All human activities have an individual and collective effect. In early stages of civilization there were no rules to regulate human activities. Then, religion became a dominant force in human life and it was religion which laid rules for social conduct. Till early seventeenth Century perhaps restrictions placed by religion-based customs were good enough to regulate human activities, as the impact of such activities was quite limited. Then slowly, the government or the State stepped in to regulate society.
Till early nineteenth Century, volumes of manufacturing and trading activities of businesses were relatively small. After the Industrial Revolution in the Western world, a new entity called limited company or corporation came into existence and soon it became prominent. Today, business volumes of corporations are very huge and they now have multi-centered operations; a good many of them have become transnational corporations, with enormous financial power.
As a number of corporations in business rapidly increased and some of them became very powerful, direct and indirect impact of their business activities on different sections of the societies, to whom the corporations provided goods and services, attracted wide public attention. Earlier, the thinking was that so long as a corporation was doing business as per law, it could be held accountable only to shareholders, who were its legal owners. However, during the last fifty years or so this thinking has changed. There is increasing recognition that business activities of corporations, particularly of those with huge financial power, need to be regulated for ensuring the welfare of all sections of the society.
We know that interests of a corporation’s shareholders-who may be regarded as its primary stakeholders-are taken care of by the Board of Directors of the corporation and they are also protected by statutory financial audit of the corporation. View that interests of other stakeholders of the corporation, namely, employees, consumers, society at large and the government, need to be given equal attention, gained ground. This is how idea of social control of business started getting attention of lawmakers.
As a part of social control of business, many new laws, for example, (a) controlling monopolies, (b) enhancing consumer welfare through consumer protection and (c) control of pollution, have already been enacted. Then there are government authorities who regulate specialized businesses like banking, insurance and telecommunications. Thus, endeavor is that business activities of all those corporations which operate in different areas of commerce and industry do not just comply with rules, but they also do business keeping in mind broader objective of enhancing society’s welfare.
Financial audit of corporations is one method of supervision and regulation of corporations. However, there are obvious limitations of financial audit. To overcome shortcomings of financial audit, idea of ‘social audit’ was suggested by those who thought that mere legal compliance by corporations was not good enough.
When social audit was first conceived for business organizations, protecting the interests of consumers was regarded as top priority. Later, (a) impact of corporations’ industrial activities on the environment and (b) need for ensuring equal opportunities in employment and for affirmative action for disadvantaged sections of society were included as objectives of social audit. In the current scenario, the impact of industrial activities on the environment is recognised as long-lasting impact, and it is also widely accepted that this impact needs to be monitored on a regular basis.
In our country, it was famous industrialist J R D Tata, late Chairman of Tata group, who first introduced the topic of social audit in his speech addressed to shareholders of Tata Steel in an Annual General Meeting. JRD Tata went further and ensured that Tata Steel conducted first social audit results of which were made public.
Today, the concept of social audit has been widened. ‘Corporate Social Responsibility’ or CSR activities are in a way an extension of the idea of social audit. Expenditure on CSR activities is now mandatory as per our Companies Act for certain category of companies-companies with a net worth of Rs 500 crore or more, or a turnover of Rs 1,000 crore or more, or net profit of Rs 5 crore or more are required to spend 2% of their average net profit of the preceding three years on CSR activities.
CSR activities are expected to provide opportunities to the corporate world to spend a part of their profits on socially relevant initiatives such as promoting gender equality, empowering women, promoting education, eradicating hunger, poverty, malnutrition, rural development projects and conserving natural resources.
Active participation of companies in CSR activities underscores contemporary relevance of social control of business. I think such participation by all other companies, who are outside the company law provisions, needs to be welcomed.
Our discussion on social control of business would be incomplete without taking note of social audit of public or government expenditure. Social audit of business and social audit of government expenditure are two related but different concepts and in the current context the latter is equally important. As in the case of activities of businesses, governments too are concerned about the impact of public expenditure. Objective for which a good part of public expenditure is incurred is that it will have a positive impact on the lives of millions of ‘below poverty line’ or ‘BPL” families. I think this objective must not be lost sight of while conducting social audit.
(Narendra M Apte, a Chartered Accountant, is a free lancer.)
Facts and views mentioned in the article are that of the author