Concept of Social Cost Benefit Analysis Profit Maximization

Concept of Social Cost Benefit Analysis ‘Profit Maximization’ is no more the only aim of business. It is being felt that besides owners, the business should evolve a balance in the interest of the employees, customers, suppliers, government and the general public. The business should help in overcoming social problems. It should try to help society even at the cost of reducing its private gains. After all, it is the society, consisting of workers and consumers, which enables business to earn profits. Thus, no business could be allowed to exist if it is detrimental to the interest of the society.

Every developing country allocates its scarce resources among different sectors within the economy and among different projects within each sector of the economy. For determining the rationality of investment in any project whether commercial or a project undertaken for social upliftment as a whole, cost benefit analysis is necessary. The commercial evaluation of a project is concerned only with private costs and benefits and does not take into account the existence of externalities in returns and costs.

INDICATORS OF SOCIAL DESIRABILITY OF A PROJECT • There are various indicators which may be used to evaluate the social desirability of a project. Some of the important indicators are discussed as below : 1) 2) 3) 4) 5) 6) 7) EMPLOYMENT POTENTIAL OUTPUT PER UNIT OF CAPITAL VALUE ADDED CRITERION COST BENEFIT RATIO PRESENT VALUE OF SOCIAL COSTS AND BENEFITS FOREIGN EXCHANGE RESERVE ENVIRONMENTAL FACTORS

DEFINITION • "an approach to reporting a firm’s activities which stresses the need for the identification of socially relevant behavior, the determination of those to whom the company is accountable for its social performance and the development of appropriate measures and reporting techniques. -D. CROWTHER

LEVELS OF SOCIAL ACCOUNTING MACRO LEVEL MICRO LEVEL

NEED OF SOCIAL ACCOUNTING INTERNAL PURPOSES EXTERNAL PURPOSES

Objectives of Social Accounting • To identify and measure the net contribution of an individual firm towards the society. • To determine whether an firm’s strategies and practices are consistent with widely shared social priorities. • To make available relevant information about firm’s goals, policies, programmes and performance toward use and contribution to scarce resources and social resource allocation. • To develop models of quantification and proper presentation of social costs and benefits of an enterprise. • To meet information needs of consumers and soceity.

Reliance Industries Limited with society Health care A unique joint initiative of RIL and National Association of Blind, Project Drishti has undertaken over 9, 000 free corneal graft surgeries for the visually challenged Indians from the underprivileged segment of the society. Dhirubhai Ambani Hospital at Lodhivali, Maharashtra continues to play a significant role in improving the quality of life in surrounding communities. It extends prompt and specialized services to the Mumbai- Pune highway accident victims. Reliance Rural Development Trust The Check Dams completed in FY 2010 -11, will have total water storage capacity of 8. 7 mcft and would cater to about 1, 065 Hectares of rural land Education A network of nine schools caters to 13, 251 students spread across geographies in India. Source: www. ril. com

ITC with soceity e – Choupal 4 million farmers empowered, 6, 500 e - Choupals installed Social & Farm Forestry 119, 919 hectares greened, generating 53. 77 million person - days of employment Watershed Development 73, 884 hectares brought under soil and moisture conservation Women's Empowerment 15, 763 women members 1343 self - help groups Livestock Development 260 Cattle Development Centres Primary Education Covering 2, 81, 000 children through 2, 554 Supplementary Learning Centres till date

Major areas of social accounting or scope of social audit 1. Community involvement: It includes community services, philanthropic programmes and community involvement by employees. 2. Human resource stewardship: It covers activities related to the well being of employees including job enrichment and promotional policies. 3. Physical resources and environmental stewardship: It includes conservation of resources and protecting environment. 4. Product or service contribution: It deals with the impact of a company’s products or services on the soceity, advertising, packaging, product safety and warranty policies.

Earnst and Earnst have identified six areas of performance: 1. Environment 2. Energy 3. Fair business practices 4. Human resources 5. Community involvement 6. Product

Benefits of social accounting • It provides many facilities to employees like facility of education to children of employees, provide free transport facility and good working conditions. • It helps in marketing through great customer support. • Effective utilisation of resources. • Provide help to customers. • It counters the adverse publicity levelled by hostile media.

• It assists management in formulating appropriate policies and programmes. • It acts as an evidence of social commitment. • It improves the image of firm. • Through social accounting, the management gets feedback on its policies aimed at welfare of society. • It improves the confidence of shareholders of the firm.

