We The People | Corporate Social Responsibility: Should It Be Mandatory?

India, has become the first country to make Corporate Social Responsibility (CSR) spending mandatory through a law. New amendments to the Companies Act have been approved by parliament to make make it impossible for companies to escape CSR. The government also plans to include a specific penal provision in the Companies Act in case of non-compliance with CSR which could include a three-year jail term for officials in companies that fail to spend funds in any given year. Will this make corporate India wake up to its wider social responsibility towards narrowing down widening inequality or is the CSR law another utopian ideal being hijacked by political interference?

The other panellists invited to We The People, to discuss this issue included Nitin Pai, Co-founder and Director of the Takshashila Institute, Harsh Mander, social activist and author, Gurcharan Das, author, commentator, former CEO of Procter & Gamble, Naina Lal Kidwai, former HSBC Chairperson, former President Federation of the Indian Chamber of Commerce and Industry, head of India Sanitation Coalition, Pushpa Sundar, Founder/Director of Sampradaan Indian Centre for Philanthropy, Madhuresh Kumar, national convener of the National Alliance of People’s Movement in India, and Ashwani Dubey, lawyer, political activist from the BJP.

This is an edited version of an episode of We The People, where Rohini Nilekani and others discuss the 2019 amendment to the Companies Act, and whether enforced CSR stipulations for companies will be effective in the philanthropy sector.

Capital Alone Cannot Solve the Problem

What we’re seeing with the amendment to the Companies Act, is how easy it is to lose public trust when something starts out as voluntary and then the government enforces it as a mandate. Imposing jail time for cases of non-compliance and forcing companies to give, seems counter-productive because it will only create more bureaucratic processes in a country already burdened by so many compliance issues. I do think that the government needs to examine how this law is being framed, and I hope that they will roll back some of these stipulations and find a way to encourage philanthropy without making it mandatory, per se. That the amendment allows corporates a three-year time frame to spend the money, is definitely an advantage and will allow companies to go further than just the annual, short-term kind of strategies. In this sector especially, to really create change, you need to invest not just money, but time, research, and readjustment of strategies.

Of course, we should all exercise our generosity muscle much more. But with any kind of government tax on the super-wealthy, the fear is that personal philanthropy will decrease. So when we’re talking about taxes on wealth, it needs to be framed in a way that spurs generosity in individuals as well as corporations. Governments working in isolation cannot solve all of society’s issues, so philanthropic capital is certainly necessary. However, forcing companies to do this when philanthropy is not their core competency involves a lot more than simply giving up 2% of their profit. It requires setting up departments and really doing the work of trying to implement change, which is not at all easy. So I think the government needs to rethink how to go about this.

The central issue with the CSR law is that it’s as if we’re trying to outsource governance, which is supposed to be the mandate of the state. The fact is that pouring in large amounts of money is not necessarily going to help, because we still don’t have the capacity on the ground to absorb all of it and put it to use effectively. Even in terms of giving during disasters, sending money for flood relief, for example, doesn’t mean the capital is necessarily being used efficiently. Investments need to happen not just in terms of capital, but in terms of building a pipeline for help to reach the people who really need it. We need to step up and create multi-year platforms, and build a lot of trust between the government, the society, and corporates, before we can start innovating solutions. Instead, laws like this criminalising non-compliance result in people trusting the government even less than before.

Gurcharan Das and Nitin Pai both bring up an important point, that each sector plays a certain role in our society. The bazaar or market requires companies to make products, create jobs, and pay taxes to the government, which should be used on education, health, infrastructure, disaster relief, etc. These are the ways that companies improve lives, and the government needs to be cognizant of that. In addition to philanthropic initiatives, the wealth gap needs to also be bridged through economic growth, and corporates play a critical role in national development. Of course, we must also give to causes and try to address social issues, however, that kind of philanthropy needs to be motivated by something greater than the fear of criminal charges. That’s not to undervalue the CSR work happening in this country right now. But what Das mentions does bear noting – we are one of only three countries in the world that has a CSR law. One of these was the UK, and they abandoned this because they realised that it simply wasn’t effective.

