Making CSR Mandatory

Indian companies had been doing social welfare activities as per their choice and charity. Now it has become mandatory to spend 2 per cent of their net profit on CSR. The message is loud and clear. Either Execute or Explain.Rama Sinha solici
Making CSR Mandatory

The section 135 of the new Companies Act is expected to make a huge positive impact on the corporate sector in India. It’s going to help companies in building the social and intangible assets. Perceived as having a socially responsible company will change the dynamics of doing business which will add value, and enhance the brand reputation and image in Indian and global markets. But, these ‘desired outcomes’ will only be achieved when companies sincerely, honestly and transparently integrate it into their business strategies, and don’t look at it essentially as ‘social tax’.

Maybe, companies in general won’t be able to foresee the benefit now because CSR has been made mandatory. Companies have always perceived this historic move of the Government as an effort towards seizing their freedom of doing things which they always believed and exercised at their discretions. CSR to them in India is companies’ voluntary initiatives, which to my thinking is wrong. But, in the long run, I am sure  they will appreciate the benefits of the Act/CSR rules from the perspective of building trust and obtaining social licenses to operate business sustainability. The future of sustainable business in developing countries including India will depend very much on social harmony and equality.  Social Equity for the bottom of the pyramid (BoP) communities has to be increased in industry led development processes through sharing the wealth with communities towards making them the resilient community,  and finally a ‘resilient society’, at large. This is what is aimed to be achieved through this Act, and corporates  as important stakeholders of the society having access to wealth have to play their desired and expected roles.

Approximately INR 18000 crore or more is going to become available for the ‘mandatory spend’ in the social sector by corporates  alone which is huge. It will ultimately supplement the efforts of the public and NGO sector on the reduction of poverty and improvement in education, health, livelihood and social infrastructure in the rural areas and urban slums.

Partnerships between companies and NGOs and even multi-sector partnerships between the Government, corporate and civil society are likely to be the outcomes of this Act. It’s bound to happen because not many companies would have the capacity and skills to do CSR on their own. Also, setting up Foundations and Trusts by companies would not be a good idea which would unnecessarily compete with the existing NGOs. But, the potential negative consequences of it could not be denied either. My greatest fear is that NGOs set up by politicians and bureaucrats will make all attempts to put pressure on companies to give funds. Secondly, companies may also use it as a legitimate fund to influence the regulators, policy makers and bureaucrats just to benefit their businesses by paying donations to NGOs run by their immediate kin. NGOs too have to improve their governance and be more transparent and accountable. NGOs have to prepare themselves to meet the expectations corporates  may have of them. If they fail to do so then perhaps corporates  will never go for partnerships with NGOs and then corporates will set up their own Foundations/Trusts. Therefore, looking at the potential risks and challenges, the Government in consultation with corporates  must develop robust operational guidelines that provide insulation to the CSR Act from such risks.

First of all, it’s the mindset; the acceptability of it is going to remain challenging, at least for some time, since it has been perceptibly imposed upon the corporate sector. It has to be therefore accepted by companies as something that has now become part of the regular business, and companies are obligated to do it with all sincerity and honesty as they do other things. CSR so far has largely remained external to core businesses of companies, which they have to mandatorily make it integral.

The Act expects companies to be transparent and accountable, and wants them to structure CSR, which is barring a few leading companies again going to be a good exercise. Further, constituting  a CSR Committee of three board members with one independent member and making the committee accountable for the compliance of it is something perceived as invavsion into the governance of the company.  Noncompliance or even a minor violation will be subject to some penalties and this of course remains as an irritant to the management of companies. Such compulsory provisions are going to force companies comply with it which may be detrimental to the efforts of making companies  self-responsible and self-accountable.

Similarly, the inflexibility of the act which brings into force many ‘first-time-things’ to be done from the first year could be the roadblock. Companies would need some flexibility especially in terms of time mainly towards formation of the committee, development of CSR organization, zeroing in on material of issues and identification of partners to execute the activities and thus increased capacity  for spending 2% meaningfully. The Government must permit some flexibility under the Act to companies, at least for the first 2-3 years in order to internalize it into the DNA.

The Act is unique. It’s all likely that other developing countries will like to take lessons from India and will also bring such an Act in their countries too. Indian Business will have the added advantage then to do business in those markets as responsible business leaders.  

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