves as a soothing
diversion from the mundane workplace routine and gives workers a feeling of satisfaction and a
meaning to their lives. Companies like Infosys, Wipro, Satyam, Tata Steel, Dr Reddy’s Lab and
Polaris, for instance, find ways and means of getting their employees interested in CSR
activities. There are reasons to believe that such employee involvement has reduced attrition
rates in these organizations. It is because of all these positive factors that organizations involve
themselves in socially responsible investing (SRI). SRI is gaining importance because of two
factors: (i) Socially responsible companies offer long term value and (ii) evaluating a company’s
social impact on top of its financial performance provides an additional hedge against risk.23 For
instance, a Chennai-based automotive parts manufacturing company faced a severe risk at its
new plant in Pune when a posse of thugs barged into the plant and demanded Rs 2.5 million as
ransom when several locals who were the beneficiaries of the company’s CSR unit came to the
rescue of the company and offered to guard it against the extortionists in future. Many MNCs
which have socio-political problems in emerging markets in which they operate, find socially
responsible investing as one of the means to blunt the adverse sentiments against them and as a
strategy to ensure their sustainable development. Most critics of CSR are against it because they
look at it separately from business strategy. CSR is an outcome for business models, which goes
beyond just financial viability. Cost of helping communities to develop becomes cost of the
business—like materials or labour. Billions of poor people have a potential to become part of the
market, if helped. Before looking upon the poor as a potential market, the future business models
must build sensitivities and capabilities to reach out to the poor.24

Businesspersons fail to appreciate the fact that CSR is a key constituent of business strategy, as
to many of them it is pure philanthropy and ‘do good’ activity unconnected with their business.
Sound strategy provides business with a source of competitive advantage. “For any competitive
advantage to be sustainable, the strategy must be acceptable to the wider environment in which
the firm competes”.25 Lack of CSR or its improper execution is bound to threaten the competitive
advantage a corporate may hold in an industry. Besides there are certain costs associated with
being a socially irresponsible organization. Nike suffered significant damage to its brand and
sales when it was brought to light that the company had poor labour standards in its supply chain.
On the other hand, Nike gained its brand and sales once it started improving its labour standards
down the line and publicized its efforts to comply with them. Nowadays, Greenpeace and other
activist groups highlight socially irresponsible corporate behaviour that leads sometimes to
voluntary corrective action on the part of the companies themselves, and at other times invites
government action as we have seen in several instances of public interest.

Practitioners of CSR stress the fact that it is a cost-effective way to gain competitive advantage.
Corporations in their effort to engage in strategic CSR aim to match business objectives with the
needs of the community. For instance, in the rain-starved Wada taluk of Thane district of
Maharashtra where its bottling plant is located, Coca Cola has been harvesting rain water since
2003 to recharge groundwater and has been supplying water to people in summer, in addition to
instituting water supply schemes in some villages. All these CSR efforts of the company have
been integrated with its business strategy and have helped it to earn the goodwill of village folks,
apart from reducing absenteeism at the workplace. An IT company for instance could help
educate school or college students in its neighbourhood, who could become their potential
employees. Likewise, a BPO can create its future workforce by providing vocational and soft
skills training to the children in neighbouring communities. This symbiosis between corporations
and the surrounding communities will go a long way in integrating CSR and business strategy
for mutual benefit.

Evaluation of CSR Activity

How to evaluate CSR activities of corporations? Experts suggest three basic principles to
measure the impact of CSR—sustainability, accountability and transparency.26 Sustainability of
CSR activity implies that there must be a clear linkage established between use of resources and
their regeneration, like the soft drink industry that uses plenty of water trying to maintain water
tables through rain harvesting and recycling; or a paper manufacturing company that destroys
thousand of trees to make paper pulp replacing an equal number of saplings. Accountability lies
in an organization assuming responsibility for the effects of its action that have impacted the
external environment. This will call for the organization compensating for the cost of damages
caused by its actions, by creating benefits that exceed costs to all affected stakeholders; and
transparency means that the organization reports the impacts of its action to all stakeholders
truthfully without misguiding them in any manner. This will enable stakeholders to have a full
and fair view of the situation.

Why a Lukewarm Response to CSR in India?

In spite of such strategy-based advantages, why does the Indian industry lag behind those in
advanced countries in socially responsible investment? A survey conducted by Indianngos.com27
shows that the major obstacles to CSR in India are lack of awareness and conviction amongst the
managers, and lack of impact analysis, that is, a system of measuring the impact of social
activities. Absence of a clear linkage between CSR and financial success is another barrier to
CSR. Besides, there are not enough trained managers and experienced advisers available to
overcome these obstacles and support the process.

ADVANTAGES OF CSR

There are several advantages to corporations when they exhibit a sense of CSR and implement it.
These advantages are the following:

1. Improved financial performance: Sometime ago a Harvard University study

(www.risc.org.uk/readin-groom/csr/csr_mainconcepts.pdf) has found that ‘stakeholder
balanced’ companies showed four times the growth rate and eight times the employment
generation when compared to companies that focused only on shareholders and profit
maximization.
2. Enhanced brand image and reputation: A company considered socially responsible can
benefit both by its enhanced reputation with the public, as well as its reputation within the
business community, that would enhance the company’s ability to attract capital. Studies
have found that excellent employee, customer and community relations are more
important than strong shareholder returns in earning corporations a place in Fortune
magazine’s annual ‘Most Admired Companies’ list.
3. Increased sales and customer loyalty: A large number of studies have suggested an
increase in the sales of companies considered to be socially responsible. Customers have
shown a desire to buy products based on value-based criteria such as ‘sweatshop-free’
and ‘child labour-free’ clothing, products with minimal environmental impact, and
absence of genetically modified materials or ingredients.

A 2001 Hill & Knowlton/Harris Interactive Poll showed that 79 per cent of Americans
take corporate citizenship into account when deciding whether to buy a particular
company’s product; 36 per cent of Americans consider corporate citizenship an important
factor when making purchasing decisions.

A 2002 Cone Corporate Citizenship Study found that 9 per cent of the American
consumers, on knowing that a firm follows anti-corporate citizenship practices, would
think of shifting to another firm; 85 per cent would communicate the information to
friends and family; 83 per cent would stop investing in the firm; 80 per cent would refuse
 employment and more than three-fourth of the respondents would not buy the company’s
products.28

4. Increased ability to attract and retain employees: Companies perceived to have strong
CSR commitments often find it easier to recruit employees, particularly in tight labour
markets. Retention levels may be higher too, resulting in a reduction in turnover and
associated recruitment and training costs. Tight labour markets as well the trend towards
multiple jobs for shorter periods of time are challenging companies to develop ways to
generate a return on the resources invested in recruiting, hiring, and training.
5. Reduced regulatory oversight: Companies that demonstrate that they are engaging in
practices that satisfy and go beyond regulatory compliance requirements are being given
less scrutiny and freer reign by both national and local government entities. In many
cases, such companies are subject to fewer inspections and paperwork, and may be given
preference or ‘fast-track’ treatment when applying for operating permits, licenses or other
forms of government permission.
6. Innovation and learning: Innovation and learning are critical to the long term survival of
any business. Corporate responsibility stimulates learning and innovation within
organizations helping to identify new market opportunities, establish more efficient
business processes and to maintain competitiveness. Eighty per cent of European
business leaders believe that responsible business practice allowed companies to
invigorate creativity and learn about the market place. The long-term survival of
organizations is dependent upon its ability to understand and act on societal and
technological change. Many organizations are co-innovating with business partners to
identify new approaches that deliver business benefits whilst tackling a social or
environmental issue.
7. Risk management: Sir Robert Smith, Chairman of Weir group has stated, “Many
corporations are broadening their definition of risk to encompass wider and longer-term
risks that incorporate social and environmental issues. They are engaging with a wider
external audience to understand needs and expectations and take action, where
appropriate”.29

Over the past few years, there have been a number of guidelines and initiatives to
encourage business to manage risks across their business. Morley Fund Management
based in London has worked out a sustainability matrix on the basis of which companies
are ranked and listed on FTSE 100 Index. The index is based on the social and
environmental performance of the concerned companies. Companies now recognize the
long-term financial risks they face by ignoring environmental and social impacts.

8. Easier access to capital: The Social Investment Forum30 reported that, in the United
States in 1999, there was more than US$2 trillion in assets under management in
portfolios that use screens linked to ethics, the environment, and corporate social
responsibility. It is clear that companies addressing ethical, social, and environmental
responsibilities have rapidly growing access to capital that might not otherwise have been
available.
9. Reduced operating costs: Initiatives like the reduced use of agrochemicals and efforts to
reduce the emission of greenhouse gases can reduce operating costs as well as improve
 environmental performance. Companies can reduce waste disposal costs as well as gain
additional income by selling recycled materials. Effort like flexible scheduling and other
such programmes increase productivity in the company by reducing absenteeism and
attrition.

SCOPE OF CSR

Three levels of social responsibility can be identified (evolution of areas of social responsibility)

 Market forces: Responding to the demands of the market. Managerial decisions may
involve business responding to the economics of the market by efficiently and effectively
using resources. The greatest impact of business on society comes form ‘normal’
operations, which therefore shows greatest social responsibility.
 Mandated actions: Government mandates or negotiated agreements (regulatory
requirements and guidelines, contracts/agreements with stakeholders). Managerial
decisions may reflect business responses to government-mandated requirements and/or
pressure group stakeholders (e.g., unions)
 Voluntary actions: Managerial decisions may be undertaken without outside pressure,
such as in voluntary social programmes.

CSR addresses the following issues:

 community, assistance in solving community problems,

 health and welfare,
 education,
 human rights,
 natural environment, and
 culture (i.e., music, arts, sports, etc.).

