Hits and misses of Baijal panel report on CSR

Wrong on penalty for non-compliance, exclusion of employee services cost from CSR spending

The high-level committee, headed by former secretary Anil Baijal, to suggest measures for improved monitoring of the implementation of corporate social responsibility (CSR) policies, submitted its report in September, 2015. The committee observes that the government should have no role in engaging external experts for monitoring the quality and efficacy of CSR expenditure of companies. I agree with this observation. The board is accountable for the quality and efficacy of CSR expenditure. It may appoint an external agency to evaluate the same if it so desires. Of course, the government can engage experts to evaluate the quality and efficacy of CSR spending at the macro-level for reviewing its policy and not for regulating CSR spending of companies.

However, I disagree with the committee's recommendation that the monetised value of employee services in implementing the company's CSR policy should not be taken into account to calculate its CSR expenditure. The committee 'encourages companies to involve their employees in their CSR activities', but feels this inclusion of the monetised value will 'create rather than solve problems'. Involving employees in CSR activities leads to significant benefits that are not available otherwise. For example, it helps sensitise employees in the CSR, build leadership qualities and develops them as responsible citizens. If the government really wants to encourage employee involvement, as desired by the committee, it should allow inclusion of the cost of employee services in CSR spending. Though it is difficult to value employee services, cost accounting methods are available to estimate this, fairly accurately.

Perhaps, the committee is concerned about misstatement by companies and their temptation to overstate cost of employee services. This concern may be addressed by introducing some kind of an audit that will provide assurance that proper records of employees' involvement in CSR activities are maintained and that the management's computation of the employee cost is in accordance with accepted cost accounting principles. Non-inclusion of the cost of employee services will discourage companies to involve employees in CSR projects resulting in loss of opportunity to leverage innovation and management skills available in the country. The government may consider putting a cap on the cost of employee services to be included in CSR spending.

In the context of penalty for non-compliance, the committee is of the view that leniency may be shown in the initial two/three years to enable companies to graduate to a culture of compliance. The extant law considers non-disclosure as non-compliance. Failure of a company to spend two percent of its average net profit of the previous three years on CSR is not considered as non-compliance. It is difficult to understand why companies will require time to develop the culture of complying with disclosure requirements. Perhaps, the committee perceived failure to spend the full amount in a particular year as non-compliance. This is an incorrect interpretation of law. The committee has recommended that the law should be amended to mandate that after five years the unspent balance should be transferred to one of the funds specified in Schedule VII. I do not agree here. A company may not be able to spend the full amount in a particular year due to a variety of reasons, such as cash crunch and other priorities in the business. A company, which cares for its reputation as a responsible company, will make up the shortfall in subsequent years. Moreover, with increased awareness, stakeholders will push companies to spend full amount over a reasonable period. Compelling companies to transfer the unspent balance to a fund specified in Schedule VII will adversely affect their ongoing CSR projects. The law does not warrant a change.

The committee strongly feels that the government cannot and should not maintain a data bank of implementing agencies for undertaking CSR activities of companies. However, I think the government or government agencies can maintain the data bank to facilitate selection of implementing agencies with clean record. The government should not mandate engagement of implementing agencies from the data bank. The present law does not require any significant change except for clarifications in the areas highlighted by the committee.

Affiliation: Chairman, Riverside Management Academy Private Limited; Professor and Head, School of Corporate Governance and Public Policy, Indian Institute of Corporate Affairs, Manesar, Gurgaon . asish.bhattacharyya@gmail.com