Bits of Interest

1. SEBI and Auditors: It was reported a few days ago that the Bombay High Court has allowed SEBI to proceed with its enquiry against the auditors in connection with the Satyam scam. The judgment is now available on the Bombay High Court website.

2. Satyam Saga: With all the accused persons now having been released on bail, questions are being raised regarding the investigative and prosecutorial processes in India. On the other hand, the current state of affairs may be viewed as resulting from the undue complexity of the case. See Shyamal Majumdar in the Business Standard and this discussion on CNBC.

3. Foreign Investment in Pharma: The Department of Industrial Policy and Promotion has released a discussion paper titled “Compulsory Licensing” that seeks to ensure the “availability and affordability of pharmaceutical products” to Indian consumers. Noting the several recent instances of takeovers of Indian pharma companies by multinationals, it seeks to restrict the foreign investment regime in the pharma industry. One of the options proposed is as follows:

Presently, investment up to 100% in the pharmaceutical sector is on the automatic route. This could be shifted to the government route so that proposals for mergers and acquisitions in this important sector could be scrutinized by the FIPB. This could be a way of monitoring whether new technology is being brought in by a foreign company while taking over an Indian company.

4. CSR: Mandatory or Voluntary: We had earlier discussed the merits and demerits of imposing mandatory CSR requirements among companies. In this Wall Street Journal column, Aneel Karnani is agnostic about managers’ ability and their motivation to pursue CSR. He notes:

Very simply, in cases where private profits and public interests are aligned, the idea of corporate social responsibility is irrelevant: Companies that simply do everything they can to boost profits will end up increasing social welfare. In circumstances in which profits and social welfare are in direct opposition, an appeal to corporate social responsibility will almost always be ineffective, because executives are unlikely to act voluntarily in the public interest and against shareholder interests.

Executives are hired to maximize profits; that is their responsibility to their company’s shareholders. Even if executives wanted to forgo some profit to benefit society, they could expect to lose their jobs if they tried—and be replaced by managers who would restore profit as the top priority. The movement for corporate social responsibility is in direct opposition, in such cases, to the movement for better corporate governance, which demands that managers fulfill their fiduciary duty to act in the shareholders’ interest or be relieved of their responsibilities. That’s one reason so many companies talk a great deal about social responsibility but do nothing—a tactic known as greenwashing.

Managers who sacrifice profit for the common good also are in effect imposing a tax on their shareholders and arbitrarily deciding how that money should be spent. In that sense they are usurping the role of elected government officials, if only on a small scale.

Karnani then discusses the role of various players such as the government/regulators and civil society as well as of self-regulation by companies, and then concludes:

In the end, social responsibility is a financial calculation for executives, just like any other aspect of their business. The only sure way to influence corporate decision making is to impose an unacceptable cost—regulatory mandates, taxes, punitive fines, public embarrassment—on socially unacceptable behavior.

Pleas for corporate social responsibility will be truly embraced only by those executives who are smart enough to see that doing the right thing is a byproduct of their pursuit of profit. And that renders such pleas pointless.

Such arguments, often adopted by opponents of the social responsibility movement, tend to take a pure economic approach. That approach does not call for voluntary CSR, let alone mandatory CSR. Such an extreme stance may not be beyond question, because both regulation and practice are beginning to recognize the existence of interests other than shareholders that corporate managers must cater to. In India, the Corporate Social Responsibility Voluntary Guidelines 2009 exhort companies to act in a socially responsible manner, while there are plenty of instances where reputable Indian companies have already embarked on serious CSR initiatives.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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