July 2011 (ed Aug
30, 2012)
Profit – legally and
ethically generated - is one of the best measures of social value-add.
Clients buy services and products only when they can extract value from
them. Example, if a company sells a soap for Rs 10 (when it costs it Rs 8 say),
the customer buys it only because s/he can extract more than Rs 10 of value
from it (say Rs 12). Hence while the company generates profit in the
transaction, the customer also gains. A company’s profits therefore are a
measure of the cumulative value it injects into the society. If the soap making
company is earning crores of rupees in profits, it is doing so by adding value
to millions of people.
A business need not do any traditional ‘Corporate
Social Responsibility’ (CSR) activity for contributing to the society. In fact traditional CSR – like donating to
schools or hospitals - may not be a very economically efficient or effective
way of impacting developmental outcomes. As long as a business keeps generating
higher and higher profits ethically and legally, it will be making greater and
greater social contributions by injecting value to its customers, and helping
them inject value into their own lives or into the lives and businesses of
their customers who are next in the chain.
Donating to a school or a needy child or family
produces immediate visible outcomes. Therefore, these are typically more satisfying
personally, and may be necessary for keeping one motivated towards social
welfare. However, these may not be the most effective and efficient ways for
achieving desired outcomes. For example, the same effort, time and money
contributed towards governance reforms in education may help create more
schools[1] and raise more people out of poverty.
Perfect markets require information symmetry between
buyers and sellers, and absence of monopolies etc. Long term complex
developmental outcomes – like reduction of corruption, governance reforms,
environmental sustainability etc – whose
benefits are spread across several people and are difficult to quantify may not
find easy market based solutions. Even though these things will be economically
beneficial for many individuals and businesses, it may be difficult for these
objectives to raise business investments[2] due to complexity of information involved, long term diffused
results, collective action problem etc. Such efforts therefore may still largely
depend on traditional charitable and philanthropic support. Individuals (rather
than business organisations) should consider philanthropic donations (out of
their personal bank balance, rather than their organisations’ profits) towards solving
such social problems which do not find market solutions.
However, while organisations need not spend on CSR, they should
avoid ostentatious display of wealth (or control 'wasteful expenditure') and
instead focus on maximising profits. Also, they should remain respectful and
empathetic to the communities they are located within and people they interface
with.
Please watch the following video interview by Nobel Laureate Prof. F. A.
Hayek’s for more on these lines: http://vimeo.com/4063439
Ref: discussion here -
http://satyameva-jayate.org/2011/08/23/profit-charity
[1] Example,
refer to this seminal paper - Reinikka, R., & Svensson, J. (2004). Local Capture: Evidence from a
Central Government transfer Program in Uganda. The Quarterly Journal of
Economics , 119 (2), 679-705.
[2] There are some interesting attempts
though. Check this out: http://www.ted.com/talks/shaffi_mather_a_new_way_to_fight_corruption.html
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