Understanding Social Responsibility of Business

The social status which people enjoy, the social groups to which they belong and within which
they have grown and from which they have initially received their value system, deeply
influence, and not infrequently, determine their understanding of social responsibility. This is
true of the business world as well. J. R. D. Tata in his key note address at the inauguration of the
Tata Foundation for Business Ethics some years ago, outlined the ethos/tradition of the Tatas in
these terms: “The Tata Industrialist Ethos inherited from the great Jamsetji himself, tried to
combine high standards and quality production with sincere concern for ethical values such as
fair and honest management, product quality, human relations in industry and industrial
philanthropy.”31

The scope of social responsibility is wide and could be considered in terms of different
viewpoints, some of which are given below:

Protecting and Promoting Stakeholders’ Interests

Some consider social responsibility in terms of services rendered to claimants or stakeholders,
who could be both insiders and outsiders. The insiders are employees and shareholders while
outsiders include consumers, suppliers, creditors, competitors, government and the general
public. Consumers expect quality goods and services at fair prices. Workers expect fair wages
without being exploited. Shareholders expect reasonable dividends and fair return on
investments. Managers expect challenging jobs with attractive salary. Government and the
general public expect them to add to the wealth and welfare of the country without polluting the
environment. In short, business organizations have to consider themselves the custodians of
public welfare, by rendering such services to the various sections of society. Some of the
corporate social responsibilities to different groups of stakeholders are given below:

1. To consumers and community

o Goods must meet the requirements of different classes, their tastes and purchasing
power.
o Goods must be reasonably priced, must be of dependable quality and of sufficient
variety.
o Provision of after-sales service advice, guidance and maintenance.
o A fairly widespread distribution of goods and services among all sections of
consumers and community.
o Provision of free competition and prevention of concentration of goods in the
hands of a limited number of producers or purchasers or groups.
o Present a ‘good image’ in the minds of the public for honesty and integrity of
character.
o Advertising policy should be based on moral/ethical principles. It should not
mislead by false, misleading and exaggerated advertisements.
o Support to educational, charitable and other programmes for the benefit of the
community.
o Social accountability to consumers and public regarding the business conditions.
o Avoidance of social and moral dangers of ‘high spots’ and ‘social tensions’
o Prevention of the growth of slums, improvement of housing conditions,
elimination of crimes in industrial areas by providing training and job counselling
for youth in situations where they may take to crime, and meeting the heavy costs
of pollution and waste disposal.
o Business should have a progressive outlook.
o Proper training should be offered to the existing employees.
o Should be a law-abiding citizen of the State.
o To pay its dues and taxes to the state fully and honestly.
o Maintain impartiality towards political affairs, that is, to abstain from direct
political involvement; and not to support political parties.
o To follow honest trade practices, and avoid activities leading to restraint of trade
and commerce.
o To try not to contact public servants for selfish ends.
o To sell commodities without adulteration.
2. To employees
 o Promote a spirit of cooperative endeavour between employees and employers
through participation in decision making and in improving production and
administration.
o To pay fair and reasonable wages to labourers and fair salaries to executives.
o To develop and adopt a progressive labour policy based on recognition of genuine
trade union right; settlement of disputes and conciliation; to create a sense of
belonging to the business, and improving human qualities of labour by education,
training, living conditions, housing, leisure and amenities.
o To provide reasonable and just work conditions.
o To recognize the labourer as a ‘human being’ and respect his dignity, and to
preserve his or her individual liberty.
o Provide facilities for joint consultation and collective bargaining.
o Help development of proper leadership from among the employees.
o Guarantee religious, social and political freedom to workers to take part in civic
activities.
3. To owners and inter-business establishments
o To provide a fair return or dividend on the capital invested.
o Give fair and impartial treatment to all.
o Develop healthy cooperative business relationship between different businesses.
o Check the advance of such unfair practices as price-rigging, undercutting,
patronage, unfair canvassing and unethical advertisements.
o Help in the control of monopoly and promotion of healthy competition.

Promotion of Common Welfare Programmes

Another way in which the scope of social responsibility could be viewed is in terms of social
concern and promotion of common welfare programmes for the benefit of the poor and the
indigent public. Companies have highlighted social issues and brought them to the notice of the
public through hoardings and other means of drawing the attention of people to the issue in
question and generate public awareness. There had been occasions, though limited in number,
where corporations have joined hands to sponsor advertisements promoting public causes or
issues of social concern such as drug addiction and smoking. Business organizations could also
consider social responsibility in terms of relatedness to their own activities. Producers of dental
or eye care products organize mass clinics in villages and semi-urban areas, where surgeons
attend to the medical needs of the poor and indigent. Such attempts greatly relieve the burden on
the finance-strapped State in a developing country like India where people, due to poverty and
for historical reasons, depend solely on the government to render every type of service.

Philanthropy

There are others who view social responsibility as philanthropy.

“Philanthropy has always been the reflection of a class society because it has depended on a
division between rich givers and poor recipients. The wealthy have not only given because they
have more; but because by alleviating distress they have secured their own position against those
who might displace them” Philanthropy by big business is generally exercised through,
‘foundations’. Such philanthropic activity not infrequently adds to the prestige of an
organization, builds up a humanitarian image among the public, and, more importantly, widens
the organization’s influence to fields which often are of vital importance to the business world”.

Ford, Rockfeller and Carnegie Foundations have been key investors in the growth and
development of higher education institutions, think tanks and research centres around the world.
Indeed, The Ford Foundation has been described as the world’s largest investor in new ideas.
They are architects of international networks of scholars and agencies involved in the production
and dissemination of knowledge. Through these institutions and networks they have been in a
unique position to influence cultural and social policies on an international scale.

In India, it is a widely recognized fact that the House of Tatas is known for its acts of
philanthropy for more than a century. Recently, the Tata family has been chosen for the
internationally acclaimed Andrew Carnegie Medal of Philanthropy by the Carnegie Corporation
of United States. The Tata family has been chosen along with three other families, all of them
American, in recognition of its “long standing commitment to philanthropic causes” which has
contributed to “beneficial changes in the lives of millions of people”. The award was instituted in
2001 and for the first time an Indian family (Tatas) received the award at a ceremony in Pittsburg
on 17 October 2007. Ratan Tata, Chairman of Tata Group companies, received the award from
India’s former President, Dr A. P. J. Abdul Kalam.32

J. R. D. Tata in his keynote address at the inauguration of the Tata Foundation for Business
Ethics some years ago said: “The Tata industrialist ethos inherited from the great Jamshetji
himself, tried to combine high standards and quality production with sincere concern for ethical
values such as fair and honest management, product quality, human relations in industry and
industrial philanthropy”.33 However, in a strict sense, the concept is restricted to the observance
of rules and regulations that govern business transactions, and in a way facilitates a smooth
running of business. “In a wider sense, it demands conformity with accepted norms and
interpretations of the laws dealing with business activity. Moreover, in a business world, where
cut-throat competition and survival of the fittest dictate the law and have the upper hand over
humanity, philanthropy also means a display of humanity which will manifest itself in some
form of benevolent activity among the larger public. It undoubtedly benefits some individuals or
communities in need.34

Take the instance of how industrialists came to the rescue of the quake-devastated people in
Gujarat. When Gujarat was shattered by the fury of the worst earthquake in recorded history over
the past 50 years, a free phone facility set up by Care India, Bharti-BT and CISCO provided the
most immediate emotional relief for people anxious for news of their families, as well as access
to medical assistance and advice. Industrialists through the Confederation of Indian Industry
(CII) and the Federation of Indian Chambers of Commerce and Industry (FICCI) have
committed large funds that have enabled several NGOs adopt villages that were most severely hit
and provided several others a great deal of relief measures.35 Likewise, when disaster struck New
York and Washington in the aftermath of terrorist attacks on 11 September 2001, American
MNCs played their part as good corporate citizens. Most have donated substantial amounts
towards the disaster relief funds and made serious gestures towards their social responsibility.
While the US food giant McDonalds had offered food for the rescue workers at different
locations across the country in addition to a donation of US$ 2 million, General Motors, General
Electric, Ford Motor and Unocal also did their best to alleviate the sufferings of those affected by
the tremendous human tragedy.

Good Corporate Governance

Some social thinkers view that in the context of emerging economies good corporate governance
itself is an ingredient of CSR. Indian corporations, for instance, have insulated themselves for
too long from wholesome developments evolving elsewhere. A closed economy, a sheltered
market, limited need and access to global business/trade, lack of competitive spirit, a regulatory
framework that enjoined mere observance of rules and regulations rather than realization of
broader corporate objectives, marked the contours of corporate governance for well over 40
years.

Corporate democracy, professional management and maximization of long-term shareholder

value are attributes of good corporate governance.

Corporate governance has acquired a new urgency in India due to the changing profile of
corporate ownership, increasing flow of foreign investment, preferential allotment of shares to
promoters, gradual unwinding of the control mechanism by the State that had hitherto provided
protective cover to even poorly managed corporations and the increasing role of mutual funds
since 1991.36

Render Social Service

Some industrial houses have been promoting activities that supplement the efforts of public
authorities in certain areas that are important for all-round human development. The Tatas have
contributed to the growth of fundamental and social sciences by building and nurturing
institutions of higher learning in these areas. The Birlas have been building and maintaining
beautiful and monumental places of worship in several cities in addition to popularizing science
through planetariums. Some corporations like Britannia Industries and MRF Tyres have been
sponsoring sports events and helping sportspersons attain international standards. TISCO has
made several contributions in such diverse areas as community, especially tribal area
development, rural industrialization, etc., SAIL has done its mite in agriculture, health care,
drinking water supply, dairy and poultry farming. ITC Ltd is socially active in agriculture, sports
and pollution control, while Brooke Bond has interests in animal welfare, providing veterinary
services and improvements in animal breeding. Down south, several corporations have
contributed to the field of education and related areas and have also rendered social service.

The Loyola Institute of Business Administration (LIBA) has instituted The Mother Teresa
Award for Corporate Citizen to showcase as role models corporates that have rendered social
services far beyond the call of their duty and responsibility for others to emulate. It has so far
identified Titan Industries, Tamil Nadu Newsprints and Papers Ltd, Polaris Lab, TVS Motors
and Orchid Chemicals and Pharmaceuticals for the Award in recognition of several
socioeconomic projects they have been running for the welfare of the disadvantaged sections of
society in and around the places where their factories are located. Some studies have shown that
there are several others too who have done yeoman services to the people at large. Some of them
are as follows: Bajaj Auto, Balmer Lawrie, Bank of America, Business Standard, Coca Cola
India, Dr Reddy’s Laboratories, Forbes Marshall, L&T, NTPC, Nicholas Piramal, Excel
Industries, Hindustan Machine Tools, Amar Jyothi Industries, Hindustan Lever and IBM, to
mention a few major corporate players. While some of them work for the welfare of the poor,
handicapped and the marginalized sections of society in and around their plants, facilities and
offices, the others go beyond their locations and reach out to those who are in dire need.

