Ethics begins where the law ends for a business

By Jagdeep S. Chhokar

INDIA has had an ancient tradition of philanthropy. The tradition of constructing places of worship, and lodging for pilgrims and worshippers near places of worship and pilgrimage, and setting up educational institutions and charitable hospitals started by kings was followed up by the well-to-do and rich communities, such as the ruling classes and the elite mercantile classes like the Jains in Gujarat and Rajasthan. It might not be too much of a stretch to see such philanthropic activities as the forerunners of what came to be termed in the study of business organizations in the west as Corporate Social Responsibility (CSR).

The advent of the factory system following the industrial revolution was felt to have led to several social problems such as labour unrest, poverty, slums, and child and female labour. It was to deal with these industrial issues and the resulting social criticism that industrialists, arguably, started to take actions such as provision of hospitals, clinics, lunch-rooms, profit-sharing, recreational facilities, even creating and maintaining complete townships. It is difficult to pinpoint clearly if these actions were taken solely to solve industrial problems and to increase productivity or were for societal good as an outcome of humanitarianism and philanthropic urges.

Starting with the above, the concept of CSR evolved to its present state. It is interesting to note that one of the phases in this evolution has been referred to as ‘Trusteeship Management’, which in western literature is said to have emerged around the 1920s and 1930s. The concept of Trusteeship Management was enunciated by Mahatma Gandhi and in Indian literature the Trusteeship Management phase of CSR is identified from 1910 to about the mid-1950s.

As it is currently understood, CSR came to be in official existence with Section 135 of the Companies Act of 2013, more specifically since February 27, 2014 when the Ministry of Corporate Affairs (MCA) notified the Companies (Corporate Social Responsibility Policy) Rules, 2014, to come into force with effect from April 1, 2014. The formulation of these Rules also saw some struggle.

There was an attempt to include ‘contributions to political parties’ as one of the permissible activities under CSR, which was successfully resisted by civil society. The final list of permitted activities to “be included by companies in their Corporate Social Responsibility Policies” had nine items plus the mandatory catchall called “such other matters as may be prescribed”.

Soon after the rules came into effect, the MCA issued a General Circular on June 18, 2014, clarifying, “The statutory provision and provisions of CSR Rules, 2014, is to ensure that while activities undertaken in pursuance of the CSR policy must be relatable to Schedule VII of the Companies Act 2013, the entries in the said Schedule VII must be interpreted liberally so as to capture the essence of the subjects enumerated in the said Schedule. The items enlisted in the amended Schedule VII of the Act, are broad-based and are intended to cover a wide range of activities as illustratively mentioned in the Annexure” (italics added, bold in the original).

Over time the activities permitted to be included in CSR policies have come to be modified and increased. The latest list of activities (accessed on January 19, 2023) consists of 12 items.

A comparison of the two lists shows, inter alia, that a majority of the changes appear to have been effected post the formation of the NDA government and thus reflect the priorities or preferences of the current political dispensation. While the deletion of “reducing child mortality and improving maternal health” and “combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases” stands out, and the addition of Swachh Bharat Kosh, Clean Ganga fund, and PM CARES fund, among others, seem worth noting, so are contributions to “public funded universities” and other institutions of research.

 

COMMAND AND CONTROL

The fact that the government decided to implement CSR in the form of a legal requirement is perhaps an indicator that the corporate sector, or at least a significant proportion of it, was not doing enough.

A simple reading of Section 135 of the Companies Act and the Companies (Corporate Social Responsibility Policy) Rules indicates that the underlying approach is one of command and control, which is in contrast to the philosophy underlying similar actions in what might be called mature democracies such as in the European Union, the US, and the Organization for Economic Cooperation and Development (OECD).

The approach of these societies seems to be one of encouraging, motivating, and nudging companies to undertake socially responsible actions rather than of forcing them.

