Much of the discussion in the mainstream media in recent times has been around responsible business practices of large corporations. Numerous seminars, conferences and workshops are conducted on corporate social responsibility (CSR) and corporate governance for large corporations. Several studies have shown that CSR is a source of competitive advantage for large organisations. Very little is known, however, about the role of responsible business practices of SMEs. Is it because they are they are small in size and hence unlikely to contribute to negative externalities? Or are they seen as not worthy of being discussed?
Whatever be the reason for the poor attention paid to SMEs, their role in the overall development of the country cannot be understated. SMEs contribute nearly 7% of India?s GDP. Their contribution towards employment generation is significant because they tend to use more labour-intensive production processes. This in turn leads to more equitable income distribution, provides livelihood opportunities through value-added processing activities in agriculture-based economies and nurtures entrepreneurship.
SMEs can exist independently or in clusters. Clusters are sectoral and geographical concentration of small and medium enterprises faced with common opportunities and threats that give rise to external economies (eg, specialised suppliers of raw materials, components and machinery; sector-specific skills, etc), favour the emergence of specialised technical, administrative and financial services, create a conducive ground for the development of inter-firm cooperation and specialisation as well as of cooperation among public and private local institutions to promote local production, innovation and collective learning approach to SMEs. There are about 2,400 clusters in India , out of which 2,000 are artisanal/rural clusters.
Are small businesses responsible?
The role of the founder/owner/entrepreneur has a significant bearing on the responsibility orientation of the SME. Since ownership and management are not separated, there is a greater scope for individual beliefs and moral decision making to affect the practices of the business as a whole. In addition, the social relationships and networks in which these owner-managers are embedded cannot be separated from the business and, therefore, the responsible business orientation towards employees and the society comes naturally. A large number of firms/entrepreneurs were driven by philanthropy and were implementing practices like health camps, educational scholarship, setting up schools, etc, without seeking any tangible financial and business benefits to the actions taken. Many of the CEOs of SMEs were members of Rotary International or Lions International. They supported a number of developmental activities as members of these organisations. They did not see this as their CSR. This finds support in Revankar?s study in the Pune belt in 2004 where a number of owners of small and medium firms saw philanthropy and CSR as one and the same.
In export-oriented clusters, the supply chain pressures created by large corporations have a significant impact on the social responsibility dimension, beyond philanthropy. For example, issues like compliance with labour laws, quality of products and environmental pollution are monitored very closely by the buyers. This in turn brings in a compliance mindset in the eyes of the entrepreneur. Since there is an incentive of future orders associated with the compliance, many entrepreneurs demonstrate greater responsibility in their export-oriented businesses compared with their domestic business.
In a study done by the UNIDO cluster development project in 2008 to understand how SMEs perceived their social responsibility, it was found that there was no common understanding of the term ?CSR?. Most entrepreneurs believed that ?taking care of the employees? and ?engaging in community activities? was their social responsibility. In an exploratory study that the author of this article undertook, it was found that many entrepreneurs felt that they were socially responsible because they paid their taxes and provided employment to a large number of employees. There was also a perception that following the laws of the land makes them socially responsible. One reason for this could be that while the Indian legal system is progressive in spirit, its implementation and enforcement is very weak.
With the SME sector poised to grow rapidly in India, there is an urgent need to examine the responsible business practices. A recent CPCB study finds that small-scale industries contribute nearly 40% of the pollution load in industries where they have a sizeable presence. It is also well known that SMEs adopt poor labour standards, do not pay minimum wages, copy trademarks and designs, have poor quality of products and flout financial regulations. In the short run, these practices, in particular, allow the SME to be profitable. Therefore, there is a need for a three-pronged approach to strengthen the responsible business practices of SMEs. First, there is a need for a sound regulatory system that will enable ethical and responsible behaviour in the sector; second, small-scale industry associations need to educate their members on the need for responsible behaviour and invest and incentivise members to behave responsibly; and finally, there is a need to appeal to the enlightened self interest of the owners/founders of the SMEs to demonstrate thought leadership in this field. A combination of proactive leadership behaviour, regulation and peer pressure should result in increased responsible behaviour.
There is a need for more research on the state of responsible business practices of SMEs and case studies of SMEs that are in existence that are ethical and responsible. It would be interesting to understand the motivations of the founder/owner and his/her senior leadership team to understand the same. In the context of the clusters, there is a need to engage the different companies in benchmarking of best practices of responsible conduct by its members and also to find ways to solve the larger problems of the community and the society. The notion that all businesses are accountable to their shareholders needs to be discussed at the level of the SME.
The recently released draft national voluntary guidelines on the social, environmental and economic responsibilities of business by the ministry of corporate affairs appears to be in the right direction and lays down explicitly the responsibilities of the MSMEs on the ethical, environmental and social fronts. This perspective is critical since they are typically a part of the value chains of bigger enterprises. It is quite likely that market and customer pressures will compel small enterprises to become more responsible.
The writer is the chairperson of the Centre for Corporate Governance and Citizenship at the Indian Institute of Management, Bangalore