Business ethics and CSR

Business Administration (BBA/BMS) · Strategy and business · free study notes for exams, placements and interviews

In short

Business ethics is the study of what is right and wrong in commercial decisions; Corporate Social Responsibility (CSR) is the company's accountability for its social and environmental impact beyond profit. India is the first country to make CSR spending statutory - Section 135 of the Companies Act, 2013 obliges qualifying companies to spend 2% of average net profits. The topic carries steady marks in BBA/BMS strategy, business environment and corporate governance papers, and appears in interviews at consultancies, banks, CSR foundations and the compliance teams of listed companies.

Explained

Business ethics: frameworks and application

Business ethics - applying moral principles to business conduct: pricing, advertising, hiring, data use, bribery, environmental impact.
Normative theories: *utilitarianism* (judge by greatest good for the greatest number - outcome-based); *deontology* (Kant: duties and rights, some acts wrong regardless of outcome); *virtue ethics* (what a person of good character would do); *justice/rights approach* (fair distribution and due process).
Kohlberg's stages of moral development: pre-conventional (reward/punishment) → conventional (law and social approval) → post-conventional (universal principles). Used to explain why employees behave ethically mainly out of fear versus conviction.
Ethical dilemmas arise where two duties conflict (loyalty to employer vs public safety), not where the answer is obvious.
Institutionalising ethics: code of conduct, ethics training, ethics officer, vigil mechanism / whistle-blower policy (mandatory under Section 177 of the Companies Act, 2013 for listed companies and certain others), disciplinary action, ethical audits.
Common ethical failures: insider trading, mis-selling financial products, bribery, false advertising, cartel pricing (penalised by the Competition Commission of India), window-dressing accounts, data privacy breaches (now governed by the Digital Personal Data Protection Act, 2023, being notified in phases).

CSR: concepts and models

CSR - the obligation to operate so that society and the environment gain, not only shareholders.
Carroll's pyramid (four responsibilities, bottom up): economic (be profitable) → legal (obey the law) → ethical (do what is right) → philanthropic (be a good corporate citizen).
Friedman's view (shareholder theory): the only social responsibility of business is to increase profits lawfully; social spending is a tax on shareholders. Stakeholder theory (Freeman): the firm must balance shareholders, employees, customers, suppliers, community, government and environment.
Triple bottom line: People, Planet, Profit - performance reported on three accounts.
Arguments for CSR: licence to operate, brand and talent attraction, risk reduction, long-run profitability. Against / limitations: cost, dilution of focus, lack of social expertise, "greenwashing", and in India a tendency to treat CSR as cheque-writing compliance rather than strategy.
CSR vs ESG: CSR is the company's voluntary/statutory social action; ESG is how investors measure environmental, social and governance performance - disclosure-driven and rated externally.

CSR law in India - Section 135, Companies Act 2013

Applicability (any one threshold in the immediately preceding financial year): net worth ≥ ₹500 crore, or turnover ≥ ₹1,000 crore, or net profit ≥ ₹5 crore.
Obligation: spend at least 2% of the average net profits of the three immediately preceding financial years, net profit computed under Section 198. If fewer than three years have elapsed, the average of the years available is used.
CSR Committee: at least three directors including one independent director; a company whose CSR obligation is up to ₹50 lakh need not constitute a committee - the Board discharges the function.
Schedule VII lists permitted activities: eradicating hunger and poverty, education and skill development, gender equality, environmental sustainability, national heritage, armed-forces veterans, sports, PM National Relief Fund / PM CARES, technology incubators and research, rural and slum development, disaster relief.
Not CSR: normal course of business, activities benefiting only employees, political contributions, sponsorship for marketing benefit, statutory fines.
Unspent amounts: amounts relating to an ongoing project go to a separate Unspent CSR Account within 30 days of the year-end and must be spent within three financial years, failing which they go to a Schedule VII fund; other unspent amounts go to a Schedule VII fund (e.g. PM National Relief Fund) within six months of the year-end.
Excess spending may be set off against the obligation of the succeeding three financial years, subject to Board resolution and conditions.
Disclosure: CSR policy, composition of the committee and the annual CSR report on the website and in the Board's report; projects implemented through agencies registered on Form CSR-1 with the MCA; impact assessment required for large companies and large projects.
Penalties: monetary penalty on the company and officers for failure to transfer unspent amounts (since the 2020-21 amendments, the default is civil, not criminal). Exact penalty figures and the impact-assessment thresholds have been amended more than once - check the current CSR Rules before quoting them.
Listed-company reporting: SEBI's Business Responsibility and Sustainability Report (BRSR), built on the National Guidelines on Responsible Business Conduct (NGRBC), is mandatory for the top listed companies by market capitalisation, with assured "BRSR Core" indicators being phased in - the coverage list expands year by year.

Key points

Business ethics - moral principles applied to business decisions; CSR - accountability for social and environmental impact.
Section 135 - India's statutory CSR: 2% of three-year average net profit, triggered by ₹500 cr net worth / ₹1,000 cr turnover / ₹5 cr net profit.
Section 198 - the prescribed method of computing net profit for CSR (not book profit, not taxable profit).
Schedule VII - the closed list of eligible CSR activities; spending outside it is not CSR.
CSR committee - 3 directors incl. one independent; not needed if obligation ≤ ₹50 lakh.
Ongoing project - unspent money parked in Unspent CSR Account, to be used within 3 years.
Carroll's pyramid - economic, legal, ethical, philanthropic responsibilities.
Stakeholder theory - balance all affected groups; Friedman - profit maximisation within the law.
Triple bottom line - People, Planet, Profit.
Vigil mechanism - whistle-blower channel with protection from victimisation, mandatory for listed and specified companies.
Greenwashing - claiming environmental virtue without substance; the main credibility risk in CSR reporting.
ESG / BRSR - investor-facing disclosure of environmental, social and governance performance.
Not CSR - employee-only benefits, political donations, business-as-usual activity, marketing sponsorship.

