Five years after the Companies Act, 2013 made it mandatory for companies above a certain size and profitability to contribute a percentage of their profits to social development, talk of corporate social responsibility, or CSR, is everywhere. There are seminars, conferences, award functions and newspaper articles galore on the subject. It has also spawned a whole array of organisations and professionals to offer advice on how to do “CSR” better. These have probably cornered more of the money to be spent by companies on social development than NGOs. But other than this, what exactly has been achieved?
Conceived to bring more responsibility in all spheres of corporate functioning, and especially to improve corporate governance, the Act has become almost synonymous with corporate giving for social development because of its clause 135. This clause mandates companies above a certain size to spend 2% of the average profits of the last three years on social development projects or what are now popularly referred to as CSR activities. What these should be are defined in Schedule 7 of the Act, which has been progressively broadened in recent years to include many more categories. The Act came into being in 2013, but it is only since April 2014 that the Act can be said to be operational.
Most of the CSR-related discourse is in terms of the monies spent under this clause , or is a hagiographic description of CSR projects of specific companies. An analysis of whether the Act has achieved the main objective of making business socially responsible is rare. It is time, therefore, for a deeper assessment.
On a positive note, the enactment must be given credit on several counts: One, without this push many companies, especially smaller ones, would not have bothered about social development at all; or at best done some ad hoc and sporadic work round their areas of operation. Two, the emphasis on governance, stricter reporting and monitoring of CSR obligations have made for a more systematic approach to social development, encouraging companies to look at policy, structures, processes and projects as an integrated whole instead of just trying to meet targets.
One commendable change is that the CSR funds can be used as venture funds to support social entrepreneurship.
Three, the Act has been treated as a work in progress, and on review the rules have been continuously revised and broadened to allow more flexibility to enable companies to play a larger and more conscious role in communities. One particularly commendable change is that the CSR funds can be used as venture funds to support social entrepreneurship to create employment and socially beneficial products. Boards can add to the prescribed list if they can justify the inclusion within the broad framework of the Act and Rules.
Four, the mandatory spending rule has led to more initiatives to train social development professionals, so enlarging the pool from which NGOs and government can also draw.
Finally, if the intention of the government was to garner resources from the corporate sector to supplement its own social development goals and programmes, then the Act can be said to be on the right track. For though the amounts are still comparatively small, both the amounts and compliance are slowly improving. Also, presumably, with experience the positive impact of the projects undertaken might also improve.
According to CRISIL’s CSR Yearbook, 2017, of the 4,939 companies listed on BSE and NSE, only 1,688 or about one-third met the criteria for mandatory spending. Of these, 1,186 voluntarily reported their spending, compared to 1,158 in fiscal year 2016-17 and 950 in 2015-16, showing an improvement in compliance. Moreover, 70% of the companies spent more on CSR in 2017 compared to the previous year.
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The Prime Database group also reports an increase in the amounts spent, with 1,019 BSENSE listed companies in 2017-18 spending Rs 9,034 crore, a rise of 7% over the previous year’s spend of Rs 8430 crores. So far so good.
But the bad news is that the spend was less than the Rs 9,669 crore they were mandated to spend as 2% of profits. In fact, both the CRISIL and Prime Database analyses show that only a little over half (57%) of the companies complied with the 2% stipulation. Prime Database reports that a median company still has upto one-third of the mandated spending unspent, though there has been some improvement over the years. While in FY 2015-16 the unspent funds as a percentage of prescribed spends were 57.66%, this has now come down to 30%.
The reasons given for the underspend is that companies are not able to identify the right projects, or the right organisations to partner with them or that they still have not been able to put together teams of the right quality for in- house implementation. But these are feeble excuses since it is now over four years since the Act came into force in April 2014. With the plethora of specialists and consultancy organisations which have come into being , these things should have been sorted out by now.
The underspending also means that if NGOs had expected a funding Nirvana from CSR, it is not yet in sight. Though most companies look for either NGOs or government to partner with, the amounts going to them are far less than what were expected and they do not compensate for the loss of declining foreign funds or even government grants. Though large NGOs have seen a spike in donations from companies, the grants given have not been as large as expected, nor transformational. They have not led to scale in the operations and impact of NGOs; nor have they led to policy changes, or to the strengthening of the development sector as a whole.
