We are all individuals but also social beings. Do you agree?
It is only natural that we depend on each other in a society. But how do we give back to the community we live in? This applies not only to individuals but to corporations as well. Corporations function in a particular environment. They use the resources of the community. So how do they return this favour? The idea of giving back forms the crux of Corporate Social Responsibility (CSR).
Read further to know what CSR is and why it is essential.
What is CSR?
Corporate social responsibility, as the term suggests, is the duty of companies towards society. It is a concept through which companies consider themselves accountable to the community they work in and engage in activities that benefit their surroundings.
Society, in this case, comprises all stakeholders of companies, the public, the physical environment, etc.
You may also like: Greenfield investment: Overview
Why should companies engage in CSR activities?
Companies operate in a specific environment where they use various resources that have environmental and social impacts. So, to reduce any negative implications and have a positive impact on its communities, corporations engage in CSR activities.
CSR is crucial in maintaining a sustainable environment for future generations.
Some companies do it through taking part in environmental activities, some others do it through philanthropic activities, while other companies may do it through promoting social causes like diversity and inclusion. It involves companies using a portion of their profits in ethical ways to contribute to the betterment of society.
Types of CSR
It includes the responsibilities of companies towards their physical surroundings. Companies take initiatives such as shifting to sustainable and environment-friendly products, reducing pollution during manufacturing, ensuring proper waste disposal, promoting the habit of recycling and reusing, etc.
They take corrective measures in their existing processes and take up new initiatives like awareness rallies, tree-planting events, etc.
The ethical responsibility of companies deals with following ethical and fair practices while treating the stakeholders. It includes treating employees with respect and giving equal opportunities for growth to all employees irrespective of age, gender, race and sexual orientation.
The ethical practices under CSR also extend towards treating customers and vendors with respect and fairness.
Another significant component of ethical responsibility involves being bound by the law. Companies must abide by the legal rules applicable in their area.
Philanthropic initiatives define how companies give back to the public and society. It refers to those activities of goodness that bring a positive change to the lives of other beings.
Such activities include donations to orphanages and old age homes, education funding and medical treatment for the needy, taking part in fundraisers, conducting medical camps and awareness campaigns on health-related issues in backward areas, etc.
Economic activities refer to utilising the company’s profit to improve its core operations. It includes financial responsibility, where the company works on improving its financial health to fulfil all the other responsibilities.
Various CSR models determine how companies should fulfil their social responsibilities. These models divide CSR activities into philanthropic, ethical, legal and economic activities.
- Carroll’s pyramid model – The pyramid model aims to give a hierarchical structure to CSR. It suggests that economic activities are the primary responsibilities of companies, followed by legal, ethical and philanthropic initiatives.
- Intersecting circles – True to their name and image, these intersecting circles believe that the different types of CSR activities are interconnected. They suggest that the activities must happen in parallel and not rely on any ranking.
- Concentric circle – A combination of pyramid and intersecting circles, this model suggests that economic activity is the core while all other activities are interconnected.
Benefits of CSR activities
CSR has positive impacts on all stakeholders of a company.
- Firstly, the physical environment of the company benefits, thereby improving the livelihood of people around.
Consider the example of a factory that emits harmful smoke against a factory responsible for its environment. The lives of people around the second factory will be better.
- CSR improves the brand image and goodwill of companies. As a result, sales, share prices, demand for products and stocks witness a rise.
- CSR helps companies remain in the good books of their vendors. It allows companies to maintain healthy business relationships.
- Employees working in companies with CSR activities have a sense of satisfaction and contentment, knowing they are part of greater causes. So, CSR activities help in employee motivation and retention.
Also read: What does the EV boom mean for auto stocks?
Corporate social responsibility examples in India
According to Section 135 of the Companies Act of 2013 in India, companies must set aside 2% of the average profit of the last three financial years towards CSR activities every year.
CSR is mandatory for companies falling in any of the below categories:
- Net worth >= ₹500 crores
- Turnover >= ₹1,000 crores
- Net profit >= ₹5 crores
Let us go through a real-world example of the CSR activities of the TATA Group.
“In a free enterprise, the community is not just another stakeholder in business, but is in fact the very purpose of its existence.” – Jamsetji Tata.
TATA has CSR activities in different sectors like education, skill development, health care, water and sanitation, etc.
The adult literacy programme by Tata Consultancy Services:
The program aimed to provide computer-based education to adults in backward areas and help the government in improving the country’s literacy rates. With its implementation across 17 states in India, the programme has helped over 10,00,000 adults, primarily women. The program has also been beneficial in prisons for reforming the inmates.
A company’s potential is not dependent on its financial performance alone.
The vision, ideologies and contribution to society speak volumes about a company. Hence, companies need to involve themselves in CSR activities that promote a healthy and better community.
CSR sees beyond business; it encourages co-existence and makes the world a happier place to live in.