The Drawbacks of CSR

Naina Lal Kidwai makes an excellent point, that our current definition for what falls under CSR areas may be too narrow. As chair of the water mission at FICCI, she examined water stewardship, which does not get covered in CSR. However, water stewardship is a key issue for companies to keep in mind when setting up and running factories in India. They need to be using water efficiently, maintaining full compliance with the circular economy and its principles. Companies inadvertently impact the communities they are located in, and doing narrowly defined CSR work after the fact is not a good solution. Instead, we need to widen the responsibility of companies beyond doing CSR, to address the environmental and social impact they have on the areas around them.

Pushpa Sundar also mentions this problem, because the government has simply interpreted CSR as financial allocation. We’ve lost sight of the need for companies to exercise responsibility and good behaviour, and we’re seeing the results of this. For example, the textile industry uses approximately one lakh litre of water to produce just one denim item. Sundar argues that if companies were to treat, recycle, and replenish water sources, that would be a far more valuable contribution than the 2% of their profit. This is one of the inherent flaws in the Companies Act – that CSR is treated as an activity or box to check off, and not in conjunction with a duty towards good governance or good behaviour.

Instead, we’re seeing these funds being used for political purposes, given to programs and goals that the present government approves of. Statistics show that in 2017, the spending for the conservation of the National Heritage category of CSR jumped from 46 crores the year before to 155 crores. This was due to several PSUs giving their CSR money to the government’s Statue of Unity project, inaugurated and unveiled by the Prime Minister. Under the Animal Welfare category, other corporates are spending large amounts of money to fund Goshalas, while issues like child mortality, and eradicating hunger and poverty were ignored and underfunded. So this certainly poses a problem.

The initial hope for the CSR mandate was that it would enable companies to come at societal issues with creativity and innovation, and perhaps problem solve in a way that the government so far has been unable to, however the reality does not quite match up to that. In addition, the new amendment poses a question of accountability. If the funds are not spent within the term of three years, how many people in the company will be held accountable and who will have the power and privilege to get off without any penalty?

Thinking Creatively

The reality is that in many cases, there is a dichotomy between companies that are underpaying their workers, adversely affecting the environment, but then starting a CSR initiative or foundation and absolving themselves of their other responsibilities. But the solution isn’t just to offer money outside their fence, but rather address the problems inside their fence as well, in order to create more sustainable, equitable businesses. However, I’m doubtful that the current CSR law will encourage this. Perhaps we need to look at other models to encourage philanthropy from the corporate sector, like asking companies to align more closely towards SDG commitments that exists internationally, so they can step up and align their businesses better.

The issue with the CSR law is that it is essentially imposing a tax, so I wouldn’t be surprised if companies say, “Why don’t I just give it to the Prime Minister’s relief fund,” to easily tick that box, rather than go through the effort of trying to innovate across societal problems. There’s a lot of work to be done in reframing how we think about accountability and our motives for philanthropy. In order to build up the capacity of social sector organisations to receive large amounts of capital and spend it well, companies need to trust our civil sector entities more.

One thought I had was that if we’re mandating that companies give this 2% SES, why don’t we allow them five years to use it to clean up their act inside the fence. That means improving the way they treat labour, improving their management of natural resources, improving the way they deal with what affluence they put out in the supply chain. It’s as good as saying “Use that 2%, otherwise government will tax it.” This kind of time frame would also help companies comply with SDG goals, etc.
Rather than trying to criminalise people for non-compliance, we can view this as an opportunity for creativity. As the other panellists have pointed out, it’s very difficult to hold the real culprits accountable, and placing that much power in the hand of the state is not what makes for successful societies, nor flourishing businesses either. There are other ways of achieving what we would like to achieve, where companies are serving the communities around them and are socially and environmentally responsible, without taking away from their profitability. So rather than the stringent CSR law currently in place, we can think of a more effective, creative solution that would be beneficial to the markets, the state, as well as society as a whole.