Abiding by Rules and Regulations

In common practice, generally the concept of ethical responsibility is restricted to the observance
of rules and regulations that govern business transactions. Such a concept is widely accepted
since it facilitates a smooth running of business. It demands conformity with accepted norms and
interpretations of the laws dealing with business activity. When we stress that corporations
should abide by rules and regulations, it implies that they should observe them not only in letter,
but also in spirit. They should abide by the law of the land in every respect, comply with the
rules and regulations imposed on them by SEBI, stock exchanges, Department of Company
Affairs, pay taxes in full and on time and protect the fair name of the country if they are engaged
in external trade.

Creation of Wealth

Rev. John Mahoney S. J., Dixon Professor of Business Ethics and Social Responsibility at
London Business School tends to see in the very activity of a business organization something
beneficial in itself for society and truly praiseworthy from an ethical and social point of view. He
explains “Developing the earth’s resources to produce goods and services to satisfy the needs
and aspirations of the increasing millions of its inhabitants not only adds value in economic
terms. It enhances the value and quality of human living”. The quality of human life can be
improved by expanding human freedom and culture, and by providing a social environment in
which human dignity too can develop and prosper. Within this line of reflection the business of
creating wealth in and for society is then seen to be a positive and constructive occupation for
men and women.37

Therefore, social responsibility has to do with much more than producing goods and services
thus increasing the earth’s wealth. Social responsibility has to do with the type of goods and
services which are offered. Social responsibility lies in wanting to know for whom the goods are
produced and whether these goods respond to the real needs of the majority of the population
inclusive of its poor. It has to do with a concern for the needs of the generations to come; it has
to do with such things as ‘sustainable development’ and ‘safeguard of the environment’.
Unfortunately, on all these accounts the performance of business in the past few decades has
been most distressing.

Ensure Ecological Balance

Most corporations while producing goods have allowed the environment to be polluted,
atmosphere and water bodies to be poisoned. They have, therefore, a moral responsibility to
restore the ecological balance.

Reducing harmful environs, low pollutants and harmony with nature are important elements in
corporate social responsibility.

Many Indian corporations such as NTRC, Tata Steel, ITC, Sakthi Masala Pvt Ltd, TVS Motors
Ltd. (Srinivasan Services Trust), Sundaram Clayton, and Pricol Industries are already doing this.

Focus on the Human Element

Companies committed to CSR would improve quality of work-life; reduce hazards, offer
equality in employment opportunities and wages.

They would settle industrial disputes within the legal framework, collective bargaining and
minimum economic disruption. While relocating plants, they would ensure employees are being
assisted in adjusting to new arrangements. Job and retirement security of a reasonable nature
would be provided. Bonded labour, slavery, etc. are ills that would be scrupulously avoided.

Improve Productivity

Organizations committed to CSR would ensure that employees are made creative and their
treatment humane. Working costs would be reduced and new technology would be
inducted,while being alert to negative impacts. They would, even while adopting superior
technology and expertise ensure job security of employees. Workers would be offered training so
that they could be deployed to increase productivity.

Sponsor Social and Charitable Causes

Some entrepreneurs had not only built industrial empires, but also contributed individually to
certain social and charitable causes. J. R. D. Tata’s contribution to the growth of the Indian
airlines industry, population-related research, education of the underprivileged, etc. had been
exemplary. Late D. C. Kothari, with his wide-ranging interests, had been the moving spirit
behind several charitable trusts and institutions of higher learning, apart from being the prime
mover of the Standards Movement in the country and earned the rare distinction of becoming the
president of International Organization for Standardization (ISO) from a Third World country.
There are several other captains of Indian industry who have done themselves and the country
proud.

Supplement State Efforts

There are several areas where corporations can effectively supplement the ever growing welfare
activities that the State is expected to undertake, but lacks the resources. Corporations can run
schools, either in their own areas or in any other adopted village of their choice, providing good
quality primary education. If each of the more than 200,000 corporations the country has adopts
three villages, we will be able to cover the entire country and provide better primary and
elementary education to our children. It will go a long way in promoting literacy and overall
development of the country. In this context, the Asian Tigers like Thailand, Philippines,
Indonesia, Malaysia and Singapore have achieved much higher growth rates, since the 1950s,
before the currency crises overshadowed their achievements.

Corporate resources can also be allocated to run family planning clinics, medium sized hospitals
in villages, literacy campaigns and adult education programmes, campaigns against smoking,
pollution, AIDS, caste discrimination and communalism and to provide housing, sports and
recreational amenities for slum-dwellers and the deprived sections of the society. Corporations
can also contribute effectively towards urban management as has been done in places like
Jamshedpur.

Another area where their concern for social welfare can be shown is in the maintenance of the
public health system. Corporations cannot be mute spectators to the deterioration in public
health. Besides the moral and social aspects involved, they have to appreciate the fact that all
their activities, business or otherwise, will come to a stand-still, if any disease of epidemic
proportions breaks out. In 1999, there emerged a unique gov-ernment-industry participation to
improve public health in Tamil Nadu. In the first phase of the programme, 57 primary health
centres (PHCs) and 6 Government Hospitals were adopted by 19 industrial groups based in the
state. According to official sources, another 40 more PHCs were to be adopted in the second
phase with more industries joining in due course. The then Chief Minister, while inaugurating
the programme, commended the industrial houses, whose whole-hearted and voluntary
participation would go a long way in enhancing the welfare of the people.38

STEPS TO ATTAIN CSR

The International Chamber of Commerce recommends the following nine steps to attain CSR:

1. Confirm CEO/Board commitment to prioritize responsible business conduct

2. State company purpose and agree on company values
3. Identify key stakeholders
4. Define business principles and policies
5. Establish implementation procedures and management systems
6. Benchmark against selected external codes and standards
7. Set up internal monitoring
8. Use language that everyone can understand
9. Set pragmatic and realistic objectives.

Corporations exist because they, in a sustainable fashion, enable people to constructively practice
their craft and create jobs, economic value, and wealth for the society and the enterprise,
especially free societies.

EXTERNAL STANDARDS ON CSR

The ever-increasing interest in CSR has been matched by substantial growth in the number of
external standards produced for business by governmental, non-governmental, advocacy
organizations, with a view to supporting, measuring and assisting in implementation, and to
create a platform for accountability for performance on CSR issues. These external standards
developed and evolved over a period of time is found necessary as companies do not have a clear
vision and focus about what constitutes CSR, how their investment quantum on it is decided,
how to evaluate the outcome and so on. Some of the standards are meant to address single-issue
(e.g. focused on environmental performance or corporate governance) while others address a
range of CSR issues.

Most of the CSR-related standards produced in recent years require corporations to voluntarily
develop and implement policies and practices in consonance with suggested performance
standards on various CSR issues. In recent years, a limited number of standards has been
developed, which instead of providing substantive recommendations for implementation of
specific CSR policies and practices, are designed to provide guidance for companies which seek
to report on their social, environmental, and economic performance. In many cases, these
performance standards and reporting standards are complementary in nature.

1. The Caux Round Table (CRT): Founded in 1986, CRT promotes principled business
leadership and the belief that business has a crucial role in identifying and promoting
sustainable and equitable solutions to key global issues impacting the physical, social and
economic environments. The CRT consists of senior business leaders drawn from
Europe, Japan and North America, and is based in Caux, Switzerland. The CRT has
produced a document called Principles for Business, which seeks to express a worldwide
standard for ethical and responsible corporate behaviour for dialogue and action by
business and leaders worldwide. The CRT principles include the social impact of
company operations on the local community, a respect for rules and ethics, support for
multilateral trade agreements that promote the ‘judicious liberation of trade’, respect for
the environment and ‘avoidance of illicit operations’, including bribery, money
laundering and other unethical, corrupt practices.
2. Organization for Economic Cooperation and Development (OECD): OECD’s guidelines
are recommendations by governments to multinational enterprises and are voluntary
principles and standards, which are not legally enforceable. Governments adhering to the
guidelines encourage companies operating within the countries to observe the guidelines
wherever they operate. The guidelines were first published in 1976, and updated in June
2000.
3. United Nations Global Compact: The UN Global Compact (UNGC) was formally
launched in September 2000. The then UN Secretary-General, Kofi Annan called on
world business leaders to voluntarily “embrace and enact” a set of nine principles in their
individual corporate practices and to support complementary public policy initiatives.
The standard includes specific practices that endorsing companies would commit to
enact, as well as a section describing the benefits to business for embracing each
principle. Tata Steel is a member of UNGC. In April 2006, Kofi Annan appointed B.
Muthuraman, Managing Director, Tata Steel, along with 19 others representing business,
labour and civil society leaders from around the world to serve on the Board of the
UNGC. With more than 2,500 participating companies in over 90 countries, UNGC is the
world’s largest voluntary corporate citizenship initiative.
4. Asia-Pacific Economic Cooperation (APEC) Business Code of Conduct: APEC is an
international organization established with the view to promote open trade and economic
cooperation among 21 member economies around the Pacific Rim.39 The code, issued as
a draft in 1999, is an inspirational standard that draws significantly on a variety of other
internationally recognized codes and standards. The drafting of the code similar to the
one by OECD was initiated by business leaders from companies functioning in APEC
countries. The code was prepared to supplement the supporting companies’ existing
codes of conduct. In addition to providing recommendations for specific ‘company
action’ on a range of issues, the code addresses policy recommendations to APEC
member governments.
5. The Global Reporting Initiative (GRI): It is more of a reporting standard rather than a
performance standard. It was established in 1997 with the objective of designing globally
applicable guidelines for preparing enterprise-level sustainability reports that include
social and environmental indicators. The GRI was convened by CERES (Coalition for
Environmentally Responsible Economics), and called for the active participation of
corporations, NGOs, United Nations’ agencies, consultants, accountancy organizations,
business associations, universities, international organizations and other stakeholders
from around the world. The GRI released in 1999 its Sustainability Reporting Guidelines.
It is now a permanent, independent, international body with a multi-stakeholder
governance structure. Its core mission is to maintain, enhance and disseminate the
Guidelines through a process of ongoing consultation and stakeholder engagement. The
GRI has begun to add sector-wise supplements, beginning with financial services and
tour operators.
6. AA1000Accountability: Instituted in 1999, AA1000 is an accountability standard created
with a view to complementing the GRI Reporting Guidelines and to improve
accountability and performance through stakeholder engagement. The standard has been
designed to help the users establish a systematic stakeholder engagement process that
generates the indicators, targets, and reporting systems needed to ensure its effectiveness
in overall organizational performance. The AA1000 Series has added a set of specialized
modules, including the AA1000S Assurance Standard, the first of its kind for social and
sustainability reporting.
7. Social Accountability 8000: It is another standard that specifies requirements for social
accountability to enable a corporate to develop, maintain, and enforce policies and
procedures in order to manage those issues which it can control or influence; and
demonstrate to interested parties that policies, procedures and practices are in conformity
with the requirements of this standard and are applicable to corporations regardless of
their geographic location, industry sector, or company size. The standard is human
resource based and is maintained by Social Accountability International. It covers
standards and monitoring programmes for child labour, forced labour, disciplinary
practices, non-discrimination, wages and benefits, working hours, health and safety,
freedom of association and collective bargaining and management systems.
8. Principles for Global Corporate Responsibility: This is not a standard but a ‘collective
distillation of the issues of concern’ to religious-oriented institutional investors developed
by groups in the United States, Canada, and the United Kingdom. The Interfaith Center
on Corporate Responsibility (ICCR) has published these Principles for Global Corporate
ResponsibilityThe ICCR comprises of more than 275 religious institutions that use their
 investments to promote social change. The principles cover a wide spectrum of CSR
issues, including workplace, community, environment, human rights, ethics, suppliers
and consumers, and are published as a reference tool that companies (and investors) can
use to benchmark or monitor their own policies, or those of the companies in which they
invest.
9. The Global Sullivan Principles: The Global Sullivan Principles introduced in 1999 were
meant to expand upon the original Sullivan Principles, which were developed by the late
Rev. Leon. H. Sullivan in 1977 as a voluntary code of conduct for companies doing
business in apartheid South Africa. “The objectives of the Global Sullivan Principles are
to support economic, social and political justice by companies where they do business; to
support human rights and to encourage equal opportunity at all levels of employment,
including racial and gender diversity on decisionmaking committees and boards”. The
objectives also include training and helping the growth of poor workers, providing them
opportunities in technical, supervisory and management areas. The Global Sullivan
Principles are also meant to help the promotion of greater tolerance and understanding
among peoples of the world. By doing all these, the principles would help in the
enhancement of the quality of life, with dignity and equality to all concerned—
communities, workers and children.40
10. The Keidanren Charter for Good Corporate Behaviour: Nippon Keidanron, the Japan
Business Federation initiated a 10-point charter, which states: “Corporations, in addition
to being economic entities engaged in the pursuit of profit through fair competition, must
be useful to society as a whole”.41 Keidanren members agree to follow the spirit of the
charter as the criterion of their corporate behaviour. The charter was revised in October
2002 to emphasize roles and responsibilities of corporate executives in an attempt to
prevent the recurrence of corporate misconduct.42

