Standing committees of Parliament are not always known for making constructive suggestions on Bills they are set up to scrutinise. On the subject of corporate social responsibility (CSR), at least, the 31-member standing committee on finance has proven true to form. On Monday, it tabled its report on the Companies Bill – now in its nth avatar – in the Lok Sabha. One key recommendation is for corporations above a certain threshold to mandatorily spend a percentage of net profit on CSR activities.
The idea is not novel. The mining Bill, also under parliamentary scrutiny, sequesters a proportion of corporate profit and all of royalty for sharing with project-affected local communities. Both are unexceptional in their intent — to put it in clunky government-speak: “corporates [sic] in general are expected to contribute to the welfare of the society in which they operate and wherefrom [sic] they draw their resources to generate profits.”
There are two points worth noting. First, as anybody with a rudimentary knowledge of commerce will point out, profit is a derived figure. It is better if such spending – if it should be mandated at all – were linked to a percentage of a corporation’s sales or turnover. In fact, it might be better to do so because it is tempting for corporations of a certain bent to show a “loss” to escape such obligations (as many do for tax purposes).
Second, how will such spending be monitored, surely a critical point if such expenditure becomes mandatory (although parliamentary committee recommendations are not binding on the government)? The Bill had said every company with a net worth of at least Rs 500 crore or turnover of at least Rs 1,000 crore or a net profit of Rs 5 crore in any financial year “shall make an endeavour” to spend on CSR (the parliamentary committee amended this to the more definitive “shall ensure”). The Bill prescribed that these companies try to spend at least two per cent of average net profit in the preceding three years on CSR every financial year.
If the data provided by Sameer Mulgaonkar of the Business Standard Research Bureau is anything to go by, the task of monitoring will be huge. Among listed companies alone, 520 have a net worth above Rs 500 crore; 536 companies have a turnover of more than Rs 1,000 crore and 1,068 companies have a profit of more than Rs 5 crore.
The Companies Bill of 2011, which introduced the concept, has provided for a CSR committee with a complement of independent directors. But for compliance, the government is relying on what it calls the “Apply or Explain” principle. This raises doubts about the government’s true intent: like the “gender budgeting” initiative of a few years ago which degenerated into a laundry-list compilation of initiatives, this, too, could become a proforma exercise.
Of course, many large companies spend far more than the prescribed amounts on CSR and have been doing so for years. But the temptation among hard-pressed smaller companies to “explain” rather than “apply” is high, given the unsurpassed detail set out in the National Voluntary Guidelines that were issued in 2011 (will these now become mandatory?). The Guidelines helpfully provide a suggested Business Responsibility Reporting framework based on nine principles with “core elements to actualise each of these principles”.
Much painstaking hard work has gone into these Guidelines — they abound in flow charts, diagrams and some genuinely thought-provoking case studies. But for the most part they ricochet between high-minded principles (“Businesses should understand the human rights content of the Constitution of India, national laws and policies and the content of International Bill of Human Rights”) and motherhood statements (“Businesses should take measures to check and prevent pollution”).
It is hard to escape the notion that the government’s effort to promote CSR is little more than a sop to a civil society increasingly and vocally restive about the government’s uneven record in human development, environmental regulation and an alarming penchant for crony capitalism.
The clue to its approach can be read in the message provided by Murli Deora, then corporate affairs minister, as a preface to the Guidelines. With due obeisance to India’s ancient past (including references to the Mahabharata and Arthashastra) and Mahatma Gandhi, he conflates personal charity and philanthropy with CSR. The hard-working Guideline authors could have told him he’s got it all wrong.
CSR is not charity; it is much bigger than that. It is about doing business in a socially responsible way. This may involve spending on “good works” in and around the area of operations (and, typically, the government has specified what these should be for public sector units), but that’s only part of the issue. Principled governance counts for as much.
Indeed, there is a school of thought that suggests CSR lies in merely doing business honestly, without discrimination and the minimum pollution, principles that sound easy but are the toughest to follow consistently. That is why CSR imposed by the government is unlikely to transform companies into model corporate citizens. The example of Enron, which spent heavily on local good works, remains a beacon of amorality.