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Procedia Economics and Finance 11 (2014) 68 75

Symbiosis Institute of Management Studies Annual Research Conference (SIMSARC13)

Corporate Social Responsibility (CSR) in

Market Driven Environment
Mr. Srinivasan Radhakrishnana, Dr. Pradnya Chitraob, Dr. Asha Nagendrac *
abc

a
Academic Research Associate, bAssociate Professor, cProfessor
Symbiosis Institute of Management Studies, Symbiosis International University, Pune

Abstract
In this work we analyze Corporate Social Responsibility (CSR) from legal and business frame that exist in a market driven
environment and infer its applicability in developing nation with an emphasis on inclusive growth. In addition we argue against
the timing and inflexible nature of mandatory CSR law (introduced by Companies Act, 2013) which may hamper the long term
ability of organizations to sustain CSR initiatives which is essential for inclusive growth.

2014 Elsevier B.V. This is an open access article under the CC BY-NC-ND license
2013 The Authors. Published by Elsevier B.V.
(http://creativecommons.org/licenses/by-nc-nd/3.0/).
Selection and/or peer-review under responsibility of Symbiosis Institute of Management Studies.
Selection and/or peer-review under responsibility of Symbiosis Institute of Management Studies.
Keywords: CSR; Companies Act, 2013

* Corresponding author. Tel.: +0-000-000-0000 ; fax: +0-000-000-0000 .

E-mail address: asha.nagendra@sims.edu

2212-5671 2014 Elsevier B.V. This is an open access article under the CC BY-NC-ND license
(http://creativecommons.org/licenses/by-nc-nd/3.0/).
Selection and/or peer-review under responsibility of Symbiosis Institute of Management Studies.
doi:10.1016/S2212-5671(14)00177-4

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Srinivasan Radhakrishnan et al. / Procedia Economics and Finance 11 (2014) 68 75

1. Introduction
In this paper we analyze the concept of CSR initiatives from legal and business perspective. We present evidence
from literature that highlights the monetary and non-monetary benefits of CSR. However we argue that mandatory
CSR laws under dismal economic and market conditions may hamper the long term efficacy of CSR initiatives and
render a dry source (organizations) for such inclusive programs. We suggest that CSR laws must be coupled with
economic conditions and must be agile in nature. We begin by discussing the legality of CSR and continue the
discussion to include the business perspective of CSR initiatives.
2. Legal Perspective
Corporate Social Responsibility (CSR) motives are often confused because of murky definitions that fail to capture
the true representation of the term. We use the simplest form of definition by Elhauge (2005) who defined CSR as
sacrificing profits in the social interest (also adopted by Reinhardt and Stavins (2010)). This definition is consistent
with other definitions that were pointing to the same meaning in different forms (Graff Zivin and Small, 2005;
Portney, 2005; Reinhardt, 2005). Milton Friedmans 1970 article, The Social Responsibility of Business Is to

Increase Its Profits, in the New York Times Magazine imbued CSR with the notion ofsacrificing profits and the
same is subjected to debate ever since (Reinhardt and Stavins (2010)). In addition the several structured definition of
Corporations exhibit a dichotomy in acknowledging CSR activities as legal. The shareholder primacy (Friedman
1970; Springer, 1999; Ehrlich, 2005; Fisch, 2006) definition of Corporations and its diluted version called as nexus
of agreement(Jensen and Meckling, 1976; Easterbrook and Fischel, 1991)does not allow profits to be diverted for
any cause that does not include the stakeholders as beneficiaries. In short CSR activities are not considered legal
from the aforementioned perspective (Reinhardt and Stavins (2010)). However viewing corporations as team
production model (Holmstrm, 1982; Tirole, 1988; Blair and Stout, 1999) or operational discretion model (Elhauge,
2005)or progressive view model (Sheehy, 2005; Gabaldon, 2006) supports legality of sacrificing profits in public
interest. Apart from legal constraints stemming from definition based structure we see that United States (market
driven economy)has several laws that describe the responsibility of a corporation and its board of members towards
its stakeholders (Reinhardt and Stavins (2010)). The law hints at the fiduciary duties being the prime responsibility
of the director towards the shareholder (Blomquist, 2006) failing which would result in personal liability to the
director (Scalise, 2005). However the responsibility of fiduciary duties is diluted by business judgement rule that
allows corporate managers to temper business decision making with their perceptions of social values (Clark, 1986;
Blair and Stout, 1999; Scalise, 2005; Fisch, 2006; Reinhardt and Stavins (2010)). The business judgment rule
essentially rates corporate managers higher than court in terms of taking business decision which otherwise may

Although the term sacrificing profits was associated to CSR by Elhauge, the article by Milton Friedman set the platform for

debate on the nature of CSR in terms of company profits.

