Social Responsibilities of Business and Business Ethics

Written and reviewed by Rohit Singh, Computer Science & Commerce faculty at UniDrill (MCA, Osmania University · 6 years teaching). Based on NCERT Business Studies Class XI, Chapter 6.

Two paint factories, one river: who is "responsible"?

Two paint factories stand on the same river. Both hold licences and pay their taxes on time. Factory A treats its waste before releasing it, pays for a school in the nearby village and tells its customers exactly what is in the tin. Factory B does only what the law forces it to do and nothing more. Neither is breaking the law, yet most people would say that only one of them is behaving responsibly.

That gap between what the law demands and what society expects is the whole chapter. A business exists because society allows it to use land, labour, water and customers' trust. In return, society expects the business to care about the people and the environment it affects, not only about its profit.

What social responsibility means

Social responsibility is the obligation of a business to take decisions and perform actions that are desirable in terms of the objectives and values of society. It means respecting society's aspirations alongside the owners' profit interest.

The key idea to lock in is that social responsibility is broader than legal responsibility. Law sets the minimum. Social responsibility starts where the law stops and depends on voluntary action by the business.

Why it matters. This pair is the favourite assertion-reason set in this chapter. If an option says "social responsibility is the same as compliance with law" or "narrower than legal responsibility", it is wrong.

Beyond the textbook. For the exam: social responsibility is voluntary and goes beyond the law. In reality: for large companies, spending on CSR has become a legal requirement under Section 135 of the Companies Act, 2013. So one activity can be both. The exam still treats the broad idea of social responsibility as voluntary, and treats the Section 135 spending rule as a separate legal provision.

Corporate social responsibility under the Companies Act, 2013

Section 135 (often written "Clause 135" in question papers) makes CSR a legal duty for bigger companies. A company must follow it if it crosses any one of the three limits in the table.

Such a company must form a CSR Committee with at least one independent director and spend at least 2% of its average net profit of the previous three years on CSR activities.

Worked example. Sundar Textiles Ltd has turnover of Rs. 400 crore and net worth of Rs. 120 crore. Its net profit in the last three years was Rs. 4 crore, Rs. 6 crore and Rs. 8 crore. The latest net profit of Rs. 8 crore crosses Rs. 5 crore, so CSR applies even though turnover and net worth are below their limits. The average of the three years is (4 + 6 + 8) ÷ 3 = Rs. 6 crore, so the minimum CSR spend is 2% of Rs. 6 crore = Rs. 12 lakh.

Pause and predict: a company has turnover of Rs. 900 crore, net worth of Rs. 400 crore and net profit of Rs. 3 crore. Does Section 135 apply?

Check your answer: No. It fails all three limits: turnover is below Rs. 1,000 crore, net worth is below Rs. 500 crore and net profit is below Rs. 5 crore. Meeting any single limit would have been enough.

Should business be socially responsible? Both sides

Businesspeople and thinkers have argued over this for decades. Learn the lists by their counts, because NTA asks "which of these belongs to which list".

In practice, businesses are moving towards social responsibility because of seven forces.

Why it works this way. Caveat emptor made sense when buyers dealt face to face with a local seller and could inspect goods. With mass production, packaged goods and mass media, buyers know their rights and have many choices. A seller who cheats loses the customer to a competitor, so "customer is king" is also good business.

The four kinds of responsibility

The chapter ranks responsibilities from the one a business has least freedom over to the one it has most freedom over.

Pause and predict: a car maker recalls a model with a faulty airbag, although no law forced it to. Which kind of responsibility is this?

Check your answer: Ethical. Society expects a maker to protect buyers even where the law is silent. If the recall were a legal order it would be legal responsibility. A free donation to a hospital that nobody expected would be discretionary.

Responsibility towards those the business touches

A business answers to several groups at once. Matching each group to its duties is a common question type.

Business and the environment

The environment is everything that surrounds us, natural and man-made. Pollution is the release of harmful substances that the environment cannot absorb, and a large part of it comes from industrial production.

Beyond the textbook. For the exam: air pollution is linked with the ozone layer problem and global warming, and they appear together in the list of environmental problems. In reality: these are two different problems with different causes. Ozone depletion is caused mainly by chemicals such as CFCs and lets in more ultraviolet light. Global warming is caused mainly by greenhouse gases such as carbon dioxide and methane. Do not use one as the explanation for the other in a science answer, but in a business answer follow the chapter's list.

A business should control pollution for five reasons, each of which also helps its own bottom line.

The business can act in seven steps: a definite commitment by top management; sharing that commitment with every division and employee; clear policies on good materials, better technology, scientific waste disposal and employee training; complying with the law; taking part in government programmes; assessing the costs and benefits of pollution control from time to time; and holding workshops with suppliers, dealers and customers.

Environmental problems and laws to know. The United Nations lists eight global environmental problems: ozone depletion, global warming, solid and hazardous wastes, water pollution, freshwater quality and quantity, deforestation, land degradation and danger to biological diversity. India's steps are shown below.

The government also set up the Department of Environment (1980), the National Afforestation and Eco-development Board and the Environment Action Plan.

Business ethics

Ethics is the body of moral values that society attaches to human actions. Business ethics means the socially determined moral principles that should govern business activities. It goes beyond the law and government rules and describes fair and just conduct as society expects it.

A company cannot become ethical by announcing a slogan. It needs five working elements.

Six ground rules apply to everyone: be trustworthy, respect others, own your responsibility, be fair in dealings, care for the well-being of others and prove to be a good citizen.

A realistic example: Kaveri Paints

Kaveri Paints Ltd, a made-up mid-size company, earns a net profit of Rs. 9 crore in a year. It treats factory effluent before release (a pollution-control step that cuts its penalty risk), prints the full ingredient list on every tin (an ethical duty to consumers), pays workers above the minimum wage and lets them form a union (duty towards workers). It also spends 2% of its average three-year profit on a village school and donates tents when a nearby town floods. The treatment plant and the CSR spend are legal duties, the ingredient list is an ethical one and the flood donation is discretionary. A single company shows all four kinds of responsibility at the same time.

Exam traps

60-second revision

Where this chapter connects

• Previous: Private, Public and Global Enterprises describes the companies that Section 135 applies to.
• Next: Formation of a Company shows how the company form that carries CSR duties is created.
• Class XII link: Consumer Protection turns the consumer duties listed here into legal rights, and Business Environment covers the social and legal forces around a business.