Some say CSR should not be made compulsory. But actually, it should be mandatory for the first three to five years. Thereafter, the momentum will be self-sustaining. The draft of the Companies Bill, 2009, had linked CSR expenditure to net profit. While there will be tax breaks, there will also be an impact on profit.
By Harsh Goenka
Chairman RPG Enterprises
A debate has started on the subject of a mandatory 2 per cent of average net profit to be allocated towards corporate social responsibility (CSR). This has aroused interest and scepticism in equal measure. It is a matter of conscience versus action, heart versus mind and numbers versus results.
The corporate world embraced CSR with companies like Shell adopting the ‘people, profit, planet’ approach to sustainable growth. Ever since, some companies have been disclosing social and environmental performance with financial results – which was alien to Indian business.
Our business houses and entrepreneurs have practised philanthropy for centuries. Whether through building temples or setting up dharamshalas, a social connect was always established by the wealthy. The principle of giving or daan has an interesting insight: the donor must detach himself from the donation and his attachment to the subject and, so, is not expected to monitor its outcome. In the West, the donor remains attached to his donation, seeking satisfaction from the outcome.
Some say CSR should not be made compulsory. But actually, it should be mandatory for the first three to five years. Thereafter, the momentum will be self-sustaining. The draft of the Companies Bill, 2009, had linked CSR expenditure to net profit. While there will be tax breaks, there will also be an impact on profit.
India is not new to corporate philanthropy. Sir Ratan Tata Trust, established in 1919, is one of India’s oldest philanthropic organisations. Recently, the Azim Premji foundation received $2 billion from its founder, the single-largest philanthropic gift in India. Institutionalised philanthropy will not depend on individual preferences and a prescriptive model will be better than a voluntary one.
A report says that Indian listed companies had a combined net profit of Rs 4,37,167 crore last year. At 2 per cent, this will yield slightly less than $2 billion a year as the CSR kitty of India Inc. Such a large sum generated every year can alleviate many of our social and environmental issues.
Companies must integrate CSR in business models. The Netherlands has been building infrastructure to support sustainable projects like recapturing used materials from the waste stream to recycle them. Starbucks is using its ‘scale for good’ model to address the jobs crisis in the US through the ‘Jobs for USA’ programme. With more than 12,000 stores in the US, Starbucks has the scale to make a significant impact on jobs.
Three countries stand out in terms of CSR regulations. The first is Denmark, the first western country to mandate CSR information in companies’ annual financial reports. The second is Indonesia that has taken a global lead by passing a law requiring all public companies to issue CSR reports and, third, perhaps the biggest impetus for CSR reporting, came in January 2010, when US’ Securities Exchange Commission asked all US-based public companies to regularly disclose climate-related risks in their annual reports.
I don’t really blame India Inc for having diverse views on the idea of compulsorily investing in CSR. India’s many leakages and red tape make it significantly difficult for any aid to reach intended targets. But the CSR model is designed towards creating a robust delivery model.
Corporate India does not want government intervention in voluntary social activity. For years, Indian companies have chosen CSR initiatives in areas where family passions lie. CSR initiatives were directed to national issues only recently. One of the biggest issues in the Companies Bill, 2009, will be to monitor the compliance of companies with provisions of the law. Auditing firms can monitor this, providing more credibility to CSR activities.
CSR investments should be compulsory, through a structure that integrates social, financial and environmental goals. Education, healthcare, women’s welfare, environment, energy and water conservation are areas where companies can play a role. ‘Reputation capital’ points, certified by a global rating organisation, can be another way to get companies to embrace CSR.
Apart from development, CSR can address social imbalances. Social divides are increasing and segments of society are seething with resentment. We have seen the Naxalite movement take roots. It makes sense to be more inclusive. We don’t want a decade to fly past as we debate the pros and cons of a statutory CSR spend. It is best to pull the trigger and get everyone on the line by prescribing the 2 per cent-of-net-profit target.
(Sourced from Economic Times)
