Social responsibility of business

1. Meaning

Social responsibility of business is the obligation of business to make decisions and take actions that are desirable in terms of the objectives and values of society, beyond what the law or economic interest alone requires. Howard R. Bowen, in Social Responsibilities of the Businessman (1953), defined it as “the obligations of businessmen 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.” Keith Davis added the “iron law of responsibility”: in the long run, those who do not use power in a way society considers responsible will tend to lose it.

2. Views on social responsibility

• Classical view (Milton Friedman). In his essay in the New York Times Magazine (13 September 1970), “The Social Responsibility of Business Is to Increase Its Profits”, Friedman argued that managers are agents of shareholders, and that spending their money on social causes is a hidden tax; the business duty is to make profit within the rules of the game.
• Modern (stakeholder) view. Business is part of society and owes duties to all who are affected by it (R. Edward Freeman’s stakeholder theory, 1984).
• Carroll’s pyramid (Archie B. Carroll, 1991): four layers of responsibility, from the base up: economic (be profitable), legal (obey the law), ethical (do what is right and fair), and philanthropic (be a good corporate citizen).
• Gandhi’s trusteeship. The wealthy hold wealth in trust for society. The idea influenced Indian business families such as the Tatas and Bajajs.

3. Why business accepts social responsibility (arguments for)

1. Long-run self-interest: a healthy, educated community provides customers and workers.
2. Public image and goodwill: consumers and investors prefer responsible firms.
3. Avoiding government regulation: voluntary action pre-empts stricter laws.
4. Society’s resources: business uses land, water, infrastructure and people provided by society and must give back.
5. Power and responsibility go together (Davis’s iron law).
6. Resources and skills: business has the money and management ability to solve some social problems.
7. Moral and ethical justification, and the trusteeship idea.
8. Pressure groups: consumer, environmental and labour movements.
9. Legal requirement: in India, mandatory CSR for large companies.

4. Arguments against

• Violates the profit-maximisation duty to shareholders (Friedman).
• Raises costs and prices, so consumers pay for it.
• Managers lack skill in social work.
• Business already has too much power; social activity adds more.
• Lack of accountability: managers are not elected by society.
• Difficult to measure social performance.

5. Responsibility towards different groups

Examples (June 2025 asked for suitable examples): the Tata group’s trusts, which own the majority of Tata Sons and fund hospitals and institutes such as the Tata Institute of Fundamental Research; Infosys Foundation’s work in education and health; ITC’s e-Choupal for farmers and its watershed programmes; Amul’s work for dairy farmers.

6. CSR under the Companies Act, 2013

India made CSR spending mandatory, the first country to do so by statute. Under section 135:

• It applies to every company with, in the immediately preceding financial year, a net worth of 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.
• The board must constitute a CSR Committee of three or more directors, at least one of them independent where the company must have independent directors (a committee is not required where the amount to be spent does not exceed Rs. 50 lakh).
• The company must spend at least 2 per cent of its average net profits of the three immediately preceding financial years on activities listed in Schedule VII (eradicating hunger and poverty, education, gender equality, environmental sustainability, heritage, armed forces veterans, sports, PM’s relief funds, rural development, slum development, disaster management).
• Since the 2019 amendment (in force from January 2021), unspent amounts must be transferred to a Schedule VII fund, or, for ongoing projects, to an Unspent CSR Account within 30 days and spent within three years. Non-compliance attracts a penalty.

How this is examined

January 2026 asked “Explain the social responsibility of business” (10 marks) and “Why do business organisations get involved in social responsibility?” (16 marks); June 2025 asked for responsibilities towards various sections of society with examples (16 marks) and the importance of social responsibility as a 6-mark note; February 2025 set social responsibilities of business in the compulsory question. Meaning, two views, reasons, stakeholder table, section 135.