Critical Analysis on Corporate Social Responsibility

Introduction

There is today a growing perception among the enterprises that sustainable success and shareholder value cannot be achieved solely through maximizing short term profits, but instead through market-oriented yet responsible, sensitive, humane behavior. Companies are aware that they can contribute to sustainable development by managing their operations in such a way as to enhance economic growth and increase competitiveness whilst ensuring environmental protection and promoting social responsibility, including consumer interests.

With Indian Corporate fraternity facing mandatory Corporate Social Responsibility inclusion in laws there becomes a greater need to concentrate and analyze on various basic aspects of Corporate Social Responsibility and its provisions.

Corporate Social Responsibility is an evolving concept that currently does not have a universally accepted definition. Corporate Social Responsibility is also called Corporate Citizenship or Corporate Responsibility. Generally, CSR is understood to be the way firms integrate social, environmental and economic concerns into their values, culture, decision making, strategy and operations in a transparent and accountable manner and thereby establish better practices within the firm, create wealth and improve society.

Corporate Social Responsibility can be explained as:-

1. Corporate – Organized Business.

2. Social – Everything dealing with people.

3. Responsibility – Accountability between the two.

In the city of Coimbatore, Tamil Nadu in the year 2009 a group of 5 enthusiastic youngsters decided to set up a Non-Profit Organization with definite and revolutionary plans to contribute to the society. The youngsters who were of the age group between 19 & 20 did acquire the necessary experience of working with social service organizations before attempting to found one. When they decided to start the legal process of making their desire into a legal entity; they came into contact with document writers in the local Registrar Office.

When an enthusiastic member of the team with no ground reality on how the bureaucratic system in India works enquired about preparing a document called “Trust Deed” for which the broker replied “One need not prepare!” The youngsters were puzzled and could not comprehend what the broker just said. The youngsters wanted a specific agenda to be included in the document stating their organization’s main activities but the broker simply shook his head mockingly. The Broker then patiently explained that such documents are ‘ready-made’ ones and the same contents are used in almost 90% of the Trust Deeds, replacing only names and addresses of the parties. The group of youngsters encountered the bureaucracy first hand and the rest of the story is irrelevant to our subject here.

Now, point is the set up in India is so lenient that anyone can form a Non-Profit Organization be it a Trust or a Society or a Section.25 Company[1].  At no time one can discount the fact that there are genuine organizations which have contributed immensely towards nation building. Similarly, one cannot deny the presence of thousands of letter-pad organizations who are existent only for various dubious reasons.

In India there is no mechanism to control the Non-Profit Organizations. No authority to regulate and streamline thousands of crores which are being spent by these Organizations. The answer to this would be same old irritating noise in ears. “It is impossible to control or monitor organizations in the country as big as India”. We, Indians are used to this template and by default any attempt to change this mentality will be looked as idiotic, futile and a waste of time.

When I read the Draft Schedule VII of the Proposed Draft Corporate Social Responsibility Rules under Section 135 of the Companies Act, 2013, I immediately recollected the standard procedure followed in registering the Non-Profit Organizations in India in the form of Trust. (The author also doubts if this Draft Schedule is copy pasted from some standard operating format of a Trust Deed).

Schedule VII further reads

Activities which may be included by companies in their Corporate Social Responsibility Policies

Activities relating to:—

1.Eradicating extreme hunger and poverty.

2.Promotion of Education.

3.Promoting gender equality and empowering women.

4.Reducing child mortality and improving maternal health.

5.Combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases.

6.Ensuring environmental sustainability.

7.Employment enhancing vocational skills.

8.Social business projects.

9.Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government of the State

10.Governments for socioeconomic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women.

11.Other matters as may be prescribed.

The intention of policy makers may be good, that is to report business community’s contribution in fulfillment of social, environmental and economic responsibilities. At the same time, where contribution to the local community is a good objective the absence of any specific mechanism makes it vulnerable to dubious entrants.

Corporate Social Responsibility under Companies Act 2013

The new Companies Act makes it mandatory for profit making companies reporting Rs.5 crore or more profits in the last three years to spend at least two percent of their average profits towards CSR activities. The new legislation could make India perhaps the first country to have mandated CSR spending through a statutory provision.

The Draft Guiding Principle of CSR Policy has been issued by the Ministry of Company Affairs which reads as:

“CSR is the process by which an organization thinks about and evolves its relationships with stakeholders for the common good, and demonstrates its commitment in this regard by adoption of appropriate business processes and strategies. Thus CSR is not charity or mere donations.

CSR is a way of conducting business, by which corporate entities visibly contribute to the social good. Socially responsible companies do not limit themselves to using resources to engage in activities that increase only their profits. They use CSR to integrate economic, environmental and social objectives with the company’s operations and growth.”

Estimates of annual spend under mandatory CSR vary: Rs.6,500 crore is the estimate by Business Standard from companies that sit on the BSE 500. Rs.12,000-15,000 crore is the estimate by Centre for Ethical Life and Leadership (CELL), a new ‘Section 25’ entity led by Former Chief Election Commissioner SY Quraishi. The ambit for this figure covers 8,000 companies, who will have to conform to the new 2% rule.[2] In short the expected pool of Rs.15,000/- crores would be allocated in any of the activities in the above-mentioned 10 points.

