The Rise of the Private Company

Due to the late 18th century abandonment of mercantilist economic theory and the rise of classical liberalism and laissez-faire economic theory due to a revolution in economics led by Adam Smith and other economists, corporations transitioned from being government or guild affiliated entities to being public and private economic entities free of government direction. In 1776, Adam Smith wrote in the Wealth of Nations that mass corporate activity could not match private entrepreneurship, because people in charge of others’ money would not exercise as much care as they would with their own.

In the United States, government chartering began to fall out of vogue in the mid-19th century.

Corporate law at the time was focused on protection of the public interest, and not on the interests of corporate shareholders. Corporate charters were closely regulated by the states. Forming a corporation usually required an act of legislation. Investors generally had to be given an equal say in corporate governance, and corporations were required to comply with the purposes expressed in their charters. Many private firms in the 19th century avoided the corporate model for these reasons (Andrew Carnegie formed his steel operation as a limited partnership, and John D. Rockefeller set up Standard Oil as a trust). Eventually, state governments began to realize the greater corporate registration revenues available by providing more permissive corporate laws. New Jersey was the first state to adopt an “enabling” corporate law, with the goal of attracting more business to the state. Delaware followed, and soon became known as the most corporation-friendly state in the country after New Jersey raised taxes on the corporations, driving them out. New Jersey reduced these taxes after this mistake was realized, but by then it was too late; even today, most major public corporations in the United States are set up under Delaware law.

By the beginning of the 19th century, government policy on both sides of the Atlantic began to change, reflecting the growing popularity of the proposition that corporations were riding the economic wave of the future. In 1819, the U. S. Supreme Court granted corporations a plethora of rights they had not previously recognized or enjoyed. Corporate charters were deemed “inviolable”, and not subject to arbitrary amendment or abolition by state governments. The Corporation as a whole was labeled an “artificial person”, possessing both individuality and immortality.

At around the same time, legislation in the United Kingdom was similarly freeing the corporation from historical restrictions. In 1844 the British Parliament passed the Joint Stock Companies Act, which allowed companies to incorporate without a royal charter or an Act of Parliament. Ten years later, limited liability, the key provision of modern corporate law, passed into English law: in response to increasing pressure from newly emerging capital interests, Parliament passed the Limited Liability Act 1855, which established the principle that any corporation could enjoy limited legal liability on both contract and tort claims simply by registering as a “limited” company with the appropriate government agency.

This prompted the English periodical The Economist to write in 1855 that “never, perhaps, was a change so vehemently and generally demanded, of which the importance was so much overrated. The major error of the second part of this judgment was recognized by the same magazine more than 70 years later, when it claimed that, “[t]he economic historian of the future . . . may be inclined to assign to the nameless inventor of the principle of limited liability, as applied to trading corporations, a place of honor with Watt and Stephenson, and other pioneers of the Industrial Revolution.

Indian Context

Corporate social responsibility is necessarily an evolving term that does not have a standard definition or a fully recognized set of specific criteria. With the understanding that businesses play a key role on job and wealth creation in society, CSR is generally understood to be the way a company achieves a balance or integration of economic, environmental ,and social imperatives while at the same time addressing shareholder and stakeholder expectations. CSR is generally accepted as applying to firms wherever they operate in the domestic and global economy. The way businesses engage/involve the shareholders, employees, customers, suppliers, governments, non-governmental organizations, international organizations, and other stakeholders is usually a key feature of the concept. While business compliance with laws and regulations on social, environmental and economic objectives set the official level of CSR performance, CSR is often understood as involving the private sector commitments and activities that extend beyond this foundation of compliance with laws.

Even much before the issue became a global concern, India was aware of corporate social responsibility (CSR), due to the efforts of organisations such as the Tata Group. (Around 66 per cent of Tata Sons, the holding group of the Tata Group, is today owned by a trust).

Corporate companies like ITC have made farmer development a vital part of its business strategy, and made major efforts to improve the livelihood standards of rural communities. Unilever is using micro enterprises to strategically augment the penetration of consumer products in rural markets. IT companies like TCS and Wipro have developed software to help teachers and children in schools across India to further the cause of education. The adult literacy software has been a significant factor in reducing illiteracy in remote communities. Banks and insurance companies are targeting migrant labourers and street vendors to help them through micro-credits and related schemes.

Research has revealed that over 90 per cent of all major Indian organizations surveyed were involved in CSR initiatives. In fact, the private sector was more involved in CSR activities than the public and government sectors. The leading areas that corporations were involved in were livelihood promotion, education, health, environment, and women’s empowerment. Most of CSR ventures were done as internal projects while a small proportion were as direct financial support to voluntary organizations or communities.

In a survey carried out by the Asian Governance Association, which ranks the top 10 Asian countries on corporate governance parameters, India has consistently ranked among the top three along with Singapore and Hong Kong, for the last eight years.

Several foundations run by corporate houses plan to devise a common strategy to ensure transparency in their social and community development operations, such as tracking spending in and progress of such projects in their annual reports. The effort is significant because it brings together a wide range of Indian companies to share ideas on innovating sustainable programmes.

Audit firm like KPMG will partner with corporates to offer guidance on evaluating corporate social responsibility or CSR programs—a trend companies are slowly embracing as India’s expanding economy contrasts sharply with growing local protests over land for future industrial projects.

CSR could prove to be a valuable asset in an age of mergers and acquisitions, especially as it helps companies spread their brand name, the new network will also serve as a common ground to lobby with the government for tax exemptions and safeguard other interests in the future.

An estimated 100 corporate foundations and 25 foreign firms are involved in CSR activities in India, but statistics on input and output are elusive. The Indian corporate sector also has been spending crores on social expenditure during every financial year. Quoting from a government report, companies drew a total exemptions of Rs5, 500 crore under income-tax laws last year. These figures sound improbable as Indian companies still do not distinguish between philanthropy and internal practices to benefit stakeholders such as employees and community.

Companies, too, continue to rely on different models to earmark its social expenditure, making it difficult to measure the overall impact. For instance, the Steel Authority of India Ltd (SAIL), the country’s largest steel company, had a budget provision of Rs114 crores on CSR in 2008-09; this was 2% of its profit after tax, exclusive of dividend tax. Yet others, such as Tata Steel Ltd, which runs 850-bed hospital and rural projects in 800 villages around Jamshedpur, spends an average of Rs150 crore as part of its annual revenue expenditure. What eventually makes up for CSR of a company ultimately depends on leadership and the way company operates.