Is it solely because of the control orientation that has been the hallmark of the governmental bureaucracy in India for a long time, or are there some other contributory factors? Has business, and particularly big business, “earned” the right to let the government know that it knows best what to do in the overall interest of society and the country? As always, the reality is that there is more than a grain of truth in both. The government does have a control orientation but it is also a widespread feeling that business has not behaved in a socially responsible manner over time.

A large majority of business enterprises or businesspersons tend to think and work individually, to take care of their individual interest. Those who think about business as a significant sector in the national economy and society are a small minority. Even among them, there are a number of groups, associations and so on, each focusing on its specific interest. There is also a tendency to think that so long as one is not violating any law, one can do what they like. This is not really conducive to effective CSR. Business has to realize that ethics begins where law ends.

 

DIVERSION OF MONEY

Some of the new inclusions in the list of permitted activities, such as the Swachh Bharat Kosh and the Clean Ganga fund, are indicative of the government’s intention of getting the corporate sector to finance some of the actions that the government itself has decided to undertake.

The inclusion of the PM CARES fund, with effect from May 26, 2020, seems to be in a different category. This fund has been controversial ever since it was set up during the onset of the COVID-19 pandemic. Its website describes it as “a Public Charitable Trust”.

It goes on to say that the “Prime Minister is the ex-officio Chairman of the PM CARES Fund and Minister of Defence, Minister of Home Affairs and Minister of Finance, Government of India are ex-officio Trustees of the Fund.”

The Trust was given permission to collect donations from foreign sources from the day it was set up whereas the rules require an entity to have at least three balance sheets before it can apply for permission to receive donations from foreign sources under the Foreign Contribution Regulation Act (FCRA). Despite this, it is claimed that it is not a government fund but a private fund and therefore does not come under the RTI Act. Consequently, the working of this fund is not accessible to people at large. It has been reported that several large public sector companies have made significant contributions under CSR to this fund. This fund, thus, remains a mystery.

Another equally big, if not bigger, mystery, though not really related to CSR, is that of electoral bonds which was dealt with in some detail in Civil Society’s December 2019 issue.

The latest available data shows that out of Rs 9,208 crore worth of electoral bonds from 2018 to 2022, the BJP received Rs 5,270 crore worth of bonds or 57 percent of the total amount received by all parties during this period. All the remaining political parties put together received 43 percent. The next biggest recipients were the Congress and the Trinamool Congress at Rs 964 crore or 10 percent and Rs 767 crore or eight percent, respectively.

It is worth recalling that in the case of electoral bonds, no one is supposed to know who has given how much money to which political party except the State Bank of India (SBI), the sole entity authorized to sell these bonds.

It seems to be a reasonable assumption that if the SBI knows something, it cannot keep it hidden from the government. It follows therefore that the government, and by extension, the ruling party at the centre, also know who has bought electoral bonds worth how much and which party they have been donated to.

A direct fallout of this information asymmetry is that the government (the ruling party) can choke, or at least control, the flow of funds to all opposition parties.

Business enterprises have been known to “manage” their environment through a variety of means. If Indian companies think that they can ‘manage’ their political environment by pumping CSR money into the PM CARES fund or to the ruling party through electoral bonds, they might be taking a sizeable risk, at least in the long term. The risk is best captured in the words of the Urdu poet, Rahat Indori, who said: “Those who are sitting on the seat of honour will not be there tomorrow; they are tenants, not the owners.”

 

LESSONS

So, what can corporates learn from this? CSR is neither merely complying with the law nor keeping the powers-that-be in good humour. The lesson is to internalize that business exists as a part of the larger society because it serves a specific purpose in society and is, in turn, supported by society which consists of the supplier of its inputs and consumer of its outputs. And that no part of a whole can survive at the cost of the whole. Directly put, business will not survive if society does not survive, business cannot be healthy if the society of which it is a part is not healthy. This is why CSR is not a mere legal requirement to be satisfied, nor is it just a desirable thing to do, it is essential for the survival of business.

 

Jagdeep Chhokar is a former professor, dean and director-in-charge of the Indian Institute of Management, Ahmedabad. He is a founder-member of the Association for Democratic Reforms (ADR). Views are personal.