Corporate altruism can do better

Compliance is improving, but sustaining it will take a couple of tweaks

Four years since spending on corporate social responsibility (CSR) became obligatory, it’s heartening to see the altruistic spirit gaining traction.

The Companies Act, 2013, requires a company to spend on CSR during a year 2 per cent of its average net profit of the preceding three years if it meets any of the three stipulated criteria — a net worth of ~5 billion or more, a turnover/revenue of ~10 billion or more, or net profit of ~50 million or more in any of the three years preceding the year of reporting.

Crisil’s analysis shows spending by eligible listed companies in the first three years of the implementation of the CSR norms has been in diverse geographies and far-flung reaches, and not just in catchments. While the overriding intent is to comply with law, many companies have gone beyond the 2 per cent mandate of their own volition — and such magnanimity is worthy of applause.

In fiscal 2017, of the 4,939 companies listed on the BSE and the NSE, 1,688 met the criteria for mandatory CSR spending. Of these, 1,186 voluntarily reported their CSR spend in their annual reports, compared with 1,158 in fiscal 2016 and 950 in fiscal 2015. The 1,186 companies together spent ~89 billion, up from ~83 billion crore in fiscal 2016 and ~64 billion in fiscal 2015. On-year growth in the number companies spending on CSR was just 2.4 per cent compared with 13.1 per cent in fiscal 2016, while on-year growth in spending was up 6.8 per cent versus 29.4 per cent.

Commendably, the growth came despite the heavylifting in fiscal 2016 because of government push to schemes such as the Swachh Bharat Abhiyan — and despite the jitters caused by demonetisation and impending rollout of the Goods and Services Tax. That suggests growth in CSR spending is stabilising. Also, the CSR spend in fiscal 2017 worked out to 2.05 per cent of the total net profit of eligible companies. Though this was a tad under 2.28 per cent the previous fiscal, there are three reasons to believe corporates are looking to comply in spirit as much as in letter.

First, over fiscals 2016 and 2017, the CSR spend surged at a compound annual growth rate of 14 per cent despite a lukewarm 5 per cent growth in net profit. Second, 70 per cent of the companies spent more on CSR compared with the previous year. Third, 57 per cent of the companies have complied with the 2 per cent stipulation, indicating the overall ecosystem is gearing up to absorb the additional spends for better compliance.

Predictably, large companies accounted for about 80 per cent of the total spending, but smaller ones were more generous, spending 2.1 per cent of the net profit on an average, compared with 2 per cent for medium and large peers.

So far so good. And directionally speaking, Mount 10K — or the ~100 billion spending mark —could very well have been conquered last fiscal.

A trend that stands out in all this is the increasing use of implementing agencies such as non-government organisations (NGOs) and voluntary organisations (VOs). As many as 74.2 per cent of the eligible companies used them in fiscal 2017 compared with 61.8 per cent in fiscal 2016.

The preference for NGOs is to be expected, given their presence in the target areas, local knowhow, and resources, and experience in executing social projects, which corporates typically lack. However, it does raise two questions. One, is due diligence adequate when selecting NGOs/VOs? And two, are companies investing to build capacity for oversight?

The answers are far from affirmative. Given the high-stakes game CSR is becoming, it is imperative to promote benchmarking of NGOs/VOs to gauge their execution capability and usher in standardisation. This would benefit the NGOs/VOs, too, given that those graded by Crisil have seen stable growth in grants from corporates in the past two fiscals.

Two key areas that a due diligence exercise must measure are governance and ability to achieve desired outcomes. Gauging governance would involve ascertaining the partner’s legal existence and commitment to transparency. Gauging the capabilities of the organisation, on the other hand, would involve gleaning insights into the scale of work the NGO/VO is accustomed to, and eliciting feedback from donors, beneficiaries, project staff and the community at large. Third-party evaluations can help here.

As for oversight, one reason corporates are not expanding their in-house CSR teams and infrastructure to ensure direct oversight may be the stipulation under the amended Rule 4(6) of the Companies (Corporate Social Responsibility Policy) Rules, 2014, which says overhead costs cannot exceed 5 per cent of the total CSR spend in any financial year. Indeed, this could be the reason companies are preferring to enlist NGOs — increasing the size of their own teams would mean exceeding the 5 per cent cap.

There is, thus, a case for hiking the limit.