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incur large transaction costs (Elhauge, 2005). In addition the managers are insulated from the shareholders
interference if they claim that their decisions (for public good) are based on long term interests of the firm
(Reinhardt and Stavins (2010)).One exception to the business judgment rule emerges when the decisions go so far
beyond the bounds of reasonable business judgment that their only explanation is bad faith (Blomquist, 2006, p.
699, Reinhardt and Stavins (2010)).
In contrast the Companies Act, 2013 was passed by Lok Sabha on December 12, 2012 followed by Rajya Sabha on
August 8, 2013 and confirmation from the president of India. The act, for the first time in progressive India has
legally bound companies with Rs 500 crore or more; or a turnover of Rs 1,000 crore or more; or a net profit of Rs 5
crore or more to have a CSR spend of at least 2% of their average net profits of past three years. In addition the act
has listed certain activities eligible to be termed as CSR activities and redefined CSR activities as not a charitable or
donation based action. Indias push on inclusive growth via CSR activities may not align with the fundamentals of a
market driven economy. The mandatory nature of the act will generate about Rs. 12,000 to Rs. 15,000 crore
annually and will include approximately 8000 companies. In order to increase the efficacy of CSR initiatives, the act
has created restrictive flow channels for dispersion of the collected funds into preformed categories targeting most
pressing issues in the field of education, health and nutrition, sanitation and livelihood.

Irrespective of law

permitting the corporations to design and implement CSR (voluntary) and in some cases law mandating CSR
inclusion, the competitive market forces create a constraint on progressive CSR initiatives. These constraints emerge
due to evolution of a business under competitive pressures. In the following section we take a look at CSR initiatives
from a business perspective.
3. Business Perspective
Market Dynamics: In a competitive arena especially in a market driven scenario, businesses are expected by the
stake holders to perform and flourish with minimalistic financial erosion. Under such pressures the service to non
stake holders may become burdensome and eventually lead to an unsustainable CSR initiative. The consensus on
CSR from business perspective is dichotomous in nature with a fraction of population confirming business benefits
of CSR while other fraction questioning the same. The detractors put forth three important arguments; 1) The very
definition of profit maximization and profit sacrificing questions the coexistence of business and CSR, 2) Business
personnel are trained and molded to take business based decisions and may be unfit to take decisions pertaining to
social benefit (Davis 1973), 3) CSR dilutes the business spread from core functions to non core functions. On the
other hand the supports of CSR argue with stating the long term self interest of the business along with the ability to
ward of government regulation(government intervention can be reduced by inducing self policing and satisfying the
society expectations) (Carroll et al. 2010). Another argument supports business has resources, and let them try
notion considering the pool of human resources and capital that a business generates (Davis 1973, p.
316).Combining this with a very effective argument of CSR being a proactive process than reactive gives corporate
(in general corporate is associated with proactive schemes involving planning, implementation and feedback

Srinivasan Radhakrishnan et al. / Procedia Economics and Finance 11 (2014) 68 75

process) more leverage over government and other organizations that implement costly and less efficient way of
dealing with problems after they have occurred (Carroll and Buchholtz 2009) (Carroll et al. 2010).In addition the act
of sacrificing profits in an ever tightening market scenario can only be possible if market imperfections exist.
Geographical monopolies, anti-takeover laws, subsidies, niche markets are some of the catalyst to create imperfect
market conditions. In such conditions the companies are able to pass on the CSR load to the consumers. Moreover
the investor behaviour also has an impact in the market position of a company. Investors pressurizing for green
technology implementation is going to generate capital at a slower pace for the company than an irresponsible
company that may be able to accumulate capital faster (eventually reducing cost of capital) and become leader in
capital market (Heinkel et al., 2001). The above discussion clearly illustrates the CSR implementation constraints
put forth by market dynamics. However we investigate further if market driven constraints terminate the opportunity
for existence of CSR initiatives. We look into several studies that have tried to assess the relationship between CSR
and financial performance. We believe that the nature of this relationship will trigger/inhibit more CSR initiatives
and enable businesses to overcome constraints posed by markets and structural definitions. Secondly we also look at
studies that have highlighted the business benefits (tangible/intangible) of CSR initiatives since financial
performance is not the only factor deciding the impact of a business.
CSR vs. Financial Performance: The phenomenon of accumulating capital leads us to ponder over a fundamental
win-win solution; can CSR lead to profitability? Several studies have explored the relation between CSR and
financial performance (Aupperle et al., 1985; Wood and Jones, 1996; Griffin and Mahon, 1997; Orlitzky et al.,
2003). Griffin and Mahon (1997) find a positive correlation between CSR and financial performance and the
inconsistencies in previous studies were attributed to methodical differences. However Roman et al., disagreed with
the interpretation of Griffin and Mahon and rendered it inconclusive. Mahon and Griffin (1999) responded to
Roman et al by stating interpretation biases. Orlitzkyet al., 2003 showed a positive relationship between CSR and
financial performance. A meta analysis of 167 studies conducted by Margolis et al. (2007) found that that 27 per
cent of the analyses show a positive relationship, 58 per cent show a non-significant relationship, and 2 per cent
show a negative relationship. The aforementioned study indicates a weak relationship between CSR and profitability
(neglecting the directionality of cause and effect). However they present strong evidence that reveals causality in
opposite direction (profitable companies tend to engage in CSR activities).Amidst of measuring impact of CSR on
financial performance, there are evidences of corporate accepting strong positive correlation on the subject (a survey
(2008) conducted by Economic Intelligence Unit (EIU) showed that majority of US business leaders observe
financial benefits of CSR). The CSR-financial performance relationship has been under continuous study and the
directionality (positive/negative) of the relationship will be iteratively updated in future with more studies on the
subject. At present the relationship is skewed towards positive side with difference in various studies cropping due
to methodical difference or interpretation bias.

