Research & Analysis

CSR Obligations: Are firms being honest?

The Finance Ministry’s recent assurance to do away with criminal penalty on company officials for failing to meet their spending obligations on Corporate Social Responsibility (CSR) would be welcome. However, the penalty on not meeting the mandated 2% spending on CSR remains and it is critical that it is complied with honestly and willingly, rather than through the danda (stick).

The move to introduce this penalty was necessitated because over 40% of entities weren’t complying with the CSR requirement, with close a fifth not spending any money, reflecting clearly that proper management policies either didn’t exist in these companies or these were flouting guidelines due to no stern action from the government. Now, the companies have been given five years as the government feels it’s high time that they share responsibility as stated in the Companies Act.

Remember, India was one of the first to implement CSR, which is a self-regulating business model that helps a company be socially accountable, to itself, its stakeholders, and the public. By practicing CSR, also called corporate citizenship, companies can be conscious of the kind of impact these are having on all aspects of society including economic, social, and environmental.

Companies with a net worth of Rs 500 crore or more or turnover of over Rs 1000 crore or net profit of over Rs 5 crore have to spend at least 2% of the average net profit made during the three immediate preceding financial years on CSR activity. So far, they were required to report it to shareholders, but now the government has decided to crack the whip.

The CSR concept can take many forms depending on the company and industry and through programmes, philanthropy, and volunteer efforts, businesses can benefit society while boosting their own brands. However, most companies don’t give the priority needed. It is generally agreed that CSR is of great value for the community where the factory and/or unit is established and such activities can help forge a stronger bond between employees, the corporation and society.

Way back in 2010, the International Organisation for Standardisation (ISO) released a set of voluntary standards meant to help companies implement CSR. Unlike other ISO standards, ISO 26000 provided guidance rather than requirements because the nature of responsibility is more ‘qualitative’ than ‘quantitative’, and its standards cannot be certified. Instead, it clarifies what social responsibility is and helps organisations translate CSR principles into effective actions. And, because many key stakeholders worldwide contributed to developing ISO 26000, this standard represents an international consensus.

However, reports indicate that over 50% of companies haven’t reported their net profit or CSR spends, and amongst those who did, there are noteworthy disparities in giving. This raises basic questions: Is corporate India complying with the CSR mandate? When it does, how much does it spend on social projects? Which sectors are primary invested? And how is the funding distributed among States?

Sadly, in the true sense, most companies are not bothered about CSR. These set up units where philanthropy is done and not as per Government guidelines. I know of a company which publishes and distributes books on religion that may not be deemed CSR activity. Obviously, doing something for the poor in terms of education, health and environment are crucial necessities that need intervention from corporates. And such expenditure for projects should be socially audited.

But as manipulation is the order of the day, companies unhesitatingly resort to such tactics. It is indeed distressing to note as per a study of Ashoka University’s, Centre for Social Impact and Philanthropy, that the CSR spend of all 19,184 companies in 2015-16 was equivalent to the combined quarterly net profit of just two companies — Reliance Industries and ONGC in Q1, 2018.

The report also found that 10,674 companies–56% –out of 19,184 had not provided either their net profit or CSR spend. In terms of number of CSR projects, 43% of companies implemented the project directly, but when one looks at it in value terms, 37% of companies operate via implementing agencies. Undeniably, CSR is still nascent and a grey area but it is known that implementation of rules and procedures are inordinately poor in India. There is need for better management policies for a strict monitoring mechanism of companies not adhering to CSR guidelines and imposing penalty for those who do not implement the same.

It is indeed distressing that only through fear of penal action the corporate sector is being made responsive to needs and demands of disadvantaged, vulnerable and marginalised sections of society. Can we think or talk of ideal management emerging even in the distant future? What does all this mean for India?

To ensure that projects are implemented professionally and effectively, companies should ensure involvement of voluntary organisations, which have a strong network at grass root level. But most companies don’t bother to get involved. Evidently, only a few have been able to formulate the right strategies, while there are still large discrepancies in the way CSR projects operate.

The study found that nearly 44% of CSR projects are located in the four States –just a fourth of India’s population. These are, Maharashtra, Tamil Nadu, Karnataka, and Gujarat, whereas densely populated UP and Bihar, just get a fraction. There is a large concentration of spending among top companies, and while government companies make up just 2% of the CSR universe, they account for 30% of overall CSR spend. This disproportionate geographical distribution of CSR funds, despite the fact that one-third of CSR spends are listed as ‘pan-India projects’, has been found to be quite intriguing.

Of 718 districts, 115 are backward, and it is here that corporate hand-holding is required. Jharkhand has 19 such districts, Bihar 13, Chhattisgarh 10, while Madhya Pradesh, Odisha and UP have eight each. But only 1% of all CSR programmes have been implemented in Jharkhand and Chhattisgarh each, while Bihar received just 2% and MP 3%.

At the same time, with management policies very tardy, reports indicate that over 50% of companies have not reported their net profit or CSR spends, and amongst those who did, there are noteworthy disparities in giving.

It can be easily stated that deficiencies in management reflect a failure of its elites in CSR, whether in the public or private sector. Public policies that increase product market competition and relax constraints on provision of training for management skills (including nuts and bolts of operations management and accounting, and not just what constitutes an elite MBA curriculum) ought to be at the forefront of policy thinking.

Thus, changing management policies is imperative. To start with we have to stop emulating Western practices and try to formulate a strategy that suits our nation’s conditions. We have to understand that when we talk of management policies we need to keep in mind all those involved in the process of managing — whether an industrial unit, a small scale manufacturing unit or an educational institution or even a health centre at the block level. Primarily, apart from expertise, there is need for sincerity and dedication to the job assigned to him i.e. to properly look after the segment under his charge without fear or favour. And deliver not just for the company but to society as well.

 

… INFA

 

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