Towards responsible CSR
With little introspection on the parameters of corporate social responsibility in India – large amounts of funds are misutilised without adequate planning.
'It happens only in India' – even Govinda while dancing on this famous Bollywood song would not have imagined the pervasiveness of this phrase. Here's one interesting example. India is perhaps the only country that legally nudges business corporations to spend money on social development activities. I am referring to Section 135 - Corporate Social Responsibility (CSR) of the Companies Act 2013. Whoever drafted this section was probably in some hurry. The Act mentions CSR fourteen times, but nowhere does it define it. It leaves the definition to the reader's interpretation. However, it implicitly underlines a common notion that if a corporation is socially responsible, it should spend money towards social causes such as health, education, etc (mentioned in Schedule VII of the Act). As per the Act, companies with a net worth of Rs 500 crores or more, net profit of Rs 5 crores or more, turnover of Rs 1000 crores or more during a financial year are supposed to spend at least 2 per cent of their net profits towards social themes mentioned in Schedule VII of the Act. If they don't, they should clearly declare reasons for not doing so.
CSR in India
Indian corporations, in the race to be seen as socially responsible, proudly and passionately spend a lot of money towards CSR. Nothing wrong in that. However, does spending a fraction of your profits towards social development really make you responsible? As per Ministry of Corporate Affairs data, Gitanjali Gems associated with Nirav Modi and Mehul Choksi spent Rs 1.1 crore and United Breweries associated with Vijay Mallya spent Rs 3.6 crore towards CSR in 2014-15. Out of all adjectives available, it would be a bit of a stretch to associate 'responsible' with these eminent corporate leaders. The broader point is: thanks to the Companies Act of 2013, a corporation is just a cheque away from being compliant to India's 'Corporate Social Responsibility' norm.
CSR norms in India appear no less than an additional tax on corporations. The only silver lining being that tax officials won't hound an eligible corporation in case of non-compliance. But if companies don't adhere to the 2 per cent norm, then they will be prosecuted in the court of public opinion. Another problem with Section 135 is that it nudges companies to focus on geographical areas around its operations. So, a corporation should care more for people around its factory premises. Now, there is an ethical problem with that. What harm have communities away from the factories done? Location of factories is generally determined by the availability of raw material (like for power plants), access to markets (say for manufactured goods) and factors which are beyond the control of local communities. However, a corporation is expected to spend money on its neighbouring community, doesn't matter where the real need is.
Moreover, I would also argue that when corporations start feeling that they are doing some social good, they are more prone to self-licensing or as behavioural economists like to call it, 'licensing effect'. The essence of this effect is that when corporations feel that they are doing something good, say constructing toilets or schools, they tend to worry less about subsequent immoral behaviour. Hence, if a corporation is spending 2 per cent of its profits towards CSR, there will be a tendency to not care much even if it subverts a few regulations or laws. A common notion in the mind of a corporate leader could be, "So what if a few extra tons of toxic waste was released by my factory, I built a school for the community around me. I am a responsible corporate citizen." But, is he really? Thus, current CSR norms have the potential to do more social harm than good in several cases.
A better definition of CSR
United Nations Industrial Development Organisation does a good job at defining CSR. It states, "Corporate Social Responsibility is a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders. CSR is generally understood as being the way through which a company achieves a balance of economic, environmental and social imperatives, while at the same time addressing the expectations of shareholders and stakeholders. In this sense, it is important to draw a distinction between CSR, which can be a strategic business management concept, and charity, sponsorships or philanthropy. Even though the latter can also make a valuable contribution to poverty reduction, it will directly enhance the reputation of a company and strengthen its brand, the concept of CSR clearly goes beyond that." Apparently, this definition further dwarfs the Indian concept of CSR.
The need is, thus, to make the Indian definition broader. One, that not only focuses on spending but makes companies uphold Indian law in letter and in spirit. So what would a 'Socially Responsible Corporation' not do? Such a corporation would not employ an army of Chartered Accountants to find loopholes in the tax code. Such a corporation would not employ Directors on its board by virtue of nepotism or political connections and, instead, consider merit and independence as parameters for selection. The list is endless. And the good part is that most of us are well aware of what a responsible corporation should actually do.
Having said that, broadening the CSR definition is easy, amending the law is also not difficult, the real hurdle will be in enforcing it. No government agency can ascertain that corporations are following the right value system, it will require a cultural shift in what we as consumers demand from corporations. That we will not purchase a good or service if the process of making it even smells of subverting the law. That we will not entertain corporations who avoid world-class reporting standards on corporate governance, stakeholder engagement and sustainability. And, social watchdogs, be it media organisations or NGOs will need to do a better job of reporting irresponsible behaviour by corporations rather than vilifying or glorifying them.
A pragmatist may argue that achieving this idealistic scenario is too farfetched for India. So what can be done in the meanwhile? Given the socio-political context, the 2 per cent norm appears to be going nowhere. The challenge is to make the best use of it. The onus here lies with the corporations. In 2014-15, the total CSR expenditure in India was reported as Rs 9,822 crores. This is a huge sum. To put this in perspective, this is almost 10 per cent of India's total R&D expenditure during the same period. When one visits company websites, one can see passionate presentations about how so many corporations are changing lives. Some are building schools, some providing drinking water and some constructing toilets. Make no mistake, all these are great initiatives with enormous social value. However, are these the best use of CSR money? These tasks are primarily government tasks and will be completed by the government, if not immediately then very soon. To supplement government's tasks doesn't appear to be the best bang for CSR bucks.
India's R&D strength
CSR funds are nothing short of precious risk capital. They should be spent on fundamental research and initiatives that are nationally important, but perhaps not that urgent. The government is already doing the urgent tasks in a mission mode. CSR funds can do much more for the society. In health – stem cell research; Education – research on affordable learning devices for the poor; Environment – developing technologies that minimise toxic waste. These are just a few examples under the Schedule VII categories of CSR spending. Now, it is for corporate leaders to choose, whether they want to use their CSR funds to feel good about themselves and have their names printed in newspapers or actually drive responsible change?
(The author is Young Professional with the Economic Advisory Council to the Prime Minister (EAC-PM), New Delhi. The views expressed are strictly personal)