CSR: FROM VOLUNTARY TO MANDATORY

Avneesh Kumar

Pinki Kumari

INTRODUCTION

Corporate Social Responsibility has been taken more of as a form of corporate philanthropy so far. And there has been debate about the economic rationality behind this form of corporate philanthropy. While Drucker (2002) talks about US companies in the words ‘corporate philanthropy underpinned by economic rationality’, Aoki (2004) says that majority of big corporations in Japan regard corporate philanthropy as a way of giving back their profit to the society which they consider it as ‘repaying obligations’.  But as far as India is concerned such assumption would change with the proposed changes in the Companies Amendment Bill 2012, which has already been passed by Lok Sabha (the lower house of the Indian Parliament) but yet to be passed by Rajya Sabha (the upper house).World Business Council for Sustainable Development defines corporate social responsibility as “the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large.”So Corporate Social Responsibility (CSR) essentially means the ethical responsibility or obligations of corporate houses that they have towards their stakeholders. The stakeholders can include any group of persons who are being affected by the actions of the company directly or indirectly. Various stakeholders of a profit-making corporate entity gain differently from the activities of the organizations. While primary (market) stakeholders which include stockholders, customers, suppliers, creditors, and employees reap the benefits from the profitability of the company, the secondary (non-market) stakeholders like local communities and surrounding environment mostly suffer from the negative externalities of the activities of the organizations.

The concept of CSR is underpinned in the idea that corporations can no longer act as isolated economic entities operating in detachment from broader society. Sahut et al. (2012) opine that over the last decades, the multiplication of crises (financial, economic, social, food and climate) have showed that the prosperity and welfare of firms cannot be dissociated from social and environmental contexts.. Sticking to the thought that “it is impossible to reap profits while doing business ethically” is a dangerous idea for the society and for sustainable development. Companies ought to be accountable to the negative externalities of their business activities.

ETHICS VERSUS LAW: VOLUNTARY VERSUS MANDATORY

In the age of globalisation and liberalisation, Government is allowing private players to assume greater role in various sectors of economy through public-private partnership as well as through privatisation. In the process we can see that last two decades (1992-2012) have been very eventful and India has collected much adulation as a country on various economic fronts at the global level. But if we start seeing the economic data on per capita basis, then socio-economic attainment of India seems miserable. So a country which is obsessed with higher growth rate, and gets little scope to ponder over Gini coefficient, does not bring out the more abysmal picture of abject poverty and deprivation suffered by a substantial population of India in the mainstream dialogue which even the per capita figures fails to reveal. And all that has happened despite India being one of the fastest growing nations for many years recently. One reason behind that is the failure of the “trickle-down theory”, and we can say that economic processes in the age of liberalization have increased greater concentration of wealth in the hands of fewer people. In France, Sahut et al (2012) observed that obtaining good financial performances was generally more important than worrying about how these results were reached. Similar things can be said about other countries including India.

With that perspective, Government intention behind mandating CSR expenditure by bigger companies would have to be understood. Very few companies are known for good CSR practices. Nonetheless, we can say that primary stakeholders are the main beneficiaries of the profit-making activities of the company and left-overs are meted out to the secondary stakeholders (particularly local communities).

Ethics are moral principles that govern the behaviour of an individual or a group. Whereas a law is a rule or system of rules recognised by a country or a community as regarding the actions of its members and enforced by the imposition of penalties. If we perform an action to be ethically correct, it is done voluntarily out of our own will but if we have to do something following a law, it becomes mandatory for us. Till now CSR in our country had been voluntary and many organisations had been actively involved in CSR activities to follow that ethical value. No doubt, it helped in creating a good image in the eyes of stakeholders and brand promotion but it was done purely on a voluntary basis more or less keeping charity in mind. Making CSR mandatory can snatch away the very essence of ethics from the organisation’s culture. As Agüero & Martinez (2005) say that if anything is not voluntary, it is not free and what is not done freely is outside the scope of ethics.

CSR is defined following the Green Paper issued by the European Union Commission in July 2002, as “the integration of social and environmental concerns in the daily operations and interactions of corporations with the stakeholders on a voluntary basis.” We find the term voluntary also in the ILO definition of CSR. The International Labour Organisation (ILO) defines CSR as “a way in which enterprises give considerations to the impact of their operations on society and affirm their principles and values both in their own internal methods and processes and in their interactions with their actors. CSR is a voluntary, enterprise driven initiative and refers to activities that are considered to exceed compliance with law.” So it can be seen that international bodies have defined CSR primarily as a voluntary activity.

TRUSTEESHIP THEORY

CSR as a philosophy can be linked to Gandhiji’s Trusteeship theory. Trusteeship is a socio-economic philosophy that was propounded by Mahatma Gandhi. It provides a means by which the wealthy people would be the trustees of trusts that looked after the welfare of the people in general. Gandhi believed that the rich people could be persuaded to part with their wealth to help the poor. Putting it in Gandhiji's words "Supposing I have come by a fair amount of wealth – either by way of legacy, or by means of trade and industry – I must know that all that wealth does not belong to me; what belongs to me is the right to an honourable livelihood, no better than that enjoyed by millions of others. The rest of my wealth belongs to the community and must be used for the welfare of the community." He did not make it legally binding on the rich to share their wealth but left it on them to decide morally.

CSR can be perceived in the same way. The organizations earn a lot of money using the human resources and the environmental resources. So they should use a part of their profit for welfare of the people who are affected by their operations. Jamshetji Tata, the founder of Tata Steel was heavily influenced by Gandhiji’s Trusteeship theory. He said “In a free enterprise, the community is not just another stakeholder, but is in fact the very purpose of its existence.” These words of Jamshetji Tata have shaped the company’s culture of social responsibility. Sir Rattan Tata Trust was established in the year 1919 and since then the company has been working extensively on issues like health, education, sports, youth and tribal welfare in the states of Jharkhand, Orissa and Chhattisgarh.

COMPANIES AMENDMENT BILL, 2012

The Companies Amendment Bill, 2012 was passed by Lok Sabha on December 18, 2012.If the bill is approved by Rajya Sabha, India will be the first country to pass a law specifying the amount of expenditure to be undertaken by companies for CSR. Till now three countries have made it mandatory for companies to provide CSR information in their annual reports. The first is Denmark to mandate CSR information in companies’ annual financial reports. The second is Indonesia which passed a law requiring all public companies to issue CSR reports. And the third is USA which made it compulsory for all US based companies to regularly disclose climate related risks in their annual reports.

According to the Companies Amendment Bill, 2012 states that all companies listed on the stock exchange having net worth of Rs. 500crore or more, or turnover of Rs. 1,000crore or more, or a net profit of Rs. 5 crore or more during any financial year, shall constitute a corporate social responsibility committee. This committee shall formulate and recommend to the board of the company, a corporate social responsibility policy which shall indicate activities to be undertaken by the company. The committee shall also monitor the policy from time to time. The bill also mentions that every company must spend 2% of the average net profits made during the three immediately preceding years in pursuance of the CSR policy and that it shall give preference to the local areas around it where it operates for spending the amount earmarked for CSR policy.

 EXPECTED EFFECTS ON CSR PRACTICES

Non-Judicious use of money- 2% of the net profits earmarked for CSR activities will bring a lot of money for welfare activities and could do a great deal in solving our social and environmental problems, provided that ,the money is used in the right place and in the right direction. Many organizations which were earlier doing CSR activities voluntarily might find it hard to comply with the new rules and regulations. Making CSR mandatory by