Section 135 of the 2013 Companies Act is unique in more than one way. It directs companies above a particular size to allocate 2 percent of their historical net profits towards CSR, it prescribes an internal process on how the programme must be governed, and mandates reporting on how the money is spent. Importantly, it prohibits companies from including any expenditure that promotes its business goals, even if the expenditure itself is of a social nature.
In other words, the CSR spend must be directed towards the development goals of the nation, as specified under the Act’s Schedule VII, in areas such as education, sanitation and rural development. Herein lies a crucial difference between CSR as practised in the US and what its aims in India are. The generally accepted gold standard for CSR in the western world is that it must be closely integrated with a firm’s business strategy such that the programmes create shared value for the company’s shareholders and its stakeholders. In India that linkage is explicitly prohibited for CSR, focusing its role solely on contributing to societal welfare.
Under these circumstances, Indian companies can explore several ways of making a meaningful contribution to society.
1. Align CSR with business values
A company must be careful to only choose those initiatives that best fit its values and the purpose of its business. This is different from integrating it with the core business strategy itself. It should ask itself the question: “Are my employees and direct stakeholders (such as supply chain partners and customers) likely to be passionate about the cause? Will we as a company feel good about what we are doing? Does it represent our values and way of doing business?”
While the choice of the initiative should anchor on the values of the company, it should at the same time be so structured that it can make a real difference to the chosen social or environmental cause. It cannot be the case of lip service. This means that when a company chooses an initiative, it should have the potential to move the needle on the social problem, and at the same time make an intangible contribution to the company’s culture.
2. Play a catalytic role
Latest figures from the Ministry of Corporate Affairs reveal that the CSR spend in 2015-16 was approximately INR 10,000 crore. This is only about 5 percent of the nonprofit sector’s spend in India, and about 1.5 percent of government expenditure on social programmes. Therefore,rather than view their CSR investments as a contribution towards the national social development kitty, corporates must see themselves playing a catalytic role in the development process.
Once they have identified the issue they want to help solve, companies must address it just as they would a business situation—committing managerial talent to the chosen problem and constructing KPIs, selecting appropriate partners actively working to build their partners’ strength for the long term, and measuring results along the way. This also means that it is important to carefully choose the activities where companies can bring their resources and competencies to play.
3. View CSR departments as an opportunity to understand the BoP market
Fifty percent of India’s population lives on less than INR 200 per day, and 80 percent below INR 300 per day, and these numbers are purchasing power parity adjusted. Ideally speaking, this is where much of CSR’s social development should be directed.
This also offers companies an excellent opportunity to understand the needs of such citizens and be sensitive to how they earn, buy and consume in this under-the-radar, much ignored marketplace. Here is where innovative product or service ideas could emerge for future growth.
With 80 percent of the country’s population, businesses will do well to remember that it is indeed this solid base of the country’s growing middle-class market that will lead to growth. Indian businesses should learn to engage with these markets in a more customer sensitive manner.
Therefore, while the CSR departments in companies may be designed to be small, the staff allocated to work on the social issues should be drawn from all aspects of the business and from all levels of managerial hierarchy. Such an approach will help companies get a better understanding of the base of the income pyramid market.
4. Help develop the nonprofit sector as a whole
While the nonprofit sector in India is growing rapidly, it remains highly fragmented. Of the nearly 13 lakh social service organisations said to be in operation, hardly 10 percent are registered, and an even smaller percentage have the kind of budgets required to effect any meaningful change on the ground. Lack of proper governance is also an issue at several nonprofits.
In such a context, the corporate sector has a chance to help grow the top 1,000 nonprofits into professional outfits, so they may build on the excellent work they are already doing on the ground. Building the capacity and capability of the nonprofit sector would be just as valuable a contribution as the others listed in the Act’s Schedule VII.
Many of the 10,000 companies that are supposed to come under the ambit of the Act are likely to make only a small contribution towards their CSR budget, especially the bottom half. If such contributions are not aggregated and properly channeled, it will certainly lead to wasteful, fragmented expenditures to suit the letter of the law rather than the spirit of what the Act intended: real effort to move the development goals of the nation.
Industry associations and local chambers of commerce must step into provide leadership. They must organise and facilitate smaller businesses to aggregate and direct their contributions towards development projects that have the potential to create real impact. Such industry collaborations, whether existing or newly created, should actively engage and build their competence in problem identification, collective deployment and impact measurement.
The CSR clause in the Indian Companies Act is unique, and the first for a big economy. Critics might see it as a 2 percent tax, but that will be the case only if we miss the golden opportunity to set a new model for how business can make a real contribution towards solving society’s critical problems.