The business case for effective CSR in India

In April this year, mandatory CSR contributions will come into action as the Company Bill 2012 becomes law in India. As per the bill: “companies with a net worth of Rs 500 crore or more, a turnover of Rs 1,000 crore or more, or a net profit of Rs 5 crore or more will have to set aside two per cent of their average net profits in the preceding three years for “corporate social responsibility” activities."

This represents a huge business opportunity for the Indian PR business, but are Indian companies convinced of the business case for CSR? In order to be truly effective companies need to be convinced of the value that CSR brings so that programmes are designed to truly do well and help the brand at the same time.

The business case for effective CSR

A major new study at Desautels School of Management at McGill University in Canada has established a direct and measurable link between corporate social initiatives and financial performance. The study researched four secondary sources about the financial performance, of US based publicly listed companies. This was done between the years 2000 and 2009.

The extensive and long research undertaken by Professor Saurab Mishra has shown that an increase in a company’s positive CSR will lead to a 20% reduction in financial risk whereas an increase in negative CSR will result in an 11% increase in financial risk.

What does this mean is real terms?

According to Professor Saurab Mishra, Desautels School of Management at McGill University, good CSR can directly affect the stock market price of a company. The professor says: “Our findings show that firms that focused on positive CSR are expected to lower their idiosyncratic risk in the stock markets, whereas those engaging in negative CSR are expected to increase their idiosyncratic risk. Idiosyncratic risk forms an important component of the total volatility in the stock price of a firm, and a reduction (increase) in it can both instil greater (lower) confidence among investors as well as lower (raise) the cost of capital for firms. Together this implies that CSR is an important strategic tool for firms to manage their stock price and shareholder value.”

Rupa Gandhi Chaudhary, CMO, Wildlife Trust of India, agrees that CSR serves as a win-win situation for both the corporate and the beneficiary. If co-branded well, it serves to augment the image of the company as a corporate that cares. Rupa adds: “In our case, WTI being conservation NGO, becomes the direct beneficiary of corporate CSR initiatives. Most of our corporate donors are actually partners in our conservation projects, such as Tata Chemicals Ltd. who have partnered with our Whale Shark conservation project since 2003. It is tough to draw a line where CSR ends and where long term project partnership begins. We also aim for more such corporate buy-ins that can serve as a multi-pronged partnership for generating awareness on threats to wildlife and the need for conservation among target audiences to influence decisions and policy on wildlife through corporate bodies like CII, ASSOCHAM.”

While good CSR actions are easily defined, what contributes to bad CSR in India is not. Professor Saurabh explains that a major reason firms engage in socially irresponsible practices is due to the belief that such actions are needed to elevate their financial performance and deliver greater value to shareholders.

“Managers often subscribe to the neo-classical economics view that CSR and shareholder value are at odds with each other and any CSR investments distract attention and resources away from financial performance. Unfortunately, many firms still do not appreciate the effect negative CSR can have on the equity they enjoy with their key stakeholders, such as consumers and employees, which in turn can adversely affect their financial value. I do not have direct evidence for the case in India, but from my personal experiences and readings it seems very likely that the incidence of negative CSR is as prevalent, if not more, than anywhere else in the world.”

4 main factors that lead to negative CSR:

Is mandatory CSR the way to go?

India is the only country in the world where CSR contributions are mandatory. Professor Saurab feels that this may not have a positive impact on the financial performance due to CSR. “One of the primary ways CSR helps financial performance is through its positive effect on the equity a company enjoys with its key stakeholders. If the stakeholders feel that a firm is "compelled to do" something, rather than because it "wants to do" it, we would expect them to experience less positive feelings and thus weaken the mechanism linking CSR with the firm’s financial performance.”

Professor Saurabh agrees that the case of India represents a complex problem where there is an urgent need for pro-social engagement by the private sector. In light of this, the government mandate makes some sense as it necessitates firms to put some money towards socially responsible initiatives.

Professor Saurab cautions: “However, the efficacy of such a mandate still needs to be proven. If history and economics is any guide, firms often find ways of circumventing legal mandates and find loopholes to minimise the impact of mandatory contributions on their financial bottom-lines. If instead, managers can be made to understand the direct, significant effect CSR can have on their shareholder value, it may have a more convincing effect on their attention towards pro-social issues. “

There is currently a directive in India that there has to be three board members on a CSR committee. PR professionals say that in spite of a high degree of senior management monitoring there are challenges in designing CSR programmes that provide real value. According to Rajesh Pandey, Managing Partner, Clarity IMC: “Every company claims to have some CSR initiative, however, what is missing in CSR is the Sustainability aspect, which a third party can audit and recommend board direction forward.”

Rajesh advises: “Our team at Clarity IMC visualises that CSR is going to be a big sustainability challenge going forward, and all PR agencies should keep pace. Various factors come into play from local Self Help Groups and Residential Welfare Societies from Governmental bodies to international regulations. Just keep your ears to the ground. It’s the masses that decide and the agency and client have to collaborate to share information and decide what is right.”

Written by Paarul Chand