If there is one clause of the new Companies Bill that has generated much heat and light, it is the requirement that companies set aside 2 per cent of their profits towards ‘Corporate Social Responsibility’ or CSR activities.

Criticism of this clause has taken many forms. ‘‘Can you tell me why a profit-seeking enterprise needs to do any good? That’s the government’s job’’ — argue diehard capitalists. ‘‘It is all just a sham; catch these corporate types doing any good’’ — counters the green brigade.

Simple economics

But my objection to the CSR provision is more basic. It is that it takes a blinkered view of the social responsibilities of an enterprise.

Any company is bound to have constant dealings with multiple sections of society as it goes about conducting its everyday business. It interacts with the local area where it operates its facility, the lenders who fund it, the employees who work for it and the exchequer which collects taxes.

If a company is fair in its dealings with all these entities, there is scarcely any need for it to make a song and dance about CSR. But if it short-changes these entities through questionable practices, this can’t be remedied by paying lip-service to CSR.

Social responsibility

This argument is based on simple economics. A typical listed company in India spends 30-40 per cent of its revenues on buying materials from suppliers and 11-12 per cent on employee benefits. It also pays out about 20 per cent of its profits as interest and over 30 per cent as taxes to the government.

In contrast, the amount to be earmarked for CSR is a mere 2 per cent of profits.

So if policymakers are really keen to imbue corporate India with a sense of social responsibility, the effort needs to go beyond the 2 per cent clause.

The following checklist can help gauge if a firm is indeed socially responsible in the holistic sense of the term.

Does the core business carry a social cost?

Scanning the annual reports of listed companies, it is clear that those with a questionable core business devote the most space to extolling their CSR efforts.

Thus, we have tobacco majors spending millions on establishing a rural supply chain, companies manufacturing dated chemical compounds taking pride in their verdant campus and fizzy drink makers announcing that they are ‘water positive’.

Within these businesses, no doubt, firms that take such initiatives are better than their peers which don’t.

But wouldn’t it be far more desirable to discourage, at the very outset, businesses that carry a high social cost?

This would call for a system of CSR credits, akin to the one prevailing for carbon credits, that awards negative marks to businesses that manufacture ‘de-merit’ goods. Does the firm care about employee rights?

It isn’t enough if the business chosen by an entrepreneur is squeaky clean. How it is run is equally important.

The last couple of years have seen quite a few episodes of industrial unrest erupt at manufacturing facilities managed by leading companies. These have brought to light several murky practices employed by some manufacturing companies to keep their production lines chugging, even as they cut corners on costs.

Using temporary arrangements to keep legitimate workers off the payroll, paying them salaries that blatantly violate minimum wage rules and using loopholes that deny them of basic legal rights — quite a few members of India Inc seem to adopt these practices to sidestep the country’s labour laws.

If a company acquits itself badly on the above counts, does it really help the social cause if it then goes on to build schools or sanitary facilities in the rural hinterland?

Does it pay its dues?

Talk to the CEO of any small or medium enterprise in India and she will usually have a litany of woes to relate about how the large firm that she supplies to makes life difficult for her. Inordinate delays in payments of dues for supply of goods or services, wafer-thin margins and one-sided contracts that barely allow survival, are all par for course for SMEs dealing with their more powerful corporate buyers.

This is indeed why listed companies were earlier mandated to make explicit disclosures, in their annual reports, of large outstanding dues to SMEs. These disclosures have now been waived. But why not count delayed payments to SME suppliers as a black mark against social responsibility?

Does it evade lenders or the taxman?

Firms often forget this. But the bank borrowings which keep the wheels of a business turning and the taxes collected by the exchequer involve large amounts of public money.

However, it has become quite commonplace in recent years to see large firms lead their lenders on a merry dance to recover their dues. Taking recourse to innovative ‘structures’ that help escape one’s legitimate share of taxes, is practically a matter of pride for the Indian businessman.

So what’s the point in actively cheating the exchequer out of a 30 per cent share of profits by evading taxes and then shelling out a paltry 2 per cent as CSR? All the above instances suggest that as policymakers sit down to frame the rules for operationalising the CSR clause in the new Companies Bill, they should actively consider a system of ‘CSR credits’ that evaluates a company’s social responsibility, in its entirety. While awarding ‘credits’ to companies that do deploy 2 per cent of their profits on CSR, it should also incorporate negative marks for being in an undesirable business or sharp practices in dealings with suppliers, employees and the exchequer.

Establishing a disclosure framework for all this may not be too difficult, as the top listed companies are already required to address many of these issues in the new Business Responsibility Report.

A report card on these lines may prompt the leading lights of corporate India to take their social responsibilities more seriously. And it may also help silence the cynics who ask if a profit-oriented enterprise can really do well, if it expends its profits on doing good.

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