Demerits of social accounting • High implementation cost and workload. • Different business objectives. • Decline in staff morale.

SOCIAL ACCOUNTING APPROCHES 1) CLASSICAL APPROACH • Introduced by Milton Friedman in 1961 • It is to maximize the profit within the constraint of legal and ethical framework, in the best interest of the society at large. • However in the changing environment and social parameters this approach is no more acceptable.

2) DESCRIPTIVE APPROACH: - • This is a simple method and traditional approach of reporting social information. • According to this method social activities of business corporations are presented along with financial statement in narrative form.

3) INTEGRAL WELFARE THEORETICAL APPROACHIt advocates the preparation of social report comprising of social benefit and social cost. SOCIAL COSTS I)PRODUCERS SURPLUS FOR • Labour performance • Fixed Assests • Material • Capital • Entrepreneural performances • Performances paid in advance II)VALUE OF NEGATIVE EXTERNAL EFFECT ON • Employees • Population • Companies • Public entities NET SOCIAL BENEFITS I)CONSUMERS SURPLUS FOR • Product A • Product B • Product C • Product D II)VALUE OF POSITIVE EXTERNAL EFFECT ON • Employees • Population • Companies • Public entities NET SOCIAL COST

4) SOCIAL INDICATOR APPROACH : • This approach involves area of social contribution to be undertaken by business corporation • Total performance= Net income + human resource contribution + public contribution + environmental contribution + product or service contribution

5) LINOWS OPERATING STATEMENT APPROACH: • D. F. Linowes give This approach According to this approach • The firm presents its social benefits as well as the social costs along with the corporate balance sheet and income statement. It includes tabulation of the firm’s voluntary expenditures to benefit its employees, the public and environment as well as the estimated costs of any social programmes which are postponed. • Social contibution = social benefit – social cost

6)Social statement Approach [ Social Income Statement and Balance sheet Approach( Abt’s Model)]: The emphasis is in quantifying the values contributed to the society and detriments caused to the society and to present them in a fashion comparable to the typical financial balance sheet. The social Income statement shows social benefits and costs related to staff, community and general public while the social balance sheet includes human assets, social capital investments in building , equipments & other organizations assets.

7) Multidimensional Statements Approach(Colantoni, Cooper and Dietzer Model) • This model has proposed to extend financial statements into multidimensional statements with all events related to each other via a monetary measure of their resource costs and benefits. It requires help from engineers, social scientists, lawyers to prepare the statements.

8)Net Contribution Approach (Estes Model) • Ralph W. Estes (1972) in his article ‘socioeconomic Accounting and External Diseconomies’ has proposed a comprehensive model to report all direct benefits and costs of an entity for which it is compensated as well as those external economies for which no compensation is received and social costs include activities or services for which compensation is made as well as external diseconomies for which no compensation is paid

Social Impact Statement Social Benefits I. Product and Services provided II. Payments to Other Elements of society: a) Employment provided b) Payment for goods & other services c) Taxes paid d) Contribution e) Dividend and Interest paid f) Loans & other payments g) Additional benefits to employees h) Staff equipments & facilities i) Services donated j) Environment improvements k) Other benefits Total social benefits Social surplus/deficit( Net contribution) Social Costs I. Goods and materials acquired II. Buildings and equipments purchased III. Labour & services used a. Discrimination b. In hiring( external) III. In placement and promotion(internal) IV. Work related injuries and illness V. Public services and facilities used VI. Other services used VII. Environment damage: VIII. Terrain damage IX. Air pollution X. Water pollution XI. Noise pollution XII. Solid waste XII. Other environmental damage XIII. Payments from other sources of elements of society XIV. Other costs Total social costs

Social Accounting in India Social Cost benefit analysis has been accepted as an important tool of investment analysis, it is not a precise technique because of its inherent difficulties. It is very difficult to identify various costs and benefits to the society and still more difficult to convert these costs into monetary equivalents. The United Nations Industrial Development Organisation (UNIDO) and the Center for Organisation of Economic Co-operation and Develpoment (COECD) have published the methodologies for measuring social costs and benefits. But still a lot of research is needed in this direction.

Social Corporate Reporting and Indian Companies ü TISCO ü Projects and Equipment Corporation of India Ltd ü Lubrizol India Ltd ü Hindustan Organic Chemicals Ltd ü Minerals and Trading Corporation of India Ltd ü Bharat Heavy Electricals Ltd ü Indian Petrochemicals Corporation Ltd