By Arun Duggal
In the new Company’s Act, 2013, the mandatory 2% corporate social responsibility (CSR) expenditure is a unique and controversial provision. It is unique because in no other country is CSR spending mandated by law. It is controversial because many in business believe the roughly Rs 15,000 crore CSR spending from corporate India could be misused. However, it is a timely idea and the challenge will lie in execution.
In many countries, companies’ contribution to society is encouraged and reported through annual sustainability reports of the board. Scandinavian countries, particularly Norway, encourage companies to be involved in social projects with global implications, like clean drinking water, poverty reduction and environmental initiatives.
In the US, large investors like Calpers monitor their investee companies’ contributions to society. In the UK, many companies report a triple bottom line. Today, the world over, public trust in government and business is very low.
The global financial crisis of 2007 led to millions of job losses, but nobody was held accountable. Political and social movements in many countries, including India, are demanding reforms in the system. The old Friedmanian doctrine, that the only social responsibility of a company is to maximise its profits, is no longer acceptable.
Mahatma Gandhi’s 80-year-old philosophy that companies are trustees of a nation’s wealth is more relevant today.
So, the CSR initiative in India is timely and pioneering. If implemented well, we could lead the world to a higher level of corporate governance and social responsibility. If done badly, it may dent investor confidence.
Now, the Airports Authority of India is planning to spend Rs 10 crore, or 63% of its CSR budget, to build wrestling halls in the constituencies of aviation minister Ajit Singh and his son — a blatant misuse of public office. Coal India, which has failed India in coal deliveries and precipitated a power crisis, is planning to create a huge bureaucracy of CSR officers to meet its obligations.
In the worst-case scenario, the Rs 15,000 crore of mandatory CSR expenditure from Indian corporates will be gobbled up by inappropriate people, bureaucracies and the growing industry of CSR consultants.
But such a terrible outcome can be avoided. Most business leaders recognise CSR spend is not donations but investments for the long-term interests of its stakeholders and society in general. The government must trust the board and its shareholders to make these investment choices and not be over-prescriptive.
Here is what needs to be done. First, if a CSR activity involves a political leader, government official, a company’s director or executive, it should be approved by independent directors, and in a shareholding meeting. This open scrutiny will, hopefully, eliminate inappropriate CSR expenditures.
Two, in addition to CSR activities specified in schedule VII of the Act, any other CSR activity or programme approved by the board in the best interest of the company and its stakeholders and also approved by the shareholders should be eligible. Three, a CSR committee should be formed, preferably headed by an independent woman director.
This also advances the agenda of having more women as independent directors in meaningful roles. Employees should be encouraged to volunteer for CSR activities.
Four, CSR activities or payments intended to win undue favours from politicians or government officials are prohibited. This will minimise bribes and corruption. Five, contributions to social sector funds approved by SEBI should be made eligible CSR spending.
Social sector fund managers are not only experts in their area and good investors but also passionate about serving society. So far, most funds for the social sector have been provided by international foundations such as the Gates or Dell Foundations.
Six, the reporting format should be flexible and not prescriptive. Seven, companies should build CSR execution and monitoring capabilities over the next one or two years to ensure the money is used efficiently and for maximum social good. Finally, eligible CSR expenditure provisions in the Act and under section 80G of the Income-Tax Act should be aligned. The CSR provision has the potential to do alot of good, let’s not blow it.
The writer is chairman, Shriram Capital. Views are personal.
( This Article first Published in Economic Times on 15 May 2014)