How a company earns is as important as its CSR

By Kiran Karnik

CORPORATE Social Responsibility (CSR) is being overtaken in boardrooms and in top corporate management circles by the new buzz-concept: Environment, Social and Governance (ESG). Though related, the two are different, with the latter being a broader concept having a wider ambit. Both have the commonality of making for good PR and adding a few pages to the company annual report as also a few paragraphs in the chairperson’s speech at the AGM. However, while ESG is seen as a “doing good” activity —possibly boosting the brand and even the market cap of a company — for a large number of businesses, CSR is now a compliance requirement.

In its early conception, CSR was something that an organization did voluntarily. It took forward the sense of responsibility that good companies felt towards their stakeholders. An early example is how the Tatas embarked on this a century ago by providing a number of benefits to their employees. They, and then a few others, broadened their altruism to include work which benefitted the local community. The change from volunteerism to a recognition of the responsibility of corporates gave rise to the idea and concept of CSR.

The formalization of CSR began with the government formulating a CSR law, requiring large and profitable companies (duly defined) to spend at least two percent of their profit (averaged over three years) on specified activities. However, there was no punishment or fine prescribed. This was an interesting new idea of enforcement via “name and shame” for offenders who did not comply. It was felt that peer, customer and stock market pressure would automatically ensure that the target was met.

Given time, and a good communication campaign — including by those who did comply — this strategy may well have succeeded. However, pressure, and possibly impatience, led to quickly abandoning this soft touch and market-orientated approach. It has been replaced by increasingly stringent provisions which, in effect, make compliance legally necessary and impose penalties for not doing so. Basically, the carrot has been given up and replaced by a stick.

The enforcement of the CSR law, as a necessary item of compliance, has practically made this one more tax or surcharge on certain companies. The only difference is that the company itself spends it, with a choice of where and how it spends the specified amount. For those who want to treat this as a purely compliance item, the best way of avoiding all the hassles is the “PM CARES route”: one cheque and all the requirements are met.

A more fundamental issue merits discussion: what exactly is the social responsibility of a company? As defined by law, it is to deploy a part ( two percent) of the gains of business for social good. This begs a number of questions: what about the processes through which the profit is made (i.e., the company’s operations)? Can the organization be irresponsible in what it does — despoil the environment, for example — and yet be seen as a “responsible” one by merely fulfilling the requirement of using a very small part of its profit for social good? The revenue of a company is 10 or 20 times its post-tax profit. The CSR requirement is, thus, to spend 0.02 percent or just 0.01 percent of its revenue (10 to 20 paise for every Rs 100 of revenue) on CSR. Is it not far more important to look at how it earns that Rs 100 than worry about (and sometimes whitewash it) spending 20 paise on some worthy social project?

Fortunately, other mandated requirements — like the SEBI-specified Business Responsibility and Sustainability Report, required annually from companies above a certain size — do look at some aspects of this. However, unlike the CSR law, this has little “stick”. However, key stakeholders of a company are now very conscious of broader social responsibilities in how the business is run (not merely in how a small part of the profit is deployed). Corporate customers in business-to-business transactions often demand certain requirements to be met by the supplier (ranging from minimum wages for workers to impact on the environment); consumers in B-to-C operations have become more aware and prefer brands that follow social responsibility norms; employees (and potential ones) want to be part of a company which is seen as a responsible one. In addition, the stock market increasingly reacts positively to companies with a good social work image. Often, all this results mainly in PR spends to create the right image: basically, more hot air than substance! Yet even the recognition of the need for a positive image in this area is a good start.

At the same time, there is need to acknowledge that many companies are genuinely committed to not only the legally required CSR spending, but also to ensuring that all their operations take account of broader social impacts and needs. This has been amplified by growing social awareness and sensitivity amongst corporate leaders, some of whom are personally exemplars of widely beneficial philanthropic contributions. A further positive development is the idealism and commitment of many young people to social and developmental causes. While many volunteer for such work in their spare time, as employees they automatically exert a certain pressure on their organization to move in this direction. 

Civil society organizations have played an important role for many decades, even pre-dating Independence. While many focus on service delivery, some are also active in the advocacy space. This, and field reports that are in the public domain, is sometimes seen by governments (past and present, state and Centre) in a negative light. This is unfortunate, because these provide valuable feedback, often superior in quality, depth and insight compared to official reports.

The advocacy of alternative policies and feedback of lacunae in various projects are an essential part of democratic functioning. It is a pity that government looks askance at these activities by NGOs. Given this, Indian companies are obviously wary about funding any advocacy work, and, under the Foreign Contribution Regulation Act, funding from foreign sources cannot be used for “political” activities (as advocacy might often be interpreted as). In sharp contrast, all governments in the past three decades have welcomed foreign funding in the corporate arena. Also, many companies, including foreign ones (MNCs) have full-fledged teams devoted to “public policy” and are very active on the advocacy front. This is, presumably, all right!

Of course, foreign donors often have — and push — their own agenda; also, a few NGOs do misuse foreign funding and indulge in activities they should not be doing. However, this is no different from similar black sheep in the corporate world — or elsewhere in our society. An overwhelming proportion of NGOs and their leaders have a deep commitment to the country and are fired by much-needed idealism. To hamstring them is, indeed, both unfair and sad. The role of NGOs amidst the COVID pandemic was lauded by the prime minister himself. Their empathy and connect with local communities is deep and strong, engendering trust: a factor that is critical for many things, including persuasion of vaccine resistors.

The active constraints on foreign funding of NGOs make it critical for companies to support them through CSR or other sources. Some argue that when the government has a programme, NGOs are not required in that field. Few now share this line of thought, as NGOs have more than proven their mettle with their ability to reach out and to fill gaps. In this context, it was surprising to see a recent missive from a government ministry seeking a halt to the malnutrition programme being run by an NGO. It would require a super-ostrich to deny that malnutrition exists and that rooting it out is a big task requiring all — government, business, NGO, academia, and others — to put their shoulders to the wheel.

CSR could also play another vital role: that of providing NGOs the funds to experiment with and innovate new modes of service delivery or of reaching other developmental goals. NGOs — with their knowledge of grassroots reality, context, and rapport — can do this best. Government is good at executing at scale but has little capacity for innovation, creative solutions, or for experimentation with short feedback loops. NGOs — which can best do this — are, therefore, invaluable and complement the work of the government.

This, then, can be an important, new, and different role for CSR funding by companies: the equivalent of providing funding for innovative business start-ups or “social impact” investments. A modification in the list of permissible areas for CSR funding could open this avenue and lead to new models of service delivery or innovations in skill building and education, or in a whole host of development, livelihoods, and sustainability activities. Successful models could be adapted, contextualized, and scaled by the state or central governments.

Companies need to go beyond the legal requirements of CSR and redefine their responsibility. As corporate citizens, often with considerable and widespread impact, they need to ensure that through their activities they further the well-being of all stakeholders, including the wider community that they affect. They also need to be active players in protecting and bettering the environment. The metrics by which they judge themselves must include all these factors and be transparently available to the public. Apart from competing for market share, valuations, talent, and profits, they must also run a race on bettering themselves in a much wider sphere. That — and not just “donating” two percent of their profit — would be true corporate social responsibility.

 

Kiran Karnik is a public policy analyst and author. His most recent book is Decisive Decade: India 2030, Gazelle or Hippo.