PRESTIGIOUS AWARDS FOR CSR

It is often felt by those who are engaged in CSR activities that while companies are berated both
by the public and the media for any of their misdemeanour, they are hardly commended for the
good social work they do, and for the time, efforts and resources that go into them. Such
commendation of their work will not only encourage them to do more and be committed to the
service, but showcasing of corporations that do exemplary work in this field will also inspire
other passive corporations to emulate them. Table 9.2 illustrates some of the awards that have
been instituted both in developed countries like the United States and the United Kingdom and in
a developing country like India.

The number of CSR-related awards has grown in the last decade. While a handful of awards,
listed below, cover general CSR performance and leadership, many more awards cover specific
areas, such as environmental responsibility, workplace practices, ethics and community
involvement. These awards can be found in other CSR reports on those subjects.

Table 9.2. Prominent and Prestigious Awards for Corporate Social Responsibility
THE INDIAN PERSPECTIVE

India has had a strong tradition of philanthropy. Business and corporate philanthropy can be
traced to the preindependence days in India, when companies funded education and other social
welfare activities. But there is a fine line of distinction between CSR and philanthropy. CSR
essentially means a more integrated and proactive action towards all the stakeholders while
philanthropy could be a charitable donation to the people in and around the area of operation of
the company even without ethical values. An organization needs to take a balanced view of the
components of CSR and implement the strategies in coherence with the vision, mission and
values of the organization.

While companies in the United States and Europe are pressured by the stakeholders to adopt
CSR practices, the Indian companies so far have not experienced any such pressures. Indian
companies are still not legally bound to formally report CSR activities unlike the developed
countries which adhere to the Global Reporting Initiative (GRI)*. India ranks last in terms of the
level of social responsibility demanded from companies. But according to the survey conducted
by Centre for Social Markets, there has been a growing change in the attitude of Indian firms
towards CSR.

Reasons For Change in Csr Attitudes

There is increasing evidence to suggest that we need to explore innovative ways of doing
business so that all the stakeholders are able to participate; when differences are valued, policies
are inclusive and the impact on the society is positive. There are no indicators of measurement to
help evaluate the CSR initiatives but increasingly the companies are building an integrated
model that is in alignment with the business processes and functions.

Social responsibility is not the exclusive domain of the government and ‘passive philanthropy’
alone no longer constitutes CSR. Most of the corporations perceive ethical conduct including
compliance and transparency of business and nation building as the closest definition of CSR.
Many global surveys have revealed that three of the most important factors that impact social
reputation of a corporation are: business ethics, compliance with regulatory requirements and
consistency in value delivery. Only 12.4 per cent of Indian companies pursue strategic
philanthropy as compared to 48 per cent of the multinationals. Charity is pursued by 35 per cent
of Indian companies and 62 per cent of the multinationals. Both Indian and multinational
corporations give money primarily to support education services, environment, health services
and uplifting the living condition. Support for art and culture, employee volunteerism, event
sponsorship and matching grants are some important activities of the multinationals but not
Indian companies. The most responsible companies in India are the following:

 MNCs—Unilever, Sony, Johnson & Johnson, Coca Cola, P&G. The main reason stated
was that these were trusted brands. Coke was mentioned because of its sponsorship of
sports events. However, the factors of environmental care, human rights, transparency
were not mentioned.
 Indian—Tatas, Reliance, Birlas and BHEL. The reasons mentioned were ethical care,
environmental practices and social work. MNCs were rated lower than Indian companies.
India is moving from corporate philanthropy to the stakeholder model. For example, the Tatas
are known for their work in Tatanagar (Jamshedpur) and have set up a Tata Council for
Community Initiatives. But by and large, Indian companies have a long way to go in imbibing
corporate responsibility as a business strategy. Corporate philanthropy is only a part of corporate
responsibility.

INDIA ON THE ETHICAL/CSR MATRIX

There is a difference in approach towards CSR in India vis-a-vis the developed nations.
Companies in India exert considerable influence on the government to shape favourable business
policies and have regulatory frameworks in place. But barring a few—Bajaj, Godrej, Tata,
Infosys, Dr Reddy’s Labs, etc. most companies do not seem to display a social conscience.

But every year, Indian companies are putting in more money in community activities. There are
several reasons for this—one, it is an ideal tool for building ‘reputation capital’. Second, it stems
from the concept of optimization of profits as against maximization of profits.

A number of recent surveys have been conducted in India to understand what CSR means in the
Indian context, what the expectations of different stakeholders are and what drivers and barriers
face the companies.

As per ‘The Corporate Social Responsibility Survey 2002, by UNDP, British Council, CII and
PwC’43 the perception of CSR among the Indian corporations is that of ethical conduct including
compliance and transparency of business and nation building. They consider business ethics,
compliance with regulatory requirements and consistency in value delivery as the three of the
most important factors that impact social reputation of a corporation. In the absence of a
structured approach to defining CSR and systems for its deployment, companies are often
unaware of the nature of CSR-related initiatives undertaken, the magnitude of their investments
in CSR related initiatives and since the investments are not systematically deployed, these at
times prove to be ineffective. The survey also indicated that many companies (nearly 42 per
cent) deploy CSR by instituting a certified management system but only few (19 per cent) have a
periodic performance monitoring mechanism in place. This may be a manifestation of the fact
that in the absence of mechanisms and guidelines for assessment of outcomes of CSR initiatives,
the companies are restricted in undertaking performance monitoring and evaluation.

There is a transition from the ethical-statist model emphasizing philanthropy and employee
relations to the liberal-stakeholder concept. Ethical model constitutes a significant portion with
48 per cent of the companies having delineated policies for charitable contributions. The shades
of statist model in the current perception and practice of CSR are visible with concerns like
employee welfare (66 per cent), labour practices (61 per cent) and customer relations (64 per
cent).

Wider adoption of CSR in Indian companies will be enabled by

 provision of tax, duties and custom benefits,

  inclusion of CSR performance of promoters as a parameter in according fast track
clearance to projects,
 decreased government interventions,
 depreciation benefits where asset investments are made, and
 development of guidelines on estimation of socioeconomic impacts.

CORE-BCSD INDIA

There are several organizations now emerging on the Indian scene that focus on issues of CSR.
Corporate Roundtable on Development of Strategies for the Environmental and Sustainable
Development (CORE) and Business Council for Sustainable Development (BCSD) India
Information Security, Control & Audit of Business Information System is a unique grouping of
corporate organizations that, for instance, are trying collectively and individually to build in
sustainable development concepts in their operations. CORE-BCSD India includes some of the
most innovative, largest and also the most forward looking organizations in the country. The
objectives of sustainable development rest within the principles of CSR, because unless the
needs of the society, both present and future, are served, sustainable development would remain
only a myth. And the most significant step in pursuing CSR Information Security, Control &
Audit of Business Information System is to proactively protect the environment.

The principal deterrent to the adoption of CSR is the lack of linkage between it and financial
success. Since no direct relationship is evident, companies find it difficult to assess how much to
invest in CSR, where to stop and how to achieve the right balance between financial performance
and CSR. Also, explicit commitment to CSR often lays the corporation open to demands from
vested interests. The CSR investments have a very long gestation period and lack visible results
making it impossible to assess the effectiveness of investment.

The lack of comprehension and capacity to implement CSR acts as a major hindrance to its
adoption on a wider scale. Potential political interference in implementation of CSR-related
activities and the lack of tools and mechanisms to measure, evaluate and report CSR practice and
performance also act as a hindrance.

Some other concerns perceived by corporate India are an anticipation of increased demand from
the interested communities and also an increase in operating cost on the adoption of CSR.
Increased interventions from regulatory bodies and a potential adverse impact on quality of
goods and services are other potentially important concerns in implementation of CSR.