The new Companies Act gives complete freedom to the companies to decide on the factors in which they would like to contribute in the society. The Act does not even talk about any stringent monitoring mechanisms for keeping a check on their activities, rather just mandates the Company to submit Reports[3] on their CSR activities. However the new Indian Companies Act 2013[4] seeks to provide that every such company shall constitute the Corporate Social Responsibility Committee in their respective Boards. The composition of the committee shall be included in the Board’s Report. The Committee shall formulate policy including the activities specified in Schedule VII. The Board shall disclose the content of policy in its report and place it on the website, if any of the company. The internal mechanism can’t be trusted and one simply cannot expect the internal mechanism to be honest when left unchecked.

Now, anybody who is well acquainted with Company affairs would conclude that this is just another procedure legislated without putting any heart or soul. The loopholes available are many and these procedures are seriously insensitive in nature and so not in touch with the issues in hand. One of the important developments is that Act gives free hand to the companies to do CSR activities by a third party NGO[5]. The only qualification or eligibility needed to become a claimant for the CSR projects is established track record of at least three years in carrying on activities in related areas[6]. Again what is “established track record” is not defined and the ambiguity in these words left for us to decipher and interpret would invite unending disputes.

This provision now will pave way for mushrooming of dormant NGOs which bit the dust to suck up the huge money pooled to be siphoned off and lead to massive embezzlement of funds which can otherwise be better streamlined and utilized. The provisions will also lead to unethical activities and since there are no monitoring mechanisms it would largely go unnoticed. We are witness to hundreds of organizations spending huge amount of money in marketing and publicity but only meager sums for actual social cause. A CSR initiative in the cover of eradicating Poverty would squander printing of thousands of colourful brouchers, inviting celebrities, superfluous PR marketing techniques where the actual benefit to the needy would be just one square meal to a particular orphanage or old age home.

Expected Contribution for CSR by Indian Companies[7]

Conquering the loophole – The Chhattisgarh way

Taking advantage of the loophole in new law[8] which states  “Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government of the State Governments for socioeconomic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women” The Chhattisgarh government has sprung a unique and potentially illegal interpretation of the new Companies Act’s mandatory Corporate Social Responsibility (CSR) provision on private sector players in the State, by asking firms to deposit their contributions to the Chief Minister Community Development Fund rather than undertake CSR projects of their own. The Chhattisgarh government has set up this Fund “for the purpose of holistic development of affected districts/district related with the industries” under the policy Corporate Social Responsibility Policy 2013 which was published in the Gazette of Chhattisgarh on May 3, 2013[9]

Such an attempt can be adopted by every State Government or even Central Government impeaching the basic idea of Corporate Social Responsibility. The Act doesn’t seem to have any legal immunity towards this misuse. Even though it can be challenged, the Act paves room for stepping in of the Courts of Law when events necessitate a judicial interpretation. Poor provisions and absence of any genuine out of the box ideas in drafting laws relating to CSR are the main reasons for this deficit.

India’s first CSR Index

In another development towards an effort to facilitate greater corporate participation in corporate social responsibility (CSR) areas, BSE (formerly Bombay Stock Exchange Ltd.), signed a Memorandum of Understanding with Indian Institute of Corporate Affairs (IICA) to collaborate and develop a CSR index and increase awareness about CSR[10]. IICA-BSE will work on capacity building to assist companies to meet their agenda of CSR and will conduct awareness programs on CSR.

Again such developments and mechanisms which has no ground level understanding on social services are equal to someone discussing grass root inadequacies from the comfort of their couch in a 7 Star Hotel about eradicating poverty in the remotest corners of the country

Conclusion

When one cannot even expect a proper mechanism to monitor the flow of this entire money to the tune of Rs.15,000/- crores the reply would again be the same “It is impossible to control or monitor organizations in the country as big as India”. Friedman’s formulation that “The business of business is business” has outlived its utility, and social responsibility and being a good corporate citizen are the buzzwords today. In the long run, those organizations or group of persons who do not exercise power in a way which society considers responsible will tend to lose it. Now, the statutory laws which mandates such compulsory spending coupled with no heart of spending mechanism will only end up as a miserable failure. Any activity which does not have its heart at the right place will never bear fruits. In what can be a game-changer to develop the social contribution of companies and upliftment of the downtrodden, the Indian Political class has failed miserably again; this time with a huge price to pay for.

[1] Section.8 Company as per Companies Act 2013

[2] As reported in “The Pioneer” on 25.09.2013 – 

http://www.dailypioneer.com/columnists/business/up-next-csr–inc-of-rs-15000-cr.html

[3] Point No.9 of Part II of Proposed Draft Corporate Social Responsibility Rules under Section 135 of the Companies Act, 2013

[4] Section 135 of Indian Companies Act 2013

[5] Point No.4 of Part II of Proposed Draft Corporate Social Responsibility Rules under Section 135 of the Companies Act, 2013

[6] Point No.5 of Part II of Proposed Draft Corporate Social Responsibility Rules under Section 135 of the Companies Act, 2013

[7] http://indiacp.blogspot.in/2013/01/CSR-Companies-Bill-2012.html

[8] Point No.9 of Part II of Proposed Draft Corporate Social Responsibility Rules under Section 135 of the Companies Act, 2013  of Schedule VII

[9] As reported in “The Hindu” on 15.09.2013 – 

http://www.thehindu.com/news/national/other-states/chhattisgarhwants-all-csr-spending-to-go-to-cm-development-fund/article5131752.ece

[10] As reported in “The Hindu” on 23.09.2013 – 

http://www.thehindu.com/business/Industry/indias-first-csr-index-on-its-way/article5160871.ece