The problem with corporate social responsibility (CSR) is that nobody is very clear about what exactly it encompasses. The Indian government has been trying to make it mandatory for companies to spend at least 2% of net profits on CSR. Facing strong criticism, it gave up the effort in mid-July and made the spending voluntary. But the debate continues.
If the proposed rule had come into play, the government would have had to spell out what constitutes CSR. That would have gone some way in removing the vagueness that exists about the term. Today, CSR to some companies means providing lunch to employees. To others, it’s about tackling global warming and environmental issues. Instead of defining CSR, the Indian government recast it as “responsible business” in a set of voluntary guidelines for firms released July 8 by then Union minister of corporate affairs Murli Deora.
The recent unsuccessful effort isn’t expected to be the last word on mandatory CSR spending, however. In meetings with industry, Deora has repeatedly expressed the personal view that CSR should be compulsory. In the latest round of recommendations, the government asks that companies keep tabs on CSR spending and disclose it to their principal stakeholders.
The CSR measures are actually part of a new Companies Bill that has been in the works for several years. The Companies Act of 1956, which is currently the rule of law, has several clauses inappropriate to the current business and economic environment. A revision process was started in October 2003 and a Companies Bill 2008 was tabled in Parliament. That legislation lapsed with the dissolution of the Lok Sabha (the lower house of Parliament) in 2009. A new bill — the Companies Bill 2009 — has been tabled. It is wending its way slowly through various committees.
While the Companies Bill contains many provisions that are of great importance to industry, it’s the CSR piece that has created the most debate. Deora’s predecessor, Salman Khurshid (now Union minister for law), at one time supported making the spending mandatory. Later, he veered around to the view that if CSR spending figures are made public, it will put adequate peer pressure on the corporate laggards.
Industry has been almost totally against a mandatory clause. The Federation of Indian Chambers of Commerce & Industry (FICCI) has suggested tax breaks instead for those who meet the voluntary targets. Rival chamber the Confederation of Indian Industry (CII) says that compulsory corporate responsibility would be counterproductive. “Companies may resort to camouflaging activities to meet such regulations, particularly during recessionary periods and economic downturns,” argues the lobbying group.
India’s philanthropic community is also against compulsory CSR. “It is a crazy idea,” says Dhaval Udani, CEO of non-governmental organization (NGO) GiveIndia. “Once you make it mandatory, people will find ways and means to get out of it. The rules will be so vague that the reporting will be even vaguer.” Deval Sanghavi, co-founder & CEO of Dasra, a strategic philanthropy foundation, agrees. “I am not in favor of mandatory CSR. When you make things mandatory, the chances of their not being done are greater,” he notes.
Industrialist Adi Godrej adds, “It’s good to say that [CSR] is desirable. Then people should decide [what to do] on their own.” Philanthropist Rohini Nilekani is more critical. “I just don’t get it,” she says. “This is outsourcing of governance. This is taking the failure of the state and the corporates and trying to create a model out of it. If you want, you tax the corporates and put the money into social programs. But you can’t dictate CSR.”
The world over, very few countries have a CSR requirement; Saudi Arabia is possibly the only exception. “The laws in developed countries do not stipulate mandatory CSR contributions,” according to KPMG partner (development sector practice) Sudhir Singh Dungarpur. “In the recent past, many European countries have specified that companies must include CSR information in their annual reports.”
India has a tradition of corporate philanthropy. The trouble is that somewhere along the way, the lines between giving and CSR have grown hazier. “Corporate philanthropy and CSR are really two different things, but get blurred, particularly in India,” Dungarpur notes. “CSR should actually relate to the way you conduct your business, whereas it gets confused with giving to the local communities in which you operate.” He, too, is against a government mandate. “Generally the carrot approach — where corporates understand the value in focusing on philanthropy and act upon it in that regard — is better than the stick approach. It is not necessarily the quantum of funds spent that matters, it is how you spend it.” Adds Parul Soni, executive director and practice leader at Ernst & Young (India): “CSR is a journey and not a destination.”