The ‘Altered Images: The 2001 State of Corporate Responsibility in India Poll’44 was conducted
by TERI- Europe in collaboration with New Academy of Business and Commonwealth Science
Council to assess the existing practices and their fitness to the evolving global corporate
responsibility. The poll focused on four dimensions of corporate responsibility, namely, worker
health and safety, community relations, environmental sustainability, and accountability to
stakeholders.

It was designed to capture perceptions and expectations (related to corporate responsibility) of

the stakeholders. The survey found that there is more trust in the Press and NGOs than in
business. The IT sector is regarded as the most responsible and alcohol and tobacco industries as
the least.

Government-controlled sectors like pharmaceutical and financial sectors are perceived to be

more socially responsible than the private sector. One of the major issues is gender
discrimination. It was felt that hiring policies and age restrictions were against women’s
interests, especially among workers.

Public expectations from corporations in social and environmental matters are rising.
Environmental pollution is being regarded with great concern. The main expectation of the
companies by the public was that they provide good quality products at low prices, treat
employees well without discrimination, protect the environment, help bridge the gap between the
rich and the poor, and help in social and economic development.

Corporations think that NGOs are the most trustworthy to work with in the interest of the
country. Employees and the public believe the media and religious groups. The government is
not regarded with much favour when it comes to CSR. Similarly, companies are not trusted to
report fairly on their performance. External verification is trusted. Hence, there is a great role
that NGOs and media can play in moving the agenda forward.

ETHICS AND SOCIAL RESPONSIBILITY OF BUSINESS

Business Ethics in India Today

In a recent international survey of levels of honesty in government and business, countries were
ranked by giving them points out of 10 for their honesty: Singapore was number one in the world
with 9.7 points while India was seventh with 3.1 points. Clearly, our country’s ethical image
badly needs furnishing.45

In 1992, XLRI, Jamshedpur conducted a highly successful conference of company directors on

business ethics. It was attended by over 100 participants and the proceedings were published
under the title Corporate Ethics, the first book on the subject in India. Till 5 years ago, XLRI
was the only management school which had ethics as a 3-credit core course. Now LIBA and the
IIMs too have introduced Ethics in their curriculum. Why this upsurge of interest in ethics today?
It is interesting to trace the crests and the troughs traversed by the concepts of ethics and social
responsibility of business in India.

Indians are inclined to believe that they are a highly ethical nation, certainly more so than most
others. Yet in 1964, Gunnar Myrdal,46 in his celebrated work Asian Drama, noted that in British
days only petty corruption at lower levels was known in the Indian administration, whereas since
independence corruption had spread throughout the system and indeed begun from the very top.
It is this, says Myrdal, which is holding India back. Some years back, Time magazine47 reported
that in the early years of independence, Indians bribed bureaucrats to do things which they were
not supposed to do, but now they bribe them to do things which they are expected to do. India
would now probably have become another Asian Tiger, if corruption was not endemic in the
country.
Why So Much Corruption?

The common man is forced to ask what has happened to its leaders. There seems to be little
doubt that the principal culprits responsible for corroding the ethical sense of the industrial and
political leaders of India is first the type of governance ‘we, the people’ gave to ourselves and
second, the type of economy that was imposed on us.48 First, we chose an electoral process in
which the spending of millions of rupees to win a seat was forbidden, yet necessary. This single
factor made corruption and black money a substantial part of the electoral process, and therefore
of government and industry.

Secondly, thousands of faceless bureaucrats and venal politicians49 decided every aspect of the
economy: what should be produced, how much, by whom, at what price, with what technology
and raw materials. Thus economic decision making was taken away from economists and end-
producers, from farmers, industria1ists and from market forces and handed over to politicians
and bureaucrats, who had a field day in making hay while the sun was shining.

The License Raj

As a result, a forest of permits, licenses and controls was set up, and the notorious ‘License Raj’
successfully dwarfed, stunted and made a ‘bonsai’ out of the economy of this enormous country.
The government inspector had a field day and had a say in every aspect of Indian economy, from
production to consumption, from distribution, to exchange. The ubiquitous Inspection Raj
touched every aspect of the life of the Indian, dwarfed his freedom and destroyed his economic
well-biding.50

Black Money

Obviously, bribes had to be paid in unaccounted cash to get licenses, permits and the like. To get
such large amounts of unaccounted cash, taxes of all kinds were evaded, exports under-invoiced
and imports over invoiced. Corruption is like cancer eating into the very vitals of the social,
political and economic life of the country. Corruption at higher levels of the administration
generates huge amounts of black money by way of dishonest businessmen and public servants.
Since black money is so widespread and has become socially acceptable, it has corrupted every
profession: teachers, doctors, lawyers, the judiciary, and it have spread its tentacles throughout
every system of the country, from top to bottom.51

SOCIAL RESPONSIBILITY AND INDIAN CORPORATIONS—A SCORE CARD 52, 53

The corporate world is now reaching to the community. And philanthropy is no longer limited to
signing cheques. The commitment is getting much deeper as a large section of employees,
including members of the top management, are now doing their bit for the causes close to their
heart.

Sunil Rajshekhar of Times Foundation says that corporate contribution is now gaining a holistic
approach where employees of big companies are encouraged to give back to communities which
are responsible for their sustenance. And the initiative does not end with an odd blood donation.
More companies are joining hands with NGOs to set up labs, adopt schools and even villages,
educate kids and women in slums, and start welfare programmes for cancer and AIDS patients.

At GE, for instance, the initiative runs right from the top as Scott Bayman, president and CEO,
GE (India) finds satisfaction in his endeavour to develop confidence among young school drop-
outs and help restart their education and help them gain skills for employment. “About 60 of our
employees are involved in voluntary programmes and at least 30 of these are very active”, says
Bayman and added “GE has implemented many such initiatives globally but I had some
apprehension about how popular it would be in India. Thankfully, our people embraced it very
fast”.

Indian industry is also equally aggressive in its drive to being socially responsible. North Delhi
Power, a joint-venture of Tata Group and the Delhi government have joined hands to help out
AIDS patients and improve awareness in industrial areas of Naraina.

The attempt to repay communities who sustain businesses are proving to be an effective HR
measure too. Hewlett Packard’ subsidiary, Agilent boasts of an attrition level of about 8
compared to over 30 seen by competitors and attributes it to their employee’s satisfaction level
achieved from social causes. Venkatesh Valluri, the Managing Director of Agilent India asserts
that people feel good about working for communities when they see the results themselves.
Though this is a difficult initiative to take, it may soon be adopted as a movement by the people.

For others like HSS, adopting villages, helping physically and mentally challenged kids comes as
naturally as forming a cricket club. The company has created an NGO called Jagriti within the
company. Social responsibility is among corporations’ top priorities today. According to Scot
Bayman, a socially responsible company is a respected and successful company.

A large number of Indian companies discharge their social responsibilities quite satisfactorily.
There are many companies which have excelled in such activities but when seen in the light of
the country’s vast needs, the achievements fall short of requirements. The money spent for social
causes by companies is generally a significant proportion of their turnover.

Here are a few illustrations of the different social responsibility functions that Indian companies
typically perform:

 AMM Foundation of the Murugappa group provides assistance to communities in

education, medical care and research in rural development.
 Asian Paints funded a large-scale community development project to enable farmers to
use local resources effectively.
 The AV Birla group is involved in social and economic development of communities.
 BHEL has contributed to the development of quality of life in rural areas, health care and
family welfare, adult education, etc.
 Brittannia Industries promote sports, especially tennis.
 Brooke Bond has been interested in animal welfare, providing veterinary services, and
improvements in animal breeding.
 Colgate Palmolive did pioneering work in the promotion of sports, dental health, and
small industry development.
 Dr Reddy’s Laboratories promotes education, livelihood and community development.
 Escorts Ltd has worked for farm mechanization, agricultural development, health care,
etc.
 Ford India Ltd runs education and training programmes in local schools near the factory;
has set up research chairs in two IITs in safety and environment; has introduced measures
to eliminate, recycle or treat waste products; and has started several community welfare
programmes.
 Gas Authority of India Ltd provides through its CSR initiatives environment protection
and horticulture care, infrastructure development to villages, drinking water and
sanitation, health care and medical facilities, educational aids and literacy enhancement.
 The Godrej group focuses on environment and conservation.
 Gujarat Ambuja Cement has been helping communities around its facilities.
 Hindustan Lever focuses on health, empowerment of women, and education of special
children.
 ICICI Bank’s focus areas are elementary education, and universal access to financial
services.
 Infosys through its Infosys Foundation, provide assistance to social development, art and
culture, schools, libraries, higher education and research.
 ITC Ltd is socially active in rural development especially in the areas of agriculture,
culture, sports and pollution control.
 MRF Tyre industries promote sports activities, especially cricket.
 NTPC Ltd is actively involved in community development of villages, resettlement and
rehabilitation, and enrichment of human rights and environment.
 Orchid Chemicals and Pharmaceuticals through its Trust promotes job-based education in
villages, selfemployment amongst women and health services to the needy, organizes
capacity-building programmes and undertakes infrastructure development programmes in
adopted villages.
 Pricol Industries is environmentally active in promoting afforestation, water harvesting
and preservation of water bodies.
 Raymonds’ focus area is combating malnutrition and rehabilitation of school children.
 SAIL contributes to the sectors of agriculture, industry, education, health care, dairy,
poultry, fisheries, and drinking water supply.
 Satyam Computers is involved in several social welfare programmes.
 Tata Steel has been a pioneer in discharging social responsibility and has made several
contributions in areas such as community development, social welfare, tribal area
development, agriculture and related activities, rural industrialization, etc.
 The Times of India group has set up a Relief Fund to organize relief and rehabilitation
measures at times of calamities (floods, cyclones, fires, earthquakes drought, famine,
etc.) to alleviate human sufferings, distress and losses, in any part of India.
 Thermaux has been focusing on education.
 Titan Industries has been training women and handicapped people in making ornaments.
Several other Tata Group companies are training local communities in water harvesting,
storage and recycling.
  TVS Group companies through their Srinivasan Services Trust is passionately involved
in rural/tribal development, primary and technical education.
 Wipro Technologies are involved in spreading quality primary education through its
Azim Premji Foundation.

FUTURE OF INDIAN CSR

There is clear need to develop a more coherent discourse on CSR. It is often seen as a strategy to
clean the sins of pollution, or to provide a facelift to the company’s public image. But it should
be more of a tool to give a cleaner reputation and socially responsible identity to companies,
involving them and their employees in the long term process of positive social transition.

