Corporate social responsibility or
CSR as we know it today, has always been a part of Indian culture and history. Traditionally, business communities have
always supported construction of dharmashalas,
panjrapols, ghats, and pathshalas. In one of the earliest printed books in India
published in 1863, the author Govid Madgaokar makes a mention of annachhatras patronized by the rich in
the nineteenth century Mumbai. In modern
day equivalents, these can be termed as holiday inns, animal-health clinics, river-fronts,
primary schools, and charity dining halls.
Today, of course, from food to fundamental research, the spectrum of CSR
activities is very wide. This includes provision
of mid-day meals through Akshay Patra
foundation to patronizing fundamental research since the early years of
independence through institutions such as Tata Institute of Fundamental
Research (TIFR).
Why would businesses undertake such
CSR activities? It turns out that society
understands that free market fails to deliver right quantity and quality of merit
goods such as education, health, and environmental sustainability. For example, social benefit of educating poor young girls is much higher than the private benefit that accrues to those girls. Economist and evangelical
supporter of free enterprise, late Milton Friedman had said that a corporate
executive’s responsibility is to make as much money as possible, provided he confirms
to the basic rules of law and ethical system.
The qualification he makes about ethical system is important, for profits
are inextricably linked to communities and environment without which a firm
cannot operate effectively. Though it is
not obvious, CSR efforts help a firm
improve the Triple Bottom Line (TBL) of profit, people and planet. Two centuries prior to Friedman, father of
modern economics, Adam Smith had also echoed this social responsibility aspect
of business in his treatise, The Theory of Moral Sentiments. And, in the Indian subcontinent, it was
father of the nation, Mahatma Gandhi who invoked the notion of Voluntary Trusteeship
through individual philanthropy. Industrialist
G.D. Birla, for example, was always very liberal in donating money to Gandhi if
any of his projects were held back due to want of money.
Of course, CSR is not the main
activity of corporates and there is no denying that one of the very raison d'être for the existence of a government is to provide merit goods. After India’s independence, the statist
model advocated by the first prime minister Jawaharlal Nehru, characterized
social responsibility as an overarching state-driven endeavor. However, following the Soviet model, state
started dictating terms in each and every sphere of economic life. This came at a heavy price – gross
neglect of provision of merit goods. Experience
of seven decades since independence and the low levels of human development
indices show a glaring state failure on this front. Perhaps the abject failure on the part of
government has now forced it to co-opt private sector in CSR activities through
the new Companies Act of 2013. In quite a few countries such as
Australia, Denmark, France, Holland, Norway, and Sweden, while CSR reporting is
mandatory, CSR spending remains a voluntary act. India is the only country in the world, where
both reporting and spending on CSR is mandatory for a certain section of the
firms. The Gandhian principle of
voluntary trusteeship has been trapped in the legal net, reformulating it in what
I call as the Mandatory Trusteeship!
It
is true that government has the coercive power to impose mandatory trusteeship
and corporates cannot wish it away.
However, the perception of various stakeholders in the economy can be
gauged from a spectrum of opinions – Arguing
from the left of the centre, the opinion would be that the government has abdicated
its own responsibility. Instead of
asking firms to spend two per cent on CSR activities, government could have
raised corporate tax by two per cent, prioritized the socially beneficial
activities, and spent the tax collection in its own right. On the other hand, arguing from the right of the
centre, forcing a mandatory spending of two per cent of profits on CSR amounts
to increasing corporate tax-rate by two per cent. Already a 34.6 per cent corporate tax-rate in
India is higher than the global average of just about 24 per cent. Mandatory two per cent spending on CSR makes
Indian corporates less competitive globally.
Moreover, arguing from a centrist perspective, it seems absurd to force CSR
spending on corporates. CSR is viewed as
an inspirational activity which comes voluntarily from within. Therefore, voluntary CSR mandated by law, a
sort of mandatory trusteeship, is an oxymoron.
The new CSR norms apply to firms with a net profit of Rs. 5 crore and more, and/or a net
worth of Rs. 500 crore and more, and/or a turnover of Rs. 1000 crore and more. These firms must spend two per cent of their
average net profits made during three immediately preceding financial years. For this, firms have to form CSR Committees
and their boards must mandatorily report the CSR activities. Moreover, the spending has to be on about dozen
eligible activities as per the law, which includes spending on items such as
healthcare, education, poverty eradication, gender equity, as also
contribution to Prime Minister's National Relief Fund. The spending cannot be related to the firms’
own business activities. These norms and
processes are indicative of potentially
inordinate administrative burden imposed by the act, both on the
government and the firms. In fact, studies have shown that the potential
mandatory CSR spending was expected to be much more than Rs. 25,000 crore a
year. However, the actual spending has turned
out to be only about Rs.5,000 crore. Moreover,
a survey conducted in December 2015 showed that among top 84 firms by market
capitalization, only 38 per cent of them had spent two per cent of profits on
CSR. Furthermore, if we are to go by
the experience of many decades of License Raj, the coercive policies of the
government may create perverse and obfuscating reactions from stakeholders. This may happen at all three stages – implementation,
monitoring, and punitive actions.
The eligible list of CSR activities
as laid down in CSR norms seems broad but not broader enough. Almost all the eligible activities prescribed
by the CSR norms come under the category of philanthropy through donations or
running CSR foundations. However, there
are two other channels of CSR activities that do not get covered under the norms. First,when firms improve their
operational efficiency, say by developing smart-building solutions that
contribute to reduced energy consumption, and/or they convert their food waste
into biogas, and/or they ensure that mercury from the used CFL bulbs and
tube-lights is recycled using a special crusher; these activities improve the
triple bottom line of profits, people and planet. Second, transformational business models by
firms such as say drip irrigation initiative may also contribute to triple
bottom line. Selling drip irrigation system
may increase firm’s profit, increase farmers’ land productivity and income,
improve resource sustainability by lowering salinity ingress, and, importantly,
conserve water for the society. In its
own interest firm may give loans to and buy-back produce from farmers for this
initiative to succeed. Such activities do
not fall under the CSR activities specified under the companies act. Now, to fulfill the straight-jacketed
mandatory requirements, firms may anchor their CSR efforts away from such
activities. Clearly there will be a
qualitative anchoring away from efforts, which in fact, improve the triple
bottom line of profits, people, and planet.
The two per cent mandatory norm may create another kind of
anchoring effect, this time a quantitative anchoring effect, which also may adversely
affect CSR initiatives. Experimental studies
(including one at IIMA) suggest that quantitative anchoring effect may lower
CSR spending by firms that are already voluntarily spending more than two per
cent or were planning to spend more than two per cent. Once a legal yardstick of
two per cent is created, firms may reassess their CSR activities and anchor
their spendings down to match the bare minimum new legal yardstick.
All in all, therefore, government may want to do a rethink
on the mandatory trusteeship. A
reconsideration of Friedman, Smith, and Gandhi’s ideas of rules of ethics,
moral sentiments, and voluntary trusteeship could be a step towards saving the
firms’ CSR from getting trapped in the legal net.