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Business Benefits of CSR: CSR initiatives impact business on several fronts; 1. company image and reputation, 2.
competitive advantage, 3. cost savings and increase in sales revenue, and 4. employee engagement. The prime
reason for companies indulging in CSR initiatives is to enhance existing image and reputation of the company.
There is a fundamental difference between image and reputation. The former being the mental picture of the
company held by its audiences (Gray&Balmer 1998, 696) and the later aimed at long term evolution of company
perception on account of personal experiences, company performance and communication. The temporal
characteristics differ in case of image and reputation; image being susceptible to changes in short term based on
environment and reputation being long term in nature. Several empirical studies have found a positive correlation
between CSR and reputation (Schwaiger (2004); Fombrun & Wiedmann 2001).It is important to focus on reputation
and image since they are considered to influence the competitiveness of the company (Gray & Balmer 1998) which
shifts our discussion to the second point i.e. competitive advantage. A Fortune magazine (2003) article stated that
competitive advantage is one of the two main factors for companies to indulge in CSR activities. N. Smith argues
that companies can build a unique position in market if they carefully design their CSR strategies (Smith.N.C.,
2003). This uniqueness enables the companies to have a competitive edge over their respective competitors (Carroll
et al., 2010). In addition CSR also acts as a catalyst to build customer relationship and enhance their loyalty towards
the company (Pivatoet al.,(2008); Bhattacharya and Sen (2004, p. 10)). The positive impact of CSR initiatives also
influence external investments with investor seeking companies who have not attenuated their company ethics and
values and have good track record of employee satisfaction, community service and corporate governance (T.Smith
2005, p.64). Kuruczet al., in their work highlight the degree of influence of CSR initiatives on stakeholder behaviour
stating that the stakeholder will prefer a firm amidst their competitors in accordance with their CSR initiatives. The
CSR initiatives also have a positive impact on a firms existing employee pool by motivating them to indulge in
voluntary programs (COM 2001, 7) and it also influences potential employees. This feel good effect helps an
organization to retain its workforce and create a better working environment for them. Moreover the indirect effect
of CSR initiatives can be felt on the cost and revenue segment of an organization. Improved investor perception due
to CSR initiatives can enable the organization to access more capital and thereby impacting its costs. On the other
hand the enhanced brand image due to CSR driven product marketing helps the organization to improve its sales and
revenue (Carroll et al., 2010).There is sufficient evidence to point out monetary and non-monetary benefits of CSR
initiatives. However in order to mandate CSR initiatives based on the aforementioned benefits alone is not
sufficient. In order to ensure most benefits of CSR activities one needs to analyze the macro economic conditions
that will enable sustainable CSR programs across various strata of the society. We argue that introducing mandatory
CSR initiatives under stressed economic conditions may prove ineffective for the concerned stakeholders and
beneficiaries. At present India is experiencing a sluggish economic growth with decrease in industrial output
coupled with fall in GDP. In addition the rising inflation is adding pressure on the middle class earning group. With
poor profitability figures at the corporate level and inability by the earning population to exhibit income sharing
traits, the concept of mandatory CSR participation is questioned seriously. Though the objective of achieving

Srinivasan Radhakrishnan et al. / Procedia Economics and Finance 11 (2014) 68 75

inclusive growth by mandatory CSR initiatives is addressed to an extent, the organization will be pressurized to
perform better in order to maintain high returns. In a competitive environment with failing economy, customers are
soon drying up. Under such conditions the organizations cannot pass on CSR costs to the customers as they risk
losing them. We need to understand that the source of CSR initiatives is the organization. Expecting an organization
under severe competitive pressures and poor economic conditions to perform above average for the stake holders
and cater to a mandatory initiative which lies outside the core competencies may dry up the very organizations
which are expected to fuel the future CSR activities on a long term and sustainable basis.
4. Conclusion
Having argued against the timing of mandatory CSR law we believe that CSR initiatives are extremely crucial for
achieving part of inclusive growth vision. The Trickle Down theory of growth and development says that as an
economy develops and progresses, just as the privileged sections of the society reap benefits of the growth, these
benefits also percolate to the lower rungs of the society. The evidence for aforementioned theory is partially
supported by raise in GDP per capita and reduction in percentage of population below the defined national poverty
line. However the Trickle Down theory is diluted by the increase in Ginis Index reflecting the increase in income
inequality between existing social strata. In order to decrease the income inequality gap we need to bridge the gap
that exists in education, health and nutrition, and employment sector. Organizations being proactive rather than
reactive entities may help achieve a sustainable inclusive growth via various CSR initiatives. Making the
organizations a partner in long term growth should be our focus and that calls for proper CSR laws which are
coupled with macroeconomic environment.
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