Most of the organizations in India have not instituted structured systems for approaching or
deploying CSR. The organizations need to structure the CSR initiatives through articulation of
policies and guidelines, allocation of resources, and performance evaluation and reporting as
followed by the institution of management systems.

Nearly 90 per cent of the corporations recognize that there is a paradigm shift occurring wherein
investors of the future shall demand greater transparency in disclosure of both financial and non-
financial information to better understand companies, and most of the corporations are gearing
up to respond to such requirements from investors as most (88 per cent) believe that they shall
benefit from such transparency.

Corporations of tomorrow see themselves as entities that earn profits but through ethical practice,
complying with regulatory requirements, with a specific substantial focus on protecting the
environment and improvement of employee safety and health. Many corporations expect to listen
more to the concerns of the stakeholders, provide equal opportunity, avoid child labour, pay
taxes and create jobs.

Given the current perception of CSR and in view of the increasing expectation of the
stakeholders on transparency, ethics and professional integrity, it becomes imperative that
managers of tomorrow be ethical team players, sensitive to the developments in the
surroundings. Corporations predominantly continue to believe that CSR will be compliance
centric. Several companies are transitioning from compliance to stakeholder engagement, and
attributes such as handling public, community work, etc., which have thus far been accorded low
importance are currently being accorded greater priority.

The vision of holistic stakeholder approach to CSR is now getting firmer. There is an all round
desire to be a good corporate citizen. However, transition from the present compliance centric
approach to the new paradigm requires creation of an enabling environment and an array of
support measures. A suitable strategy based on the barriers and drivers for change need to be
developed. This process will be facilitated by the business schools in the country teaching CSR
as a part of the course curricula. Industry associations will also play a critical role in sharing of
experiences and rewarding best practices. Also, there is a need to incorporate the public policies
that are being developed globally into the Indian CSR. International agencies have a role to play
in the cross-country sharing experience.
Social responsibility is not an exclusive domain of the government and ‘passive philanthropy’
alone no longer constitutes CSR. A majority of the corporations in India perceive CSR as a
mechanism to proactively approach and address the significant regulatory requirements.
Accordingly, in pursuit of CSR, systems and policies/guidelines are delineated for concerns such
as health, safety and environment.

SUMMARY

The concept of CSR has come to mean that the responsibility of a corporation to the society is an
inalienable part of its operations and strategy. CSR is about how companies manage the business
process to produce an overall positive impact on society. It is qualitatively different from the
traditional concept of corporate philanthropy. It acknowledges the debt that the corporation owes
to the community within which it operates.

Corporations, whether public or private, draw much from society. If a corporation draws so
much from society it has to make its own contribution to society.

Social scientists have formulated several theories that justify the importance of corporations
engaged in promoting social welfare of the society in which they operate. These theories are as
follows: the trusteeship model that adopts a realistic and descriptive perspective in viewing the
current governing situation of a publicly held corporation, as a social institution with a corporate
personality. The social entity theory regards the company not as a private association united by
individual property rights, but as a public association constituted through political and legal
processes and as a social entity for pursuing collective goals with public objectives. The
pluralistic model supports the idea of multiple interests of stakeholders, rather than shareholder
interest alone. It argues that the corporation should serve and accommodate wider stakeholder
interests in order to make the corporation more efficient and legitimate.

When CSR is adopted as a business strategy for sustainable development, it goes to improve
corporate performance. It offers manifold benefits to corporations, both internally and externally.

The scope of CSR is wide and could be considered in terms of different viewpoints. These
include protecting and promoting all stakeholders interests such as those of employees,
consumers, creditors, business associates, dealers, government and environment; social concern
and promotion of common welfare programmes including those meant for the benefit of the poor
and indigent public; taking up issues such as drug addiction, drinking and smoking and helping
NGOs fight against them; corporate philanthropy which manifests itself in some form of
benevolent activity at times of natural calamities such as earthquakes, tsunami, etc.

KEY WORDS

Era of globalization • Sustainability of business • New Economy framework • Image

merchandising • Private initiatives • Conflicting perspectives • Profit maximization •
Controversial thoughts • Impact on society • Accountability to society • Integral part • Wealth
creation • Ethical responsibilities • Philanthropic responsibilities • Stakeholders • Interests •
Environmental concerns • Systematic implementation • Global role • Trusteeship model • Social
entity theory • Pluralistic model • Statist model • Risk management • Operating costs • Mandated
actions • Vanguard • Creation of wealth • Social and charitable causes • Indian perspective •
Ethical matrix • Scorecard.

DISCUSSION QUESTIONS

1. Why should corporations engage themselves in social welfare projects?

2. Would you justify the view of economists like Milton Friedman that corporations have no
other responsibility other than making profits for their shareholders?
3. To what extent have Indian companies zealously espoused CSR in their activities? Will it
be correct to think that whatever has been done in this area is good, but yet there is a lot
more to be done in a poor and developing country like India?
4. Discuss in detail, CSR as a business strategy for sustainable development.

FURTHER READINGS

1. K. N. Arun, “A Double Honour for India,” The New Indian Express, Chennai, 18 August
2007.

2. Fr. Paul De La Gueriviere, S. J. and Fr. Louis Xavier, S. J. Social Responsibility of Business
(Chennai: LIBA Publications, 1996).

3. A. C. Fernando, “Corporate Governance: Time for a Metamorphosis,” The Hindu Business

Review, 9 July 1997.

4. Milton Friedman, Capitalism and Freedom (Chicago, IL: University of Chicago Press, 1962).

5. Milton Friedman, “The Social Responsibility of Business is to Increase Its Profits,” New York
Times Magazine, 13 September 1970.

6. Fr. Peter Hans Kolvenbach, Superior General of the Jesuits, at the Fifth J. R. D. Tata Oration
on Business Ethics, Jamshedpur, 18 October 1995.

7. K. M. Mittal, Social Responsibilities of Business—Concepts, Areas and Progress, (New

Delhi: Chanakya Publications, 1988).

8. Harsh Shrivastava and Shankar Venkateswaran, The Business of Social Responsibility—The

Why, Where and How of Social Responsibility of India (Bangalore: Books for Change, 2001).

9. Sahlini Singh, “India Inc. Shuns Mana Mask, Wears Human Face,” Economic Times, 5 July
2001.

10. Adam Smith, An Inquiry Into the Nature and Causes of Wealth of Nations (New York:
Random House/ Modern Library, 1937).

Case Study
DR REDDY’S LABORATORIES: COMMITMENT TO ALL-ROUND CORPORATE
EXCELENCE
(This case study is based on reports in the print and electronic media, and is meant for academic
purpose only. The author has no intention to sully the image either of the corporate or the
executives discussed herein.)

COMPANY PROFILE*

Dr Reddy’s Laboratories (DRL) was established in 1984 in Hyderabad by Dr Anji Reddy, a

graduate in pharmacology and a doctorate holder in chemical engineering. Dr Reddy who had
worked as a scientist in Indian Drugs and Pharmaceuticals Ltd (IDPL) established DRL to create
and deliver innovative pharmaceutical healthcare solutions. DRL became a public limited
company in 1985. In the following year, DRL had floated an IPO of equity linked debentures
totalling Rs 24.6 million. In the 1990s, the company strengthened its position in the domestic
formulations market by launching several new products and by acquiring a couple of companies.
For instance, in 1999 DRL acquired a controlling stake (45 per cent) in American Remedies Ltd.
(ARL). With this acquisition, DRL expanded its product line to include Mucolite, Antoxid, BioE,
Becozine and Optisulin, all of which constituted 60 per cent of ARL’s sales. The newly acquired
company, ARL had two manufacturing facilities, one each at Pondicherry and Chennai. With its
own expansion and acquisition of ARL, DRL developed itself with research and drug
development as its core competencies, and its sights fixed at the global pharmaceutical market.

Today, the company develops, produces and markets a wide range of pharmaceutical products
not only in India, but also in the United States and elsewhere overseas, that include finished
dosage forms, generic finished dosage, active pharmaceutical ingredients and biotechnology
products. DRL’s research programme focuses on the discovery of medicines to cure cancer,
cardiovascular diseases and diabetes. The company’s research centre makes use of cutting-edge
technology and has discovered breakthrough pharmaceutical solutions in select therapeutic areas.
In a short span of operations, the company has filed for more than 75 patents. Dr. Reddy’s is the
first Indian pharmaceutical company to out-license an NCE (New Chemical Entity) molecule for
clinical trials. Moreover, with a view to strengthen the company’s research capabilities, DRL has
set up a research subsidiary, Reddy US Therapeutics Inc. in Atlanta, USA.

Dr Reddy’s Lab is emerging as a global pharmaceutical company with proven research

capabilities. The company, true to its founder’s vision, is focused on creating and delivering
innovative and quality products to help people lead healthier lives at an affordable cost. Their
technologies and expertise in the development and manufacture of quality products have been
critical to their success in offering life-saving medicines to customers worldwide.

Since its inception in 1984, DRL has chosen to walk the path of discovery and innovation in
health sciences. The company’s competencies cover the entire pharmaceutical value chain active
pharmaceutical ingredients (API) and intermediates, finished dosages (generic and branded) and
new chemical entity (NCE) research. The company aims to become a discovery-led global
pharmaceutical company. Presently, there are 300 researchers actively involved in various drug
discovery and clinical developing programmes at the company’s discovery research strategic
business unit (SBU). In all its endeavours, DRL is driven by values of quality, innovation, truth
and integrity, respect for the individual, social responsibility and collaboration.

DR REDDY’S NEW CORPORATE IDENTITY

Within a short span of 15 years, DRL had advanced considerably towards its goal of becoming a
global pharmaceutical company. Satish Reddy, Managing Director and COO, of the company
observed: “In 1999, we got the critical mass and the feeling within the company that we had
arrived. We were close to the Rs 1,000 crore (10,000 million) mark in turnover, which called for
a new way of looking at things and taking the message to the stakeholders”.1 The management
felt that with the company’s push for a world-wide presence, there was a need for a new
corporate identity in tune with its global profile. A new corporate identity was also found
necessary after the merger of DRL with American Remedies Ltd and Cheminor Drugs Ltd into a
homogenous corporate entity in 2000, and the company’s listing on New York Stock Exchange
(NYSE) in 2001.

