Will India soon become the first country to make CSR mandatory?

Sukanti Ghosh is Managing Director of APCO Worldwide in India. When he is not at work, he is a critic, photographer, writer, public speaker, music buff and foodie – perpetually struck by wanderlust. You can also follow his tweetfeed at @SukantiG.

A shade over two decades ago, while conducting a study at Tata Steel, I remember being astounded by the work the steel major was doing in the area of community relations, social development and tribal welfare both in and around Jamshedpur and in other parts of the country. I remember spending days in Steel City as I tried to get a first-hand account of what the company was doing, going through each and every document that I could lay my hands on – a Social Audit Report, a Sustainability Report, an Environment Report and reams of related documentation that painstakingly laid out the issues the company was trying to address; the success metrics that had been defined at the beginning of the programme; and the progress the company had made over the years in achieving these goals. I also remember that on my way back from Jamshedpur, I threw out most of my clothes from the suitcase I had carried as I wanted to keep the reams of material I had picked up from the plant. Strange as it may sound, I still have most of this material.

I was amazed then, and I am even more amazed now, at the fact that the Indian Parliament is currently – two decades later – one step away from passing the revised Companies Bill, which, when passed by the Rajya Sabha, will make India the first country in the world to make CSR expenditure mandatory for successful companies. Going forward, all companies with a net worth of INR 500 cr or more; companies with a turnover of INR 1000 cr or more; or companies with a net profit of INR 5 cr or more during any financial year will all be required to earmark and spend at least 2 per cent of their average profits (for the immediate past three financial years) on corporate social responsibility projects. I continue to be surprised that there are companies like the Tatas that are so far ahead of their time and equally so that a government mandate is required for everyone take cognisance of what is considered a normal part of the social contract that companies enter into by setting up a plant in a community in several other parts of the world.

Over the past year, there has been much debate amongst members of several leading industry chambers on whether or not it is appropriate for the government to unilaterally mandate companies to commit to CSR expenditure. ‘After all’, many have argued, ‘there are many companies who don’t need to be told. They understand their social responsibilities and already earmark a healthy portion of their profits for charity and other social development projects’.  There has also been angst expressed over why companies should have to be told to how and where to invest these funds – "preferably in areas close to the area of operations of these industries’; and in the ‘eradication of hunger and poverty, promotion of education, gender equality and empowering women, healthcare, employment and promoting vocational skills, contribution to central or state level relief funds, ensuring environmental sustainability, social businesses etc". But then are all companies operating in India driven by the same values as these corporations?

Segments within India Inc. have also spent considerable time questioning whether such mandatory expenditure on CSR should be considered a social tax over and above standard corporate taxes – after all, wasn’t it Milton Friedman who said the "business of business was business only"? They have objected strongly to the proposed penalties or censure that companies that fail to adhere to these guidelines may face; and have even questioned whether this is another attempt by the government to bridge the current account deficit by INR 10,000 cr per year – the sum the government expects this initiative to funnel into the development sector.

The debate that continues to rage is how such expenses should be treated. Are these expenses that should be deducted from the net profits of a company before arriving at an assessment of corporate tax for a particular financial year? Or not … Well, the jury is still out.

Though the concept of the triple bottom line is still yet to gather acceptance in India, it will no doubt become a key differentiator in the not too distant future, as it has in other parts of the world. In the meanwhile, perhaps it suffices to say, this is a cost that companies need to consider paying for their continued license to operate; a chance to meaningfully participate in fuelling India’s sustainable development story.

As in other parts of the world, in time, more and more employees, customers and shareholders will seek to work and associate with organisations that display a strong social conscience; a conscience best communicated through the testimonials of the people who work or are associated with the firm and not through glitzy advertising.

Customers will increasingly turn to buy the products of companies that are known to do good – be that in terms of breaking convention to establish norms of fair trade in the marketplace or in terms of promoting sustainable sourcing practices. Some people will even be ready to pay a considerable premium to be associated with such a brand.

Should a robust CSR strategy therefore be seen as an extension of a NGO distribution strategy? Definitely not. Nonprofits are crucial organisations in the delivery of services that help in the overall development framework, but the cause must not be mistaken for the means or the end.  Rather, the CSR strategy of a company must be a carefully crafted document, which could be reviewed every three to five years, but must quintessentially continue to reflect the realities of an organization’s operations, its impact on society and the vision of its top management in terms of what its social responsibilities are.

Similarly, the causes that a company chooses to support need to be relevant to the needs of the people they are meant to benefit, rather than causes that provide an organisation with a surrogate marketing platform. Though there are strategic platforms that one can choose to adopt.

Finally, companies should remember that CSR can only work and make a difference if it is conceived and truly led from the helm. How else is one to explain the selfless act of WIPRO Chief Azim Premji? He has signed the Giving Pledge and, through his recent ‘donation’ of INR 12300 cr to the cause of education, has single-handedly contributed more than the cumulative amount that the government expects to set free from all of India Inc. in a single financial year! Today, we can be proud to say that we have a growing number of such philanthropists in our midst. Perhaps it is now time for corporate India to set a similar example.

Source: Tata Steel silhouette – Tata Steel

This article first appeared in The Times of India