As Kaku Nakhate, CEO of Bank of America, mentioned in an interview, many of the large companies, especially MNCs, often give only to the same few NGOs and do not attempt to locate more worthy NGOs or nurture grassroots-level NGOs.
At the same time, in their need to meet targets, some companies do not do due diligence of the NGOs chosen, and the lure of money is leading some NGO into unethical practices. But even more than due diligence, what is required for more effective, rather than target-oriented, spending and investment by companies in building their partner organisations’ capabilities.
While the interest in NGOs as partners is understandable, given that few companies have core competence in undertaking social development, CSR funds can also be used to build up major research or teaching institutions by skilling their staff, and helping them partner with similar organisations abroad in various fields. Conducting research in green field areas offers another opportunity. These are yet to be fully utilised.
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If the idea was to provide seed capital for imaginative, risky but potentially big payoff ideas, then too there is a long way to go. The bulk of the spending (37%) is on routine education, vocational skill development, environmental sustainability and slum development projects, though infrastructure development, social welfare and sports are slowly getting more money. While contributions to the Prime Minister’s Relief Fund have declined 56% from Rs 162 crores in FY 2016-17 to Rs 71 crores in FY 2017-18, showing more imagination is being used in the choice of projects, Indian companies are yet to make much headway in linking business strategies to CSR objectives. Linking core competencies to deliver better economic, social and environmental value by producing, for instance, cheap healthcare gadgets, energy-saving products and solutions to make drinking water accessible to the poorest is yet to become more common.
Sustainability of the projects taken up is another problem area. Instead of long-term commitment and nurturing of the projects undertaken, funding goes to meet new projects decided according to board interests or to meet targets in a particular year, leaving earlier projects stranded for funds.
Sudhir K. Sinha, a critical observer of Indian CSR, argues that while choosing projects, companies need to ask themselves critical questions such as: Will this help poor people to help themselves? Will it make communities more resilient? Are all stakeholders of CSR, including corporations, aligned with a common agenda of development, or are they driven by their separate motivations? Otherwise, CSR will remain just a collection of disparate projects without social impact.
The above are, however, implementation problems. With experience these deficits will, hopefully, be overcome. But the concern is that the more fundamental problem, which is conceptual, will remain.
If the aim of the Act was to inculcate business responsibility towards all the stakeholders, then there is still a long way to go.
If the aim of the Act was to inculcate business responsibility towards all the stakeholders, then there is still a long way to go. By equating social responsibility with money contributions, the government seemed to imply that all that was required to be held socially responsible was to make the required contribution – almost like guilt money – and all other transgressions will be forgiven. But how a company makes its profits is as important as what it does with its profits. Unfortunately, several instances can be given of how companies are behaving irresponsibly on this front, even though they may be compliant with clause 135.
We still have companies over using scarce community resources. According to the Times of India’s Make India Water Positive campaign, industries consume 70% of our entire usable water. Manufacturing denim, for instance, uses up 10,0000 litres for making an item. In a country where millions do not have access to drinking water, companies should not guzzle water. If industry treats, recycles and replenishes water, its contributions will be several times more valuable than its contribution of 2% of profits.
Another example: Aakar Patel, writing in the Business Standard, reports that in Chhattisgarh, ore mining companies have not only taken over Adivasi lands, but that their huge trucks carrying ore are tearing up the roads, which in any case are few in the Adivasi belt. A thermal power plant in an Adivasi area discharges jet black water onto the fields adjoining it and the villagers are being pressured to withdraw their complaints or to compromise with the company by taking the paltry compensation offered. The capitalist-politician nexus, with its pernicious influence on policy, will take more than section 135 to disappear.
To conclude, instead of focusing merely on financial contributions, companies should be guided by what Nandan Nilekani has termed CLIFFE – providing client value, leadership by example, integrity, transparency, fairness and excellence. This will serve society far more in the long run.
This article was originally published on The Wire. You can read it here.