On 26 April 2001, DRL ‘unveiled its new corporate identity and philosophy, reinforcing its
commitment to bring hope to life through meaningful research’. Of the new corporate identity
that included a reiteration of the company’s philosophy, new logo, colours, a code of conduct for
employees, a new anthem and a new base line—Life, Research, Hope, Dr K. Anji Reddy,
Chairman, commented: “The new identity highlights the company’s ethos—a caring organisation
that leverages its expertise in research for a healthier life”.2

FUTURE PLANS

DRL is moving fast to acquire companies overseas to make its global presence felt. The
company looks for acquisitions in Spain, Italy and France. The company’s acquisition of
Betapharm in 2006 has given it competitive strength in Germany.3 Apart from acquisitions in
Europe, DRL has also tied up with the UK-based ClinTec International for the joint development
of an anti-cancer compound, DR 1042. The compound could be a potential drug for the treatment
of various types of cancer and it is expected to hit the market by 2010. Phase-I trials for this anti-
cancer drug has been completed in India and the results of phase II trials just carried out are
being evaluated. G. V Prasad, CEO of DRL is very optimistic about the drug. According to him,
“Our studies have showed that the compound has an advantage over other injectibles available
for cancer treatment as it could be administered orally”.4

DRL, which acquired Group Pharmaceutical’s range of dental care products in December 2001
successfully negotiated with vendors to expand its oral care portfolio.

DRL had by that time seven products in this therapeutic area. Most of these were acquired from
another company, which catered to the national market alone, along with a few products
expected to be launched in 2003.

A source added that the company is looking keenly at the export market and for this, will more
than double its product offerings in the category.

Another area of future growth of DRL lies in pharma outsourcing. The company expects that its
Custom Pharmaceutical Services (CPS) division will record revenues of US$ 100 million in
2006–2007 compared to $30 million in 2005–2006. Globally, pharmaceutical outsourcing
business is estimated around US$ 35 billion. India’s share in this outsourcing business presently
is about US$ 400 million, but is set to grow to US$ 1 billion soon. DRL, which currently
develops active pharmaceutical ingredients, intermediates and formulations for big and emerging
pharma companies worldwide, is likely to grab a large chunk of business that comes to India.5

DRL’S COMMITMENT TO CORPORATE SOCIAL RESPONSIBILITY

The chairman of DRL, Dr Anji Reddy is an avid champion of CSR. His commitment for CSR is
reflected in his observation: “Corporate houses have done very well for themselves. The
government can’t act in seclusion. Why should we shy away from our responsibility toward the
society? Against great odds, we have built up a capacity to make the nation proud. Over the next
50 years, let us shift our attention to the eradication of poverty from the nation. Let us innovate
and do something for the poor”.6

DRL has been active in promoting CSR among its members. DRL always promotes and
encourages its members to look beyond the corporate walls and has a CSR policy which is to
improve quality of life of all stakeholders. DRL’s clearly defined CSR policy has provided
intricate details and clear direction to plan CSR action for the company.

VISION AND VALUES

 Well-defined purpose for existence.

 Help people to lead healthier lives through innovation in medical field.
 Synchronized long-term vision among DRL’s family members for a common goal.
 Identified boundaries, belief and guiding principles that facilitate the company’s journey
towards the above visions.
 Highest ethical standards of truth, integrity and transparency are the values of DRL for
successful business practices.

As a company, DRL is committed to the principles of sustainability; DRL promises its

stakeholders economic growth, it promises society to create a positive impact through its
business activities as well as voluntary efforts; and finally, is committed to the creation of clean
environment through its restorative activities. This is represented by the flow chart, which is
taken from the company’s Annual Report, 2005.

DR REDDY’S FOUNDATION FOR HUMAN AND SOCIAL DEVELOPMENT

Commissioned in the year 1996, Dr Reddy’s Foundation for Human and Social Development
(DRFHSD) focuses on the sustainable development of individuals, communities and society at
large through projects that link learning and livelihoods in a healthy and sustainable way. Dr
Reddy’s Foundation now catalyses sustainable public-private partnerships specifically for
children and youth at risk, through innovative programmes and application of pioneering ideas
and practices across the three Ls (life, learning and livelihood) for a better society.
Source: Courtesy Dr. Reddy’s Sustainability Report 2005. Reproduced with permission from Dr
Reddy’s Laboratories.

Dr Reddy’s Foundation identified various social problems and also has given solution to them
through their commitment and involvement which is shown by the model of a cycle reproduced
below from the Annual Report of DRL.

Out of the multifarious CSR activities of DRL the following are worth mentioning here:

 Livelihood Advancement Business Schools (LABS)

 Naandi—The Beginning Project
 Centre for Social Initiative and Management (CSIM)
Source: Courtesy, Dr Reddy’s Sustainability Report 2005. Reproduced with permission from Dr
Reddy’s Laboratories

Table 9.3 Proof of Success in the Year 2004–2005

Livelihood Advancement Business Schools (LABS)

In 2000, Livelihood Advancement Business Schools (LABS) was commissioned with an

objective of making youth from poor financial background employable. LABS has set a target of
creating one million employable youth by 2010. Started with 10 centres in 7 states, LABS now
has 74 centres in 11 states.

Achievements:

 Created 20,000 livelihoods in a year against a target of 10,000.

 Without restricting its services to Andhra Pradesh, LABS has also entered the States of
Uttar Pradesh, Chattisgarh, apart from Sri Lanka and Vietnam.
  Recognized by the Indian government and various corporations for customized man
power training.
 Training includes e-training, micro-enterprise development, agro sales and marketing,
machine tool operations and industrial garment manufacturing.
 The beneficiaries of this proj ect have reported considerable financial growth in their
lives.
 Thousands of youth have benefited from the job-oriented training they received from
LABS. Tables 9.3 and 9.4 give the number of beneficiaries in various streams of training
offered by LABS.

Naandi—The Beginning Project

Naandi is an autonomous non-profit Trust which means ‘The Beginning’ having Dr Anji Reddy
as the Chairman. The trust was co-founded by Satyam Computers, the erstwhile Global Trust
Bank, and the Nagarjuna Group of industries. The foundation works in areas as diverse as
education of underprivileged children, provision of water to drought-hit farmers and support to
marginalized tribals.

Table 9.4 Livelihood Created in the year 2003–2004

2003–04 2004–05 2005–06

5,000 25,000 100,000

Source: Dr Reddy’s Sustainability Report 2005. Reproduced with permission from Dr Reddy’s
Laboratories.

Achievements

The foundation is running primary schools in tribal Paderu, providing quality education to
children attending government schools in Hyderabad, and managing creches for children of the
rural poor, and daily wagers in Vizianagaram. The foundation has also launched income
generation projects for the tribal poor in Araku.

Centre for Social Initiative and Management (CSIM)

Health Initiatives

DRFHSD conducts a lot of health camps. Among them a few are

 Family planning programme in Kondmulagam village where 70 families benefited.

 Super speciality health camp for villagers in and around Peddadevulapalli
 Blood donation camp wherein 104 units of blood was collected from employees
 Safety and personal hygiene programmes for employees and the neighbouring
community
  Eye camp for casual workers and their family members covering 176 persons
 Education health awareness camp in Miryalguda on health and pollution
 Drinking water camp at the weekly fair in Kandivalasa Gedda under the ‘Cheeyutha’
social initiative scheme

Educational Initiatives

Educational initiatives of DRFHSD included:

 adoption of a government school in Puttaguda village, Medak district to provide books,

stationery, and the sponsorship of a teacher’s salary.
 funding distribution of notebooks to 250 primary school children in five mandals of
Srikakulam district.
 Scholarships for 15 meritorious poor students from the tenth standard and intermediate
level, covering five mandals of the Vizianagaram and Srikakulam districts

Other Social Initiatives

DRFHSD organized the following social activities:

 Adopted Sambhipur village where an eye camp was organized benefiting 250 persons
belonging to the village
 Held health and sanitation camp to discuss the perils of open defecation
 Conducted a formal course for the youth on leadership and technical skills in association
with the ‘Art of Living’ group
 Motivated the formation of ‘self help’ groups by the youth to embark on village
developmental issues

IMPACT OF DRFHSD’S CSR EFFORTS

DRL through their CSR activities have come a long way in improving the life of the poor
community. Their activities have helped many poor village people to see a ray of hope in their
lives. DRL’s activities clearly subscribe to Gandhiji’s advocacy of trusteeship principle requiring
a new ethical code to be followed by the owners of business.

The CSR efforts of DRL have been so inspiring and their impact so profound that others have
started emulating them. Many corporations are eager to extend their support to the programmes
initiated by Dr. Reddy’s Foundation which has been promoting its welfare programmes since
2003 in the states of Tamil Nadu, Maharashtra and Kerala, apart from Andhra Pradesh. Earlier,
Satyam Computers, Nagarjuna group of Companies and the now defunct Global Trust Bank have
joined hands with DRFHSD to provide succour to the underprivileged.

To meet the challenge of training the youth to acquire soft skills such as communication, sales
and customer service, Dr Reddy’s Foundation has tied up with Adecco, the staffing solutions
firm. The foundation will find the trainable youth and impart training across the country. Adecco
will help find placement for the suitable candidates.7
Likewise, The Tata Council for Community Initiative (Hyderabad regional group) and DRF have
announced an initiative called Neev—The Foundation, for enhancing employability skills among
the underprivileged youth. The Tata Council will suggest addition of market-oriented training
programmes to be disseminated among the youth through Livelihood (Centres) Advancement
Business School (LABS) centres of DRF. These programmes consist of three months of class-
room training followed by three months of on-the-job training. This includes academic, basic IT
and spoken English skills. The sectors that are covered range from IT-enabled services and sales
and marketing to micro entrepreneurship and finance and business.

LABS has its presence in about 85 districts in the country. Around 68,000 people have
undergone training from LABS centres of which 85 percent have been employed. The Tata
Council provides knowledge support to LABS through employee volunteership and participation
in market research activities and group discussions for curriculum development.8

DR REDDY’S COMMITMENT TO BUSINESS ETHICS AND CORPORATE GOVERNANCE

Dr Reddy’s long-standing commitment to high standards of corporate governance and ethical

business practices is a fundamental value shared by its board of directors, management and
employees. The company’s philosophy of corporate governance stems from its belief that timely
disclosures, transparent accounting policies, and a strong and independent board would go a long
way in preserving shareholders’ trust while maximizing long-term shareholder value. Good
corporate governance flows out of the commitment of the management and the board of
directors. When commitment is backed by the fundamental beliefs of maximizing value for
stakeholders, transparent actions in business, values of a corporate, and mutual trust amongst all
constituents of the business, the organization transforms itself into an ethical business unit.

