Friday, October 15, 2010

Law Street - Economic Times (Oct 2010) -CSR issues

Dear Readers,

Wishing you a happy Diwali. Zenobia Aunty and I hope that you will also be spreading the light by donating whether in cash or in kind. For the October column of Law Street: Charity begins at India Inc, please click here for the online edition of The Economic Times.

Else as always, scroll below.

Best regards,


Most non-profits which Zenobia Aunty is associated with would call her a good soul. She, in turn, admires a host of companies (editorial etiquette will prevent her from naming these companies) who voluntarily give back to society. In one of her earlier columns, she had advocated the need for uniform reporting guidelines for CSR activities, perhaps a CSR index. This would ensure that market forces could take into cognisance the contributions of such companies and would directly or indirectly boost their market value and profits.

However, the concept of a ‘mandatory CSR regime’ has taken her a bit aback and she decided to seek views from a cross section of her friends. The Standing Committee has approved of a provision contained in the Companies Bill, 2009, that mandates every company having a net worth of more than . 500 crore or turnover higher than Rs 1,000 crore; or a net profit of Rs 5 crore or more during a year to formulate a CSR policy to ensure that every year at least 2% of its average net profits during the three immediately preceding financial years is spent on CSR activities as may be approved and specified by the company.

In addition, directors are required to make suitable disclosures in the annual reports. In case any such company does not have adequate profits or is not in a position to spend prescribed amount on CSR activities, the directors are required to provide an explanation.

The intention seems laudable, but is it the right approach? After all, corporate entities do pay taxes. Zenobia Aunty’s friend, Ravichandar, a Bangalore-based consultant, doesn’t think it is a good idea. He explains: “It just reaffirms that the compact between business and government is broken. The role of the corporate sector is to create jobs, generate income and pay taxes. The government was required to take care of law and order, security and social infrastructure provisioning . This machinery has failed and now there are plans to mandate CSR on business. My concern is that ‘fudge’ will be the order of the day on conforming to specified CSR percentage requirements that are to be met. A more sustainable solution will evolve only when business entities realise that getting engaged on social issues is good for business success, this trend is slowly emerging.”

Dave Mason, a businessman from the US, seems to agree. He says: “The devil is in the details and what constitutes a CSR activity is a pretty big detail to have not defined prior to any passage of the Bill. I don't believe I could support such a measure without knowing ‘the what’ and ‘where’ of the money flow.” In case you are wondering, there is no defined mandatory regulation requiring companies to engage in CSR in the US.

Others point out that a few businessmen use the corporate vehicle to fund the so-called CSR activities for their own personal gratification or glory, whereas they should actually be using their own personal money for this purpose.

Zenobia Aunty agrees that there is scope for ‘fudging’ results. Further, what constitutes CSR is in itself quite subjective. Could a landscaping of a workplace campus be CSR? After all, they are ‘making the environment greener’ !

The line between a business activity and a CSR activity could be blurred. At times, CSR can be truly linked to business needs and yet be a worthy cause, such as providing free education to the children of their shop floor workers by setting up a good school near the factory complex which, in turn, could lower attrition or deter strikes.

Yet at other times, CSR activities could be totally delinked to business objectives such as donating to known organisations including government funds especially during natural calamities. There could even be a hybrid model wherein goods or services of the company are used for CSR activities, such as a pharma company donating drugs to a government-aided hospital.

Another issue would arise, some CSR activities could be a business expenditure and deductible, others may benefit from a tax deduction (such as cash donations to recognised organisations), but there may be others which would not get any benefit at all.

However, a few are more optimistic. Dilip sir, a former army personnel and now a management professor, says: “We do have examples of corporate leaders who believe that a ‘profits only’ approach is much too short-sighted . Profit is important for survival and growth but must not the only reason for existence. It is in such companies that CSR emanates as a natural byproduct. The government making it mandatory to earmark at least 2% average net profit during the previous three years will help increase awareness and is a positive step.”

Zenobia Aunty sums it up by saying: “It is better than a CSR cess, for instance as regards education cess, it is impossible for us to know where the money went. At least the power will now be with the shareholders to ensure that the money is put to its rightful use.” The need of the hour is: mature shareholders. Are we ready for that?

Source of the Photograph.