CSR law too narrow in scope
POONAM MADAN
CSR is confined to community development and does not deal with
environmental and social impacts.
In India, the term CSR was mostly misunderstood as writing cheques for
welfare programmes and non-governmental organisations.
It was not considered unusual if a company seeking to discuss a policy
or regulatory issue with a politician was asked to plan a CSR project
for her constituency.
It is unspoken knowledge that CSR funds often go to NGOs linked with
powers-that-be or to select NGOs operating in select electoral
constituencies or to causes 'suggested' by strategic contacts. The
issue is whether the CSR regime under the new Companies Act is going
to alter this situation.
From the manner in which CSR is defined, it would appear that a major
chance to transform the situation has perhaps been missed.
A recent conference cited an example of a local bureaucrat asking a
public enterprise to part with funds from its CSR budget for
constructing a national highway. It seems that if a company's board
includes 'roads' in its CSR policy, such demands could well be made of
it. Taking a higher moral ground, a recent article in an English daily
argued the case for tapping CSR funds for financing the food security
Bill!
Such suggestions will increase now with Clause 135 of the new
Companies Act 2013, which not only mandates 2 per cent of net profits
for CSR spending, but also prescribes a list of "activities"
constituting CSR. Perhaps keeping strategic stakeholders satisfied
could be rationalised as a business case for survival!
STRATEGIC PHILANTHROPY
By confining the legal definition of CSR to community development, the
government is not encouraging companies to assess and disclose their
more substantive environmental, social and governance (ESG) impacts.
The Act ignores the Corporate Affairs Ministry's very comprehensive
national voluntary guidelines (NVGs) on social, environmental and
economic responsibilities of business.
This point was raised by critics over the past two years, while the
law was being drafted. Some of these critics now feel that debating
the definition of CSR any further could obfuscate what can be claimed
under the 2 per cent budget; "firms might start claiming that the 2
per cent was spent on water conservation in their factory or human
rights protection in their labour force", for example. Instead, a
"pragmatic solution" offered is that we should now interpret CSR as
NVG Principle 8 -- "which states that businesses should support
inclusive growth and equitable development".
However, NVG Principle 8 extends well beyond community spending; it
advises companies to understand and minimise their negative impact on
social and economic development; and innovate and invest in products,
technologies and processes that promote the wellbeing of society.
SEBI's mandate for business responsibility (NVG-based) reporting by
the top 100 listed companies was a good first step that the Companies
Act could have built upon in its CSR clause.
Sure, the Company Act's prescription for governance of corporate
spending on social causes is good. But it is very clear that what
Clause 135 has mandated is 'strategic philanthropy'.
VALUE CREATION
To acknowledge that CSR is about all the NVGs, not just how it spends
the 2 per cent, let's revisit the theoretical construct. Nobel
laureate, economist Ronald Coase, in his seminal 1960 paper, The
Problem of Social Cost, suggested an underlying bargain about who
should bear the externalised costs.
The result is an implicit social contract between business and
society, which is informed by the expectations of stakeholders
(business partners, investors, employees, regulators, shareholders,
consumers, civil society and local communities). In 1981, R. Edward
Freeman's 'stakeholder theory' highlighted that for long-term value
creation, the more responsible a firm is towards all its stakeholders,
the more sustainable it is and the easier it will be to meet its
business objectives and gain competitive advantage.
Further concepts evolved in the form of the 'triple bottom line'
(profit, people, planet) by John Elkington in 1994, 'blended value'
creation by Jed Emerson in 2000 and 'CSV' (creating shared value) by
Michael Porter and Mark Kramer in 2006.
INCLUSIVE GROWTH
The draft rules of the Act are confusing the issue in describing
'strategic CSR'. They state that "CSR… may also focus on integrating
business models with social and environmental priorities and processes
in order to create shared value" and that "CSR policy… should provide
that surplus arising out of the CSR activity will not be part of
business profits". It is inexplicable why co-creation of business and
social (shared) value should be mutually exclusive with profits.
DILUTING THE CASE
While many companies are addressing ESG risks in some aspects of
business operations, an integrated approach and disclosure is limited.
Not too many companies see value in measurement yet. However,
mandatory reporting of comprehensively defined CSR could have
benefited all stakeholders and businesses. While approving the
mandated CSR policies, will managements engage enough to ensure
sustainability in society in the long run? If that business case gets
diluted by the 2 per cent "philanthropy mandate", then mere
compliance-driven disclosure will continue to be the thrust for ESG
advocates.
The Companies Act 2013 could have enhanced the scope of CSR.
The onus of inducing more firms to focus on the big picture now may
lie on SEBI, along with the Corporate Affairs Ministry.
(The author is an independent consultant and advisor on sustainability
and social enterprise.)
(This article was published on October 16, 2013)
Keywords: CSR project, SEBI, Nobel
--
CS A Rengarajan
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