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Governance

CSR as compulsion

The parliamentary standing committee on finance was tasked to examine the changes proposed by The Companies Bill, 2009. The committee made various recommendations, one of which relates to mandatory corporate social responsibility by companies. Stemming from a concern for a comprehensive CSR policy, the committee’s report states that the bill  may now include a mandatory provision that every company having a net worth of Rs. 500 crore or more, or a turnover of Rs. 1000 crore or more, or a net profit of Rs. 5 crore or more, during a year, shall be required to formulate a CSR policy to ensure that every year at least 2 percent of the company’s average net profits, during the three immediately preceding financial years, shall be spent on CSR activities as may be specified by the company itself. If a company does not have adequate profits or is not in a position to spend the prescribed amount on CSR activities, the directors of such company are required to make a disclosure and give suitable reasons in their annual report. The committee believes that non-compliance will get checked by such disclosures.

Notably, the committee’s recommendations do not detail what constitutes spending on CSR. While this by itself will hinder the effective implementation of any mandatory CSR policy, it is also recognition that perhaps there can’t be a universally prescribed regulatory regime for CSR. It is, therefore, necessary to understand the evolution, scope, and a well accepted definition of CSR to analyse whether spending on and compliance with CSR can be mandatory or is best left as being voluntary.

The classical view, also termed the “constrained profit-making view”, is that the purpose of corporations is to make money. Accordingly, corporate profits belong to the shareholders as owners and requiring managers to pursue socially responsible objectives means managers are spending money that belongs to others. Contrastingly, the liberal view prescribes that business should be sensitive to potential harms of its actions on various stakeholders and the business must consider the interest of all parties affected and use its vast resources for social good. In the middle lies the trusteeship model which states that businesses should manage their enterprises as a trust held in the interest of the community.

As corporate profits soared, starting with the mid 1990’s, businesses realised that they had certain societal roles to fulfil. This led to the evolution of the stakeholder model wherein companies were expected to measure their performance according to the “triple bottom line” approach, taking into account their ecological and social performance in addition to their financial performance. Companies were expected to evaluate their action in terms of people, planet and profit.

Today, CSR represents the relationship between a company and the community within which the company operates. Appropriately defined by the World Business Council, CSR is “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 which is integrated with their core business objectives, and one that takes into account their core competencies. This needs to be embedded in their day-to-day business operations. Some working examples include Dabur working towards developing sustainable cultivated source for herbal ingredients, which would help in reducing the strain on natural habitat of these herbs. Another notable project is of the JSW foundation, which manages the CSR activities of the JSW Group. They set up BPO facilities at their remote locations to provide an alternate livelihood to the local population, thus empowering them socially and economically.

Interestingly, there are hardly any examples across the globe where an absolute legal obligation is imposed on companies to carry out CSR activities. Considering this, in 2009, the Ministry of Corporate Affairs (“MCA”) also issued voluntary CSR guidelines for Indian corporates. By taking into account the “governance  challenges  faced  in  our country  as  well  as  the  expectations  of  the  society” the voluntary guidelines were intended to indicate to Indian businesses some core elements they need to focus on while conducting their affairs. These guidelines attempted to clarify that charity and philanthropy is not CSR and acknowledged that “CSR activities are purely voluntary” and includes “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 emphatically voiced at the interactive session hosted by the MCA 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 corporate affairs secretary, at the interactive session, inquired whether CSR is a good business proposition. The answer is yes!  But there is need for greater advocacy on what constitutes CSR, what constitutes spending on CSR and the manner in which the amounts need to be deployed. Clarity is also needed on whether corporations can give their mandatory spend to a trust or foundation run by the business itself. Some form of regulatory mechanism also needs to be established which ensures a commitment from the top management for implementing CSR initiatives. Eventually, the commitment has to come from within. Any dialogue on social responsibility cannot be enforced by an iron hand or a legal provision since it can potentially deter corporations from doing the social good which they may otherwise voluntary undertake.

 

First Published in Governance Now on February 18, 2011

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