Is the Mandate on CSR Spending by Corporations a Good Idea?

It doesn’t address people’s concerns about corporate activity but could drive companies to align philanthropy with their core objective

Arun Maira
Member, Planning Commission

arun maira“This will create another set of accounts that corporations must give and the government must check, at a time when the former is pleading against excessive inspections”

We should step back one more time and consider the purpose of mandating that corporations spend two per cent of their profits on corporate social responsibility (CSR). What is the government hoping to achieve with this? The government wants corporate investments in setting up schools, hospitals, and other social necessities to increase. There is evidence that a cement company can do a better job at running a school than the government, and a steel company a better job at running a hospital — even though it is not its business. While this is an indictment of the government’s ability to do what it is supposed to do, all efforts to improve the country’s social infrastructure are welcome.

There are, however, two serious objections to the government mandating that corporations do such good works, which many were doing voluntarily. The first is, this will create another set of accounts that corporations must give and the government must check, at a time when corporations are pleading that there are excessive inspections and controls of business activities in the country. The second objection is more serious. Voluntary CSR wins goodwill precisely because it is not mandated. Corporations are seen to do it because they care, and not because they are required to. If CSR is mandated, where is the heart?

A principal purpose of CSR is to win trust by showing that the corporation cares for the needs of the community. Declining trust of citizens in the activities of big corporations is making it difficult for the latter today to obtain their “licence to operate” from communities. Some evidence is: stalled projects for mining, metals production and power generation in India and other parts of the world, and difficulties that retail giants face in opening new stores even in communities in the West. What people are concerned about is the impact the corporations’ products and processes have on the environment, their livelihoods, and the fabric of their community. Spending more on CSR “on the side” – in hospitals, schools and the like – does not address their real concerns. People are more concerned with how the corporation makes its profits, rather than on what it does with the profits. It is no wonder that some corporations who are already spending even more than two per cent of profits on CSR, even winning international awards for CSR, are unable to get communities’ support for their expansions.

Trust requires an understanding of what really matters to people and demonstrating transparently and by action that one cares. Good corporations display this understanding towards their financial investors. They report to them regularly about what is being done with the resources investors have provided and what are the financial outcomes. Studies of corporate governance practices confirm that corporations that are more transparent find it easier to raise investments. The same principle, currently applied to financial investors, of accounting for resources and outcomes, must be applied to other stakeholders, too. Indeed, this is the conceptual framework of reporting that the UN Global Compact and the Global Reporting Initiative have been promoting around the world.

This is an idea whose time has come. People all over the world are concerned about the condition of the environment, more jobs and better livelihoods, as well as corporate-government cronyism. At the same time, corporations say they want less government, and want more freedom to operate. Therefore, they must earn that freedom by winning the trust of communities themselves, not asking the government to convince people that corporations are good for them.

The Indian Institute of Corporate Affairs and the corporate affairs ministry have developed National Voluntary Guidelines for corporate accounting to stakeholders. These have been developed through extensive consultations with business associations and civil society organisations in India. Emerging international best practices have also been evaluated. The Securities and Exchange Board of India has taken a lead in insisting that large companies, to begin with, must adopt these. This movement must grow. Unfortunately, this sound idea has been drowned by the conceptually flawed push for two per cent CSR.

Sachin Pilot
Minister of State (Independent Charge), Ministry of Corporate Affairs

sachin_pilot_minister“There will be no ‘Inspector Raj’. It is the companies’ money and they will decide what to do with it, and how to spend it. The provision is about self-regulation”

The present corporate social responsibility (CSR) debate must be viewed in terms of significant challenges before us as a nation. These include widespread malnutrition, school dropouts, lack of access to sanitation in rural areas and easily preventable illnesses at all ages. The government’s flagship programmes are being continuously strengthened to achieve our objectives in these areas. Private sector efforts can give an extra edge to these programmes, and result in quicker achievements. A sustained focus on entrenched problems would ensure greater resource flow, as opposed to commitments that are vaguely formulated and loosely implemented.

There was a trust deficit in society that corporations are not contributing enough. This provision can act as a bridge to correct that perception. We just want a clear-cut commitment from the corporate sector towards social causes. Most large corporations have undertaken their own CSR initiatives. The only change is that they now have to mention what they are spending on, and how much. I am hopeful that these enabling provisions will allow companies to have a strategic focus on CSR. Every CSR project needs to be conceived, funded and supported over the long term, and where ownership transfer is envisaged at a later stage to other, possibly non-profit organisations, to ensure smooth transfer.

In addition, moving from pure philanthropy to projects aligned with core corporate objectives is likely to be more sustainable. This will also ensure that non-financial organisational resources are available. Companies may also like to consolidate their activities into a few visible streams.

However, there is a perception that making CSR mandatory might lead to “Inspector Raj”. I wish to clear the air. There will be no “Licence Raj” or “Inspector Raj”. It is the companies’ money and they will decide what to do with it, and how to spend it. The government will not get into deciding how they will spend it. For instance, a fast-moving consumer goods company may decide to do things differently than, say, a mining company. The provision is not prescriptive in nature, but all about self-contribution, self-regulatory and self-compliance.

There is no confusion in my mind over the issues surrounding CSR. The National Voluntary Guidelines are more macro in nature and they address other important aspects of corporate governance, such as sustainability, environmental impact of businesses and employee welfare. While they facilitate an overall climate conducive to CSR, it is within the general framework of corporate leadership.

The decision on CSR provisions of the Bill was taken after due consultation with the stakeholders. As is well known, the Bill went to the Parliamentary Standing Committee twice. All stakeholders were aware of the provisions. In fact, in my consultations with companies, they said they were happy and were looking at it as an opportunity to demonstrate their commitment towards society and the environment. India is one of the few countries in the world with CSR in the statute books. However, it is still an evolving concept.

I am confident that the provisions of the Bill would raise the visibility of CSR efforts with the company boards and shareholders. In today’s fiercely competitive landscape, meaningful CSR would provide an added dimension to brands and embedding entrepreneurs more firmly in the surrounding communities. Our ground-breaking proposals are also important because of India’s emerging economic leadership on the global stage.

Our push for large profit-making companies to commit to CSR has been done in the faith that most of them wish to do so. Although we have developed a list of illustrative activities that can absorb CSR commitments, it by no means exhausts the possibilities. We have visible impact and tangible outcomes in mind. We also aim to create a repository of good CSR projects and practices. Corporations may, if they wish, adopt some of these to improve their CSR profile and portfolio. We also wish to initiate CSR sensitivity in medium-sized enterprises and to provide them off-the-shelf solutions with maximum positive social impact.

I again wish to underscore that companies would be able to formulate their own CSR policies and projects. We have created an enabling provision to strengthen their intent to contribute to society.

Source : Business Standard, 29 January 2013.




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