Column : Corporate virtue in India

CSR is fine but it does not preclude a firm making large profits through unethical business behaviour

In previous columns, I discussed the concept of virtuous growth, which encompasses inclusive growth. Virtuous growth includes promoting fairness, but it also means avoiding societal change that corrupts and degrades positive human values. I discussed how virtuous growth might be promoted in practical terms, in the realms of governance and civil society. Here I want to discuss the role of business, specifically large firms that are India's leading institutions of capitalism. What can and should their role be?

One idea of virtue is that of corporate social responsibility (CSR). This is fine as far as it goes, but it does not preclude a firm making large profits through unethical business behaviour and then allocating a small amount for superficial do-good efforts. Business tycoons also set up charitable foundations with their wealth, but, like CSR, these have no impact on the manner of doing business. The key desideratum is more ethical behaviour at the core of business practices.

One problem in effecting better business behaviour is that corruption is endemic in Indian society. The corruption scandals that are so common in government functioning also involve corruption by private sector firms. People in government demand bribes, and people in business supply them, in an unholy equilibrium. How can this equilibrium be changed? Kaushik Basu's proposal to decriminalise bribe-giving (but not bribe-taking) focused on situations in which individuals are entitled to a government service but are forced to make illegal payments to receive it. At the Delhi Economics Conclave earlier this month, Avinash Dixit of Princeton offered a different focus and proposal for reducing corporate corruption.

If corporations need government approvals, or are competing for government as a client, they may pay bribes to avoid being at a competitive disadvantage if "everyone else is doing it." Dixit proposes to address this problem through collective action mechanisms. In particular, he advocates self-regulation by the major industry associations, with clear codes of ethical conduct, explicit pledges, and mechanisms for punishing violations. The judicial system would have to create a framework for recognising such extra-judicial mechanisms, just as it does in the case of special arbitration. Existing examples of such institutions are university and military honour codes, and the workings of local associations to manage common pool resources (studying which earned Elinor Ostrom an Economics "Nobel"). Implementing such mechanisms is not easy, nor are they ever perfect, but they can work.

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