“I don’t think there is a clear distinction,” between philanthropy and CSR, says Arpan Sheth, Mumbai-based partner with Bain & Company and the author of Bain’s recently-released “India Philanthropy Report 2011”. “It’s like a Venn diagram where there’s overlap between the two. I think in many ways, in India in particular, CSR is almost a 100% overlap with whatever the promoter family’s passions are.”
Recently, the government also sought to include vocational training for employees as part of CSR. But that term, too, is difficult to define. Would Infosys, which runs a huge university of sorts for entry-level employees, qualify? Or is would the vocational training umbrella only include those who are taught manual skills? The first government paper on CSR — released by the ministry of corporate affairs in 2009 — also talks of health, cultural and social welfare, and education coming under the CSR head.
Indeed, just about everyone sees CSR through a different lens. When Bill Gates and Warren Buffett came to India earlier this year to popularize their Giving Pledge, which asks the wealthy to commit to giving the majority of their fortunes to philanthropy, they told Indian companies that the effort was not CSR but CSC — corporate social compulsion. An Ernst & Young white paper titled, “The Emerging Role of Business — Not Just for Profit,” offers other options: “CSR could be and is used synonymously with terms like corporate responsibility, corporate citizenship, sustainable responsible business, corporate social performance and corporate sustainability.”
Stepping into the breach is the Institute of Chartered Accountants of India (ICAI). The accounting regulator has set up a subcommittee to identify what should come under the CSR umbrella and what shouldn’t. But that effort has spawned its own debate with some others questioning ICAI’s right to be heard.
The arguments will likely continue because, as a white paper by KPMG and the Associated Chambers of Commerce and Industry of India (ASSOCHAM) presented at the first International Summit on CSR held in New Delhi in 2008 put it: “CSR is comprehended differently by different people.” The report — titled, “CSR: Towards a Sustainable Future” — noted that until the 1990s, CSR was dominated by the idea of philanthropy and that business efforts were often limited to one-time financial grants. “Moreover, businesses never kept the stakeholder in mind while planning such initiatives, thereby reducing the efficacy and efficiency of CSR initiatives,” according to the report. “However, over the past few years, the concept of CSR has been changing. There has been an apparent transition from giving as an obligation or charity to giving as a strategy or responsibility.”
The View from Delhi
When former minister of corporate affairs Khurshid released the 2009 guidelines he noted that though India’s business sector has generated wealth for shareholders for decades, the country continues to grapple with problems of poverty, unemployment, illiteracy and malnutrition. “Corporate growth is sometimes seen as widening the gap between India and Bharat [rural India] through its income-skewing capability,” Khursid said. “This gap needs to be bridged. While the government undertakes extensive developmental initiatives through a series of sectoral programs, the business sector also needs to take the responsibility of exhibiting socially responsible business practices that ensure the distribution of wealth and the well-being of the communities in which the business operates.”
A report from global accounting and consulting firm Grant Thornton that used data collected in late 2010 and early 2011 noted that CSR activities across the world have increased dramatically in recent years as “businesses realize their value not only commercially, but also in terms of boosting employee value, attracting staff and cutting costs.” Incidentally, “Saving the planet” came in sixth in the survey of drivers of CSR. The Grant Thornton International Business Report was launched in 1992 and now covers over 11,000 respondents per year in 39 economies.
Despite this seemingly irreconcilable divergence, some management thinkers feel a meeting of minds is possible. In a 2006 Harvard Business Review article titled, “The Link between Competitive Advantage and CSR,” authors Michael E. Porter and Mark R. Kramer argue that creating shared value (CSV) should take precedence over CSR. “CSV should supersede CSR in guiding the investments of companies in their communities,” they wrote. “CSR programs focus mostly on reputation and have only a limited connection to the business, making them hard to justify and maintain over the long run. In contrast, CSV is integral to a company’s profitability and competitive position. It leverages the unique expertise and resources of the company to create economic value by creating social value.”