The year 2013 was a watershed moment for corporate social responsibility (CSR) in India, which probably became the first and only country to have “mandated” businesses to spend on CSR. The mandate for them was to “do or explain”, in the sense that they were asked to expend two percent of their profits or explain why they did not. The Act provided a set of guidelines and reporting framework for companies. The best thing that has happened since then is that CSR has got into the vocabulary across business in a big way.
Two years earlier, in 2011, the Ministry of Corporate Affairs launched one of the most progressive voluntary guideline framework called the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Businesses (NVGs), which defined responsible business very broadly; and in fact, made an explicit mention of Human Rights as one of its nine principles. The guidelines provided the most important benchmarks on responsible businesses for all businesses. It is a comprehensive guidelines and reflects an Indian narrative. The presence of the document helped different stakeholders to facilitate a constructive debate on CSR with human rights as the core theme.
However, the subsequent enactment of the Companies Act of 2013 derailed the entire debate on wider social responsibility and the debate of two percent assumed prominence. The two percent CSR started being used synonymously with community development by companies. The entire debate shifted to allocation of extra funds for ‘national development’ sector rather than about making their core business operations responsible.
Is anything wrong in making ‘community development’ the core of CSR? Community development as CSR suddenly puts businesses on a pedestal, with CSR being an ‘additional’ task that businesses were doing for ‘national development’. In other words, CSR almost became a parallel process for companies to be seen as philanthropists, rather than as responsible corporate citizens. While CSR still is defined as such activities that are “beyond compliance”, the Company Act seems to have defined CSR not only as beyond compliance but also beyond core operations. The irony is that the businesses are now mandated by a law to comply a section that asks companies to go beyond compliance!
The Act specifies a minimum limit of two percent of profit to be the expense on CSR. Firstly, at a time when a number of companies are not yet allocating funds for CSR, it seems that two percent has almost been seen as the maximum limit, rather than minimum. Secondly, some companies are also trying to redefine some of their regular expenses as CSR expenses. For example, a pharmaceutical company, which used to organize health camps for promoting its new medicines, was alleged to include these health camp expenses as CSR expenses rather than product promotion expense. By definition, the law seems to stress that any expense on core business should not be considered as CSR expense. Therefore, often, companies’ expenses on CSR are not for their workers or supply chain or communities that may have been resettled by them, but such communities “adopted” by the business beyond their core area of operations. Probably, the challenge for the Act was that if they allowed expenses on their workers and compensations for resettlement or supply chain development as part of core operations as CSR expense, then two percent would hardly be enough.
However, now the trend will be that companies’ CSR activities would now be largely with “adopted” communities beyond their operations rather than with families of their contractual workers or members of supply chain or communities that may have been resettled by them, beyond their legally mandated activities. The companies would prefer to spend their CSR expenses on “external communities” or to donate to Government programmes than to spend on their own workers or supply chain fearing that the expense might get disallowed.
It is important to note that this is a time when businesses are reluctant to perform even their mandatory tasks, especially when it relates to contract workers or supply chain; for example, their living wage, skill development, associations, safe and secure space for women and disability. At this time, if the businesses have to take out additional 2 percent for CSR, where would this money come from? If these expenses have to be beyond even the community of workers and supply chain, it will be an impoverished understanding of corporations if it is assumed that they would take this money from profits!
If one speaks to any company, it is clearly seen that now when they calculate prices for product and services, 2 percent is included in the cost. If there is a pressure to reduce the cost to get orders, the line items that are vulnerable are in fact those related to research, training, workers and supply chain members for they are the ones who are not in decision-making spaces. Companies are more prone to compromise on safety norms, affirmative action and skill development for informal workers than on other expenses, including 2 percent CSR!
Will it be right to say that 2 percent CSR on community development is actually competing with expenses which otherwise would have been expended on safety norms, workers and supply chain – put simply as those activities beyond compliance in core business? If yes, the CSR strategy could probably be counter-productive to promoting sustainable core business.
Pradeep Narayanan is the Director at Partners in Change.
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