Formulas and examples

CSR obligation = 2% × [ (NP₁ + NP₂ + NP₃) / 3 ]
NP = net profit of a financial year computed under Section 198 of the Companies Act, 2013 (₹)
Applicability test (preceding FY): net worth ≥ ₹500 cr OR turnover ≥ ₹1,000 cr OR net profit ≥ ₹5 cr
Unspent (ongoing project) → Unspent CSR Account within 30 days of FY-end; spend within 3 FYs
Unspent (non-ongoing) → Schedule VII fund within 6 months of FY-end

Example 1 - is the company covered, and how much must it spend? A company reports, under Section 198: FY 2023-24 ₹8 crore, FY 2024-25 ₹12 crore, FY 2025-26 ₹10 crore. Net worth ₹260 crore, turnover ₹610 crore.

Applicability: net worth and turnover are below the thresholds, but net profit in the preceding year (₹10 crore) exceeds ₹5 crore → covered.
Average net profit = (8 + 12 + 10)/3 = 30/3 = ₹10 crore.
Obligation = 2% × ₹10 crore = ₹20 lakh for FY 2026-27.
Obligation ≤ ₹50 lakh → no CSR committee required; the Board discharges the function.

Example 2 - unspent CSR and set-off. Obligation ₹2 crore. Actual spend ₹1.4 crore. Of the ₹60 lakh shortfall, ₹45 lakh relates to a three-year ongoing school-building project and ₹15 lakh to a one-off scholarship not started.

Shortfall = 2.00 − 1.40 = ₹60 lakh.
₹45 lakh (ongoing) → transfer to Unspent CSR Account within 30 days of FY-end; spend within the next three financial years.
₹15 lakh (not ongoing) → transfer to a Schedule VII fund within six months of FY-end.
Next year the company spends ₹2.5 crore against an obligation of ₹2.2 crore → excess ₹30 lakh may be set off against the obligation of any of the succeeding three financial years, subject to Board resolution.

	Business ethics	CSR
Nature	Values guiding conduct	Action and spending on society
Scope	Every decision, every employee	Projects outside normal business
Legal status in India	Largely voluntary; specific provisions (vigil mechanism, competition, disclosure)	Statutory under Section 135 for qualifying companies
Measured by	Conduct, audits, complaints	Spend, beneficiaries, impact assessment

Where it is used

Corporate CSR and sustainability teams - Tata Group, Infosys Foundation, Reliance Foundation, HDFC Bank's Parivartan, Wipro Cares: project selection, CSR-1 partner due diligence, impact assessment, annual CSR report.
Compliance, secretarial and audit roles - company secretaries computing Section 198 profits, filing Board reports, managing Unspent CSR Accounts; auditors verifying CSR disclosure.
ESG research and ratings - analysts at rating agencies, banks and mutual funds reading BRSR data for investment screening.
NGOs, CSR consultancies and implementing agencies - writing proposals to corporate CSR funds in education, skilling, health and sanitation.

Interview questions

Q: What are the thresholds that make CSR spending mandatory in India? A: In the immediately preceding financial year, net worth of ₹500 crore or more, turnover of ₹1,000 crore or more, or net profit of ₹5 crore or more - any one is enough.
Q: How is the CSR amount computed? A: 2% of the average net profit of the three immediately preceding financial years, net profit being computed under Section 198 of the Companies Act, 2013.
Q: What happens if a company does not spend its full CSR amount? A: Unspent money for an ongoing project goes to a separate Unspent CSR Account to be used within three years; other unspent money goes to a Schedule VII fund within six months, and the reasons must be disclosed in the Board's report.
Q: Explain Carroll's pyramid of CSR. A: Four layers of responsibility - economic (be profitable), legal (obey the law), ethical (act fairly) and philanthropic (contribute voluntarily) - with the lower layers required before the higher ones.
Q: How do shareholder and stakeholder views of responsibility differ? A: Friedman's shareholder view says the firm's only duty is lawful profit maximisation; stakeholder theory says the firm must balance the legitimate claims of all groups it affects.
Q: What is greenwashing and why is it a governance risk? A: Presenting a misleadingly green or socially responsible image; it invites regulatory action, loses investor trust and damages brand value once exposed.
Q: What is a vigil mechanism? A: A whistle-blower channel required under Section 177 for listed and specified companies, letting employees and directors report unethical conduct with safeguards against victimisation and direct access to the audit committee chairperson.

Common mistakes

Using accounting or taxable profit instead of Section 198 net profit for the 2% calculation.
Treating applicability as needing all three thresholds - any one is sufficient.
Averaging only the latest year, or including the current year, instead of the three preceding financial years.
Counting employee welfare, political donations or marketing sponsorship as CSR.
Writing CSR and corporate governance as the same thing, or quoting pre-2021 rules (the Unspent CSR Account, CSR-1 registration, set-off and impact assessment all came later).