Mandatory Corporate Social Responsibility: The India Experience

Abstract

The idea that companies service a wide range of stakeholders dates back to the 19th Century but has gained increasing traction in more recent times. The question is what to do where the corporate sector fails to keep pace with societal expectations. The response of the Indian government was to make it mandatory for large corporations to spend funds on corporate social responsible (CSR) activities. In this paper, we investigate the success of this legislation both for the companies and the intended beneficiaries. We find that the impact of the legislation has fallen short of expectations both in terms of the volume of CSR expenditure generated and the activities to which it has been directed. In particular, we find that the legislation has had a negative effect on the relationship between CSR and profitability which in turn can have a perverse effect on the willingness of companies to spend in this area. We conclude that greater care has to be taken when implementing mandatory CSR if it is to be effective.