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If the Companies Bill, 2011 is passed, Corporate Social Responsibility (CSR) would have a board-level mandate in companies across the country. And it will be part of a company's annual financial statement approval process and reporting procedures.
Role of committee
The Companies Bill mandates in Clauses 34 and 35 that every company with a net worth of Rs 500 crore or more, or turnover of Rs 1,000 crore or more, or a net profit of Rs 5 crore or more in a financial year, will have to form a CSR committee under its board, consisting of three or more directors, of which, one should be an independent director.
The role of the committee will be to formulate and propose the company's CSR policy to the board, recommend the amount of expenditure to be incurred and, from time-to-time, monitor the CSR policy.
The board's key roles are to approve the policy and to ensure the activities mentioned therein are implemented.
The policy and progress thereunder are to be reported by the board in the company's general meetings. The Bill also stipulates that companies under this purview should make “every endeavour” to ensure that they spend in every financial year, at least 2 per cent of their average net profits made during the three immediately preceding financial years, and if they do not, specify the reasons for not spending the amount.
Major implications
The new Bill has wide-reaching implications for the way that CSR is conducted and reported in India. Much more scrutiny of investments made in the CSR and the returns achieved will take place both within and outside companies.
Yet, and regardless of any regulation, a company spending money on CSR from its hard-earned profits should be able to understand and assess the social and economic return created.
Like any other business investment, monitoring of accountability and performance of CSR spend should be a board-level activity — monitoring in terms of value created within the communities which the CSR targets, as well as for other internal and external stakeholders in the company.
A commonly held perspective is that robustly measuring CSR value creation and presenting it in boardroom-speak is not possible.
Measurement system
This may be one reason why many corporates stop short at only measuring outputs of their investment (example, number of schools supported), without delving further into understanding the outcomes of that support (example, on gross enrolment ratios, dropout rates, learning outcomes, and further changes (example, in terms of someone's earning ability, empowerment, and so on).
Without a robust measurement system, it becomes difficult for companies to not only understand whether they are on track with their CSR strategy but also put in place an implementable strategy and a set of programmes with realistic targets.
Defining a measurement system is normally part of a larger CSR planning process, where the theory of change of a CSR programme along with its results/impact mapping is undertaken.
Without a measurement system, it is also difficult to identify where further investments are required or not, and whether value for money is being achieved.
It may also result in a missed opportunity to highlight to a wider audience, the critical importance and impact created by one's CSR programmes. Yet, measuring social return robustly and at scale is possible.
(The author is Partner, Advisory, KPMG in India.)
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