Make the Best Use of the CSR Pro­posal

The Economic Times - - The Edit Page - Arun Dug­gal

In the new Com­pany’s Act, 2013, the manda­tory 2% cor­po­rate so­cial re­spon­si­bil­ity (CSR) ex­pen­di­ture is a unique and con­tro­ver­sial pro­vi­sion. It is unique be­cause in no other coun­try is CSR spend­ing man­dated by law. It is con­tro­ver­sial be­cause many in busi­ness be­lieve the roughly .` 15,000 crore CSR spend­ing from cor­po­rate In­dia could be mis­used. How­ever, it is a timely idea and the chal­lenge will lie in ex­e­cu­tion. In many coun­tries, com­pa­nies’ con­tri­bu­tion to so­ci­ety is en­cour­aged and re­ported through an­nual sus­tain­abil­ity re­ports of the board. Scan­di­na­vian coun­tries, par­tic­u­larly Nor­way, en­cour­age com­pa­nies to be in­volved in so­cial projects with global im­pli­ca­tions, like clean drink­ing wa­ter, poverty re­duc­tion and en­vi­ron­men­tal ini­tia­tives. In the US, large in­vestors like Calpers mon­i­tor their in­vestee com­pa­nies’ con­tri­bu­tions to so­ci­ety. In the UK, many com­pa­nies re­port a triple bot­tom line.

To­day, the world over, pub­lic trust in govern­ment and busi­ness is very low. The global fi­nan­cial cri­sis of 2007 led to mil­lions of job losses, but no­body was held ac­count­able. Po­lit­i­cal and so­cial move­ments in many coun­tries, in­clud­ing In­dia, are de­mand­ing re­forms in the sys­tem. The old Fried­ma­nian doc­trine, that the only so­cial re­spon­si­bil­ity of a com­pany is to max­imise its prof­its, is no longer ac­cept­able. Ma­hatma Gandhi’s 80-year-old phi­los­o­phy that com­pa­nies are trustees of a na­tion’s wealth is more rel­e­vant to­day.

So, the CSR ini­tia­tive in In­dia is time- ly and pi­o­neer­ing. If im­ple­mented well, we could lead the world to a higher level of cor­po­rate gov­er­nance and so­cial re­spon­si­bil­ity. If done badly, it may dent in­vestor con­fi­dence. Now, the Air­ports Au­thor­ity of In­dia is plan­ning to spend .` 10 crore, or 63% of its CSR bud­get, to build wrestling halls in the con­stituen­cies of aviation min­is­ter Ajit Singh and his son — a bla­tant mis­use of pub­lic of­fice. Coal In­dia, which has failed In­dia in coal de­liv­er­ies and pre­cip­i­tated a power cri­sis, is plan­ning to cre­ate a huge bureau­cracy of CSR of­fi­cers to meet its obli­ga­tions. In the worst-case sce­nario, the .` 15,000 crore of manda­tory CSR ex­pen­di­ture from In­dian cor­po­rates will be gob­bled up by in­ap­pro­pri­ate peo­ple, bu­reau­cra­cies and the grow­ing in­dus­try of CSR con­sul­tants. But such a ter­ri­ble out­come can be avoided. Most busi­ness lead­ers recog­nise CSR spend is not dona­tions but in­vest­ments for the long-term in­ter­ests of its stake­hold­ers and so­ci­ety in gen­eral. The govern­ment must trust the board and its share­hold­ers to make these in­vest­ment choices and not be over-pre­scrip­tive. Here is what needs to be done. First, if a CSR ac­tiv­ity in­volves a po­lit­i­cal leader, govern­ment of­fi­cial, a com­pany’s di­rec­tor or ex­ec­u­tive, it should be ap­proved by in­de­pen­dent di­rec­tors, and in a share­hold­ing meet­ing. This open scru­tiny will, hope­fully, elim­i­nate in­ap­pro­pri­ate CSR ex­pen­di­tures.

Two, in ad­di­tion to CSR ac­tiv­i­ties spec­i­fied in sched­ule VII of the Act, any other CSR ac­tiv­ity or pro­gramme ap­proved by the board in the best in­ter­est of the com­pany and its stake­hold­ers and also ap­proved by the share­hold­ers should be el­i­gi­ble. Three, a CSR com­mit­tee should be formed, prefer­ably headed by an in­de­pen­dent woman di­rec­tor. This also ad­vances the agenda of hav­ing more women as in­de­pen­dent di­rec­tors in mean­ing­ful roles. Em­ploy­ees should be en­cour­aged to vol­un­teer for CSR ac­tiv­i­ties.

Four, CSR ac­tiv­i­ties or pay­ments in­tended to win un­due favours from politi­cians or govern­ment of­fi­cials are pro­hib­ited. This will min­imise bribes and cor­rup­tion. Five, con­tri­bu­tions to so­cial sec­tor funds ap­proved by Sebi should be made el­i­gi­ble CSR spend­ing. So­cial sec­tor fund man­agers are not only ex­perts in their area and good in­vestors but also pas­sion­ate about serv­ing so­ci­ety. So far, most funds for the so­cial sec­tor have been pro­vided by in­ter­na­tional foun­da­tions such as the Gates or Dell Foun­da­tions.

Six, the re­port­ing for­mat should be flex­i­ble and not pre­scrip­tive. Seven, com­pa­nies should build CSR ex­e­cu­tion and mon­i­tor­ing ca­pa­bil­i­ties over the next one or two years to en­sure the money is used ef­fi­ciently and for max­i­mum so­cial good. Fi­nally, el­i­gi­ble CSR ex­pen­di­ture pro­vi­sions in the Act and un­der sec­tion 80G of the In­come-Tax Act should be aligned. The CSR pro­vi­sion has the po­ten­tial to do a lot of good, let’s not blow it. If growth did fol­low lib­eral poli­cies and re­forms in the In­dian econ­omy, …still some crit­ics ar­gue that the growth is not “in­clu­sive”, that it has failed to re­duce poverty and has not spread to the marginalised groups in so­ci­ety. It is of­ten ar­gued that a pol­icy of re­dis­tri­bu­tion is prefer­able. This sounds plau­si­ble ex­cept that the In­dian ex­pe­ri­ence, and we might also add the East Asian ex­pe­ri­ence, shows oth­er­wise. In 1980, econ­o­mist Gary Fields, who spe­cialises in poverty, de­scribed In­dia as a “mis­er­ably poor coun­try”. Yet, the re­forms, es­pe­cially be­gin­ning in 1991, trans­formed it from a bas­ket case into a pow­er­ful en­gine of growth, with poverty de­clin­ing at rates never be­fore ob­served in the coun­try…. Com­mon sense sug­gests that we should ex­pect a rapidly grow­ing econ­omy to cre­ate more jobs and op­por­tu­ni­ties for the poor to es­cape poverty, whereas slow-grow­ing economies would hardly do so. Pro-growth ad­vo­cates are of­ten con­fronted with the fail­ure of “trickle-down” eco­nomics, which sounds like the Earl of Not­ting­ham and his courtiers and vas­sals are eat­ing veni­son and roast legs of lamb at the din­ing ta­ble and crumbs are fall­ing to the serfs and dogs be­low. We don’t care for the con­cept or anal­ogy. In­stead, we use the now-pop­u­lar phrase “pull-up” growth strat­egy, which bet­ter de­scribes what we have ob­served: a rad­i­cal, ac­tivist set of poli­cies to ac­cel­er­ate growth and to pull up more of the poor into gain­ful em­ploy­ment.

From “Why Growth Mat­ters”

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