Did shareholders sign up for CSR?

So now, companies meeting certain criteria are supposed to spend 2 per cent of their profits on corporate social responsibility (CSR). Given the warm and fuzzy feelings associated with CSR and the prevalent negative view of Corporate India, this is likely to go down well. Why can’t the corporates spare some of their profits for a good cause, right? But is that what it’s about?

How will it work?

In any sensible nation, the government collects taxes from companies and individuals. These taxes are set aside to carry out the government’s activities, including social spending. In an indirect way, we all, by paying taxes, are performing our social responsibility. Given the huge scale of the social agenda and the government’s inability to address everything, NGOs, other “not-for-profit” organisations and even individuals in some cases, plug some of the gaps. This is how the system is supposed to work.

By imposing this activity on corporates, the government is admitting its inability to perform this core task. Is this not another way of increasing taxes under the garb of an emotive issue? The truth is, the corporate sector is probably even more ill-equipped to deal effectively with CSR, which means that companies that are serious about complying with this law will have to build this capability anew, increasing the costs of doing business.

Whose money is it anyway?

Why is it so easy for us to accept the fact that individuals cannot be persuaded towards charity but corporates can? Simply because companies are perceived as inanimate entities which have been stereotyped as being purely profit-minded with not a thought being spared to how they make these profits. No surprise therefore if it sounds reasonable to force the issue.

In the adrenaline rush of ideology, we forget the primary reason these companies exist — their shareholders. The fundamental fact about corporate commerce is that shareholders have invested their money in a company and expect a return. It would be irresponsible for the company to indulge in activities that diminish shareholder value over the long run. And if the company is successful, it is obviously generating enough tax revenues to address the government’s social spending needs. And, assuming shareholders get a return from their investment, it is their call to spend their individual earnings on themselves or charity or whatever. That’s the way it should be. The Bill & Melingda Gates Foundation is not an expense account in Microsoft. It is his personal wealth he is putting on the table. The crucial point that is conveniently being bypassed is that any company actually belongs to its shareholders, a big chunk of which would be common shareholders like you, me, our father, uncles, aunts, friends and so on. If we want to do charity, we’ll do it our way, from our earnings. We did not mandate the company to do this.

Compliance with laws

So, does the corporate have a social responsibility at all?

Sure it does — in ensuring compliance with the laws of the land. And in paying taxes. The sad fact is that our corporate performance in these areas is quite pathetic. And maybe that’s where companies should start, rather than setting lofty CSR goals.

Do all our companies comply with basic labour laws? How many of our shops have a shops and establishment licence? How many of our factories have a factory licence? Do our companies comply with environmental norms?

The truth is, if our corporates just focused on doing the right thing by the law of the land, a huge dose of social good would have already been served. And that’s probably as far as its social activities should go.

When does CSR count?

CSR makes sense when the business requires it — not the government! For example, a company that opens a factory in an area would be well served if it had outreach programmes in the neighbouring areas and villages. The goodwill of the local community and leaders can be a useful asset for the purposes of business continuity and management of labour conflicts. Similarly, a business that depletes resources such as water can, and should, put in place initiatives that replenish these resources to restore environmental balance.

Effective CSR is meaningful only when it is integrated into business strategy — which implies that it should be voluntary. Everything else is an indulgence that the shareholder did not sign up for. If the government still wants to push ahead it might as well come clean, increase taxes by 2 per cent and be done with it; and save itself another bunch of bureaucrats who will administer compliance.

The simple point is this. The problems of the poor and needy in this country are real and need addressing. The government is supposed to address these problems. The CSR tax is a diversion and a cop-out. The government would be better served by improving its execution capabilities. But that sounds like hard work, right? The easier way is to bring industry into the mix and watch the fun as the right and left wings debate the problem, leaving the government free to do more important things like lighting lamps and flagging off rallies…

(The author is an Investment Director with Peepul Capital Advisors Pvt. Ltd.)

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