Can a government make it legally obligatory for a company to be good? The government of India tends to think so, missing the distinction between ‘moral’ and ‘legal’.

The latest changes in company law relating to corporate social responsibility (CSR) have created a situation in which a firm which comes under its purview is legally bound to be socially responsible, that is good. Not being so will be a penal offence under the law which could attract a fine of up to ₹25 lakh and the defaulting officers in the company in question could face a prison term of up to three years.

The law, which came into force in 2014, says a company under CSR will seek to fight hunger and poverty, promote education and vocational skills, empower women, take forward gender equality and also strive to enhance environmental sustainability.

CSR activity should be focussed locally — in the area where a company is present. These are typically the duties which a company would discharge to society under Gandhiji’s idea of trusteeship. Now, in a sense, trusteeship will be legally enforced.

Forcible philanthropy

If you are a company with a net worth of ₹500 crore or a turnover of ₹1,000 crore or have made a net profit of ₹5 crore then you will have to incur a CSR expenditure of 2 per cent of the average net profit of the preceding three years.

The law till now asked a company to lay out a CSR policy and agenda and include in its annual report what has been done. If there has been a shortfall in action then there has to be an explanation. Now, not spending the requisite amount in the right way will be like not paying statutory dues. Expectedly, business has cried foul and described the legal changes as leading to over-regulation and expanding inspector raj , even as the current official talk is to reduce it.

The way the law now stands, underspending on CSR amounts to committing a criminal offence. If nothing else, this directs the focus on spending, not outcome. For example, emphasis will be on maintaining records of expenditure on education, whether the children concerned have actually learnt something or not being another matter. For its part, the government has argued that it is simply trying to work towards greater accountability and compliance which will make for better corporate governance.

Even without the latest compulsion a practice of robust compliance with CSR has evolved among large companies. Spending has been steadily rising but the 2 per cent goal is some distance away. Disclosure levels have however been inadequate, providing the motivation for bringing in the legal compulsion.

The guidelines forbid activity under CSR which benefits a company’s employees and their relatives. Also normal business or promotional activity like organising a marathon, running awards and sponsoring content on TV should not be carried out under CSR. Nevertheless, it is widely known that CSR work often has an eye on brand promotion. Also, pet NGOs of the promoters and the management tend to get preferred.

The whole issue is whether trying to introduce legal compulsion to ensure that a corporate entity does its duty towards the society in which it lives, its ultimate wider stakeholder, is likely to work; it may even turn out to be counter productive.

The Tatas are widely acknowledged to have worked for the uplift of the Jharkhand tribals whose home is around its main factory and township in Jamshedpur. The Tata Memorial Hospital is similarly acknowledged as one of the standard bearers of cancer care in the country. A sense of social responsibility was part of the make-up of group founder Jamshedji Tata who lived over a century ago when CSR or corporate governance were unknown terms.

Similarly, Azim Premji, the patriarch of the Wipro group, is respected across the country for the way in which he has directed corporate profits to the Premji Foundation which has done outstanding work in promoting education for all.

If threat of fine or jail is unlikely to make companies more socially responsible, what will? Certainly public opinion. The public rewards companies for their business ethics, exemplified by IT firms, and sense of social responsibility.

There is a global movement for ethical and socially responsible investing in the fields of social justice and environmental sustainability.

The writer is a senior journalist