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Governance

Coercive social responsibility

The Parliamentary Standing Committee on Finance has proposed mandatory corporate social responsibility (CSR) by companies as part of changes to the Companies Bill, 2009.

It says every company having a net worth of 500 crore or more, or a turnover of 1,000 crore or more, or a net profit of 5 crore or more, during a year shall be required to spend every year at least 2% of the company’s average net profit during the three immediately-preceding financial years, on CSR activities of the company’s choosing.

If a company does not have adequate profit or is not in a position to spend the prescribed amount on CSR, the directors of such company are required to make a disclosure and give suitable reasons in their annual report, with a view to checking non-compliance.

The recommendations do not detail what constitutes spending on CSR. While this by itself will hinder implementation of a mandatory CSR policy, it is also recognition that there can’t be a universally-prescribed regulatory regime for CSR.

The classical view is that the purpose of corporations is to make money. Corporate profits belong to the shareholders and requiring managers to pursue socially-responsible objectives means managers are spending money that belongs to others.

In contrast, the liberal view prescribes that a business should be sensitive to potential harms of its actions on various stakeholders, consider the interest of all parties affected and use its vast resources for social good. In the middle lies the trusteeship model: businesses should manage their enterprises as a trust held in the interest of the community.

Starting with mid-1990s, as corporate profits soared, businesses realised that they had certain societal roles to fulfil. This led to the evolution of the stakeholder model wherein companies measure their performance using the ‘triple bottomline’ approach, taking into account their ecological and social performance in addition to the financial, evaluating actions in terms of People, Planet and Profit.

The World Business Council defines CSR as “the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large”. Accordingly, corporate responsibility involves a commitment by a company to “manage its role in society as a producer, employer, marketer, customer and a citizen in a responsible and suitable manner”. Rationally, these commitments should not be prescribed by law.

It is most practical for corporates to adopt a strategy embedded in their day-to-day business operations and integrated with their core business objectives. Examples include Dabur’s efforts towards sustainable cultivated sources for herbal ingredients, reducing the strain on natural herbal habitats, and the BPO facilities set up by the JSW Foundation at JSW’s remote locations to provide an alternate livelihood to the local population.

There are few examples across the globe of a legally-mandated CSR obligation. In 2009, the ministry of corporate affairs had issued voluntary CSR guidelines for Indian corporates, indicating some core elements for Indian businesses to focus on. These guidelines attempted to clarify that charity and philanthropy are not CSR and acknowledged that “CSR activities are purely voluntary” and include “what companies will like to do beyond any statutory requirement or obligation”.

What has changed in the last year for the shift from voluntary guidelines to mandatory legislation? Also, is a mandatory spend on CSR not an indirect form of taxing corporate profit? In such circumstances, the opposition by industry chambers to a mandatory spend appears justified. The expectation that companies receive incentives for their CSR spend is also reasonable. But doesn’t this negate the whole idea of social responsibility?

The ambiguity on what constitutes spending on CSR, the manner in which the amounts should be deployed and whether corporations can give their mandatory spend to a trust or foundation run by the business itself can, in fact, lead Indian businesses ending up spending less than what they currently do on CSR.

What is, instead, needed is greater advocacy relating to what constitutes CSR, how itcan be implemented and aform of regulatory mechanism that ensures commitment from the top management. Eventually, the commitment has to come from within. A dialogue on social responsibility cannot be enforced with an iron hand since it can potentially deter corporations from doing the social good that they may otherwise undertake voluntarily.

First Published in the Economic Times on February 19, 2011

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