CSR law too narrow in scope

In India, the term CSR was mostly misunderstood as writing cheques for welfare programmes and non-governmental organisations.

It was not considered unusual if a company seeking to discuss a policy or regulatory issue with a politician was asked to plan a CSR project for her constituency.

It is unspoken knowledge that CSR funds often go to NGOs linked with powers-that-be or to select NGOs operating in select electoral constituencies or to causes ‘suggested’ by strategic contacts. The issue is whether the CSR regime under the new Companies Act is going to alter this situation.

From the manner in which CSR is defined, it would appear that a major chance to transform the situation has perhaps been missed.

A recent conference cited an example of a local bureaucrat asking a public enterprise to part with funds from its CSR budget for constructing a national highway. It seems that if a company’s board includes ‘roads’ in its CSR policy, such demands could well be made of it. Taking a higher moral ground, a recent article in an English daily argued the case for tapping CSR funds for financing the food security Bill!

Such suggestions will increase now with Clause 135 of the new Companies Act 2013, which not only mandates 2 per cent of net profits for CSR spending, but also prescribes a list of “activities” constituting CSR. Perhaps keeping strategic stakeholders satisfied could be rationalised as a business case for survival!

strategic philanthropy

By confining the legal definition of CSR to community development, the government is not encouraging companies to assess and disclose their more substantive environmental, social and governance (ESG) impacts.

The Act ignores the Corporate Affairs Ministry’s very comprehensive national voluntary guidelines (NVGs) on social, environmental and economic responsibilities of business.

This point was raised by critics over the past two years, while the law was being drafted. Some of these critics now feel that debating the definition of CSR any further could obfuscate what can be claimed under the 2 per cent budget; “firms might start claiming that the 2 per cent was spent on water conservation in their factory or human rights protection in their labour force”, for example. Instead, a “pragmatic solution” offered is that we should now interpret CSR as NVG Principle 8 -- “which states that businesses should support inclusive growth and equitable development”.

However, NVG Principle 8 extends well beyond community spending; it advises companies to understand and minimise their negative impact on social and economic development; and innovate and invest in products, technologies and processes that promote the wellbeing of society.

SEBI’s mandate for business responsibility (NVG-based) reporting by the top 100 listed companies was a good first step that the Companies Act could have built upon in its CSR clause.

Sure, the Company Act’s prescription for governance of corporate spending on social causes is good. But it is very clear that what Clause 135 has mandated is ‘strategic philanthropy’.

value creation

To acknowledge that CSR is about all the NVGs, not just how it spends the 2 per cent, let’s revisit the theoretical construct. Nobel laureate, economist Ronald Coase, in his seminal 1960 paper, The Problem of Social Cost , suggested an underlying bargain about who should bear the externalised costs.

The result is an implicit social contract between business and society, which is informed by the expectations of stakeholders (business partners, investors, employees, regulators, shareholders, consumers, civil society and local communities). In 1981, R. Edward Freeman’s ‘stakeholder theory’ highlighted that for long-term value creation, the more responsible a firm is towards all its stakeholders, the more sustainable it is and the easier it will be to meet its business objectives and gain competitive advantage.

Further concepts evolved in the form of the ‘triple bottom line’ (profit, people, planet) by John Elkington in 1994, ‘blended value’ creation by Jed Emerson in 2000 and ‘CSV’ (creating shared value) by Michael Porter and Mark Kramer in 2006.

inclusive growth

The draft rules of the Act are confusing the issue in describing ‘strategic CSR’. They state that “CSR… may also focus on integrating business models with social and environmental priorities and processes in order to create shared value” and that “CSR policy… should provide that surplus arising out of the CSR activity will not be part of business profits”. It is inexplicable why co-creation of business and social (shared) value should be mutually exclusive with profits.

Diluting the case

While many companies are addressing ESG risks in some aspects of business operations, an integrated approach and disclosure is limited. Not too many companies see value in measurement yet. However, mandatory reporting of comprehensively defined CSR could have benefited all stakeholders and businesses. While approving the mandated CSR policies, will managements engage enough to ensure sustainability in society in the long run? If that business case gets diluted by the 2 per cent “philanthropy mandate”, then mere compliance-driven disclosure will continue to be the thrust for ESG advocates.

The Companies Act 2013 could have enhanced the scope of CSR.

The onus of inducing more firms to focus on the big picture now may lie on SEBI, along with the Corporate Affairs Ministry.

( The author is an independent consultant and advisor on sustainability and social enterprise .)

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