The forward-looking approach of Dr Reddy’s has always helped it in achieving the desired
results. This approach has transformed the company’s culture to one that is relentlessly focussed
on the speedy translation of scientific discoveries into innovative products. Dr Reddy’s
commitment towards ethical business and corporate governance started well before the law
mandated such practices. The company has identified and established its core purpose, mission
and core values for achieving corporate excellence. DRL believes in crafting an environment
where the parameters of conduct and behaviour of the company and its management is constantly
aligned with the business environment.

The highlights of Dr Reddy’s corporate governance systems are an independent board of

directors following international practices, committed management team, internal control
systems and dissemination of information to various stakeholders. To reflect their continued
commitment to the highest standards of truth, integrity and transparency, the board of directors
of the company has adopted a Code of Business Conduct and Ethics. This code applies to
everyone at Dr Reddy’s, across the world. The code at Dr Reddy’s has been designed to comply
with the provisions of the Sarbanes-Oxley Act of 2002 and its implementing regulations. It is a
general statement of goals and expectations for individual and business conduct. The Code and
an Ombudsman Procedure have been chalked out to provide information, education and
resources to help employees make good, informed business decisions and to act on them with
integrity. DRL has also encouraged whistle blowing as a means of promoting ethical practices by
allowing employees to communicate unethical practices in the organization to the top
management and yet safeguard themselves from being victimized.

Sharing of information has a two-fold benefit to Dr Reddy’s systems. They use the information
and data for strengthening business operations as well as to help stakeholders make better
decisions in their dealings with the company. The company has established systems and
procedures to disseminate, in a planned way, relevant information to its stakeholders, including
shareholders, analysts, suppliers, customers, employees and the society at large. During the last
few years the company has executed a comprehensive disclosure plan through various means for
the different stakeholders. Though the primary source of information for stakeholders regarding
the Company operations is the corporate Web site, the company has also initiated and developed
other Web sites like vikreta2drl.com, customer2drl.com, my-drreddys.com, insider,
drlintouch.com, and an HR portal for dissemination of information.

Dr Reddy’s is the first Indian pharmaceutical company to be listed on the NYSE in April, 2001.
Companies listed on the NYSE must comply with certain standards regarding corporate
governance as codified in Section 303A of the NYSE’s Listed Company Manual. Among those
listed, companies that are foreign private issuers (as such term is defined in Rule 3b-4 under the
Exchange Act) are permitted to follow home country practice in lieu of the provisions of this
Section 303A, except that such companies are required to comply with the requirements of
Sections 303A.06, 303A.11 and 303A.12(b) and (c), which are as follows:

 Establish an independent audit committee that has specified responsibilities.

 Provide prompt certification by its chief executive officer of any material non-
compliance with any corporate governance rules; provide periodic written affirmations to
the NYSE with respect to its corporate governance practices; and provide a brief
description of significant differences between its corporate governance practices and
those followed by U.S. companies.

As an Indian company listed in NYSE, Dr Reddy’s Lab has complied with the above
stipulations.

DR REDDY’S BRUSH WITH SOME QUESTIONABLE PRACTICES

Case 19

Even as the controversy over the safety of non-steroid anti-inflammatory drug (NSAID)
Nimesulide raged on, Dr Reddy’s Labs and Nicholas Piramal India—two of the leading
manufacturers of this drug in India—have decided to withdraw their brands of Nimesulide from
the market. While DRL withdrew all fixed-dose combinations of Nimesulide—Nise Spas and
Nise Spas DS, Novigan N, NIAP and Nise MR—Nicholas Piramal India will withdraw its
Nimesulide tablets for adults from the market. Dr Reddy’s Nise brand was the market leader in
the Nimesulide-based NSAID segment, which is estimated to have had a total size of nearly Rs
2,000 million. Dr Reddy’s informed the Drugs Controller General of India (DCGI) about its
decision to discontinue the marketing of its four Nimesulide brands.
Case 210

Dr Reddy’s Laboratories Ltd suffered a setback in its legal battle with Pfizer over patent
infringements on its hypertension drug. In a significant ruling, the US Court of Appeals for the
Federal Circuit reversed a lower court ruling and determined that the patent extension covering
Pfizer’s Norvasc (amlodipine besylate) is applicable to Dr Reddy’s AmVaz (amlodipine
maleate). The Appeals Court also said that allowing Dr Reddy’s drug would be exploiting an
unintended loophole in the law. Norvasc is the world’s top-selling hypertension drug from
Pfizer, with the global drug major holding patent rights till 2007. Dr Reddy’s had filed with the
United States Federal Drug Authority (US FDA) to obtain approvals for its variant of Norvasc,
for marketing AmVaz using the 505(b)(2) route of the US law.

Though Dr Reddy’s had not spelt out the total loss it had suffered owing to the legal battle, it was
clear that the company had a tough time since it had not seen a big product launch for close to
two years. According to the spokesperson of Dr Reddy’s, the legal expenses over the issue
“could be in the range of $10 million, while the market opportunity lost has not been
determined”.

Responding to the development, Dr Reddy’s CEO G. V. Prasad, said, “We are clearly
disappointed by the court decision and had expected that the views expressed by the Chief Judge
in the dissent would have been the position of the majority”. However, in spite of this ruling, the
company remains committed to investing the resources to create a sustainable US-based business
of specialty products and new chemical entities as well as generic medicines.

Case 3

Suspended Diabetes Drug Trials11

As many as 2,500 diabetic patients in over 30 countries were subjected to clinical trials of the
controversial anti-diabetic drug, DRF 2725 that had been licensed to the Danish drug major,
Novo Nordisk by Dr Reddy’s Laboratories Ltd.

The detection of urine bladder tumours in rats treated with DRF 2725 forced Novo Nordisk to
suspend clinical trials. Asked as to why the clinical trials were continued till July 2006 when the
tumours in rats were detected in February 2006 itself, DRL’s CEO, Prasad said that there are
many pharmaceuticals in the market that have shown tumours in trials involving rats and these
findings are not alarming. He also informed that the American and European health authorities,
including the Danish Laegemiddlestyrelsen, did not ban the clinical studies though being
informed of tumour findings in the rats by Novo Nordisk.

It was only after finding tumours in mice also that Novo Nordisk decided not to continue trials in
humans. According to Prasad, generally investigators who conduct the trials alone are allowed to
contract trial participants directly.

The detection of tumours in rats during trials in February 2006 was informed to all the
stakeholders concerned, including patients, through investigators and the patients were asked to
reassess their continued participation in clinical trials. Stating that the process of informing the
patients and the ethics committees was currently under way and was being followed closely by
Novo Nordisk, Prasad said “it takes a year to know whether any of these patients suffered any
harm due to DRF 2725.” According to him the risk, if present is very small as “majority of
patients were exposed to DRF 2725 for less than six months and only very few were exposed for
a period of seven months”.

According to Prasad, DRF 2725 falls under the category of non-genotoxic carcinogens which
require many years of exposure time to pose a risk to humans. Novo Nordisk would suggest the
patients to have a urine test sample taken one year after they stop taking the drug to determine
whether they suffered any harm. The Deputy Drug Controller General of India, Dr M
Venkateswarlu, when contacted, told newsman that the regulatory framework for conducting
clinical trials simultaneously on both animals and human beings varied from country to country
and there were no universal guidelines on the issue. There is no single global regulatory body to
approve clinical trials across the world and the drug discovery companies will have to obtain
approvals from the regulators of individual countries. Further, according to him, the development
of adverse effects on rats during the clinical trials need not necessarily indicate human relevance.
Whenever a drug research company finds such developments in rats, they suspend the clinical
trials on human beings and initiate risk benefit analysis. They proceed for clinical trials on
intermediate species such as cats, monkeys and chimpanzees based on the results. This process
enables them to decide whether the findings in rats detected at the initial stages would be of any
human relevance later, Dr Venkateswarlu said.

CONCLUSION

The detailed study of Dr Reddy’s Lab clearly reveals the fact that the company has been growing
exponentially and that it has been true to the vision of its founder, Dr Anji Reddy, “to create and
deliver innovative pharmaceutical healthcare solutions at an affordable cost” and to have a global
presence in healthcare industry. At the same time, DRL has also shown an unwavering
commitment to ethical business, corporate social responsibility and corporate governance.
However, the three cases mentioned above bring out certain grey areas that lie scattered between
what is ethical business and what is not in such a life-saving and sometimes life-threatening
industry like pharmaceutical industry. Only time will tell whether what Dr. Reddy’s Lab did
under these circumstances were ethical or not. Moreover, in such matters as the justification of
clinical trials of some drugs on humans when found to be harmful in mice and rats, the final
word may lie interred deeply in the womb of time, for want of credible evidence one way or the
other.

DISCUSSION QUESTIONS

1. Trace the establishment and growth of Dr Reddy’s Laboratories. What type of business
strategy has DRL adopted to achieve the fast-track growth it has registered over the
years?
2. Dr Reddy’s Lab is well-known and acknowledged countrywide for its commitment to
CSR. Explain how DRL established its reputation in this field?
3. Answer the question in the context of Dr Reddy’s Lab. Even organizations committed to
ethical business and better corporate governance practices could be drawn into situations
 that may expose them to ethical pitfalls. What are the causes and how would you mitigate
them?

FURTHER READINGS

The following Web sites are referred for information and data:

www.businessworldindia.com/nov0804/coverstory_mrc_no6.asp

www.contentlinks.asiancerc.com/ib/DetailNews.asp?newsid=1139237

www.csrwire.com/article.cgi/1487.html

www.drreddys.com/coverview/cg_internalcontrolsystems.htm

www.drreddy.com/coverview/cgovernance.htm

www.drreddys.com/coverview/sd_sr_drrfoundation.htm

www.expressitpeople.com/20040607/cover.shtml

www.financialexpress.com/fe_full_story.php?
content_id=41521pmindia.nic.in/speech/content.asp?id=12

www.themanagementor.com/kuniverse/kmailers_universe/hr_kmailers/hrp_Acut.htm

www.tribuneindia.com/2002/20021025/biz.htm

The sustainability reports of Dr. Reddy’s Lab for the years 2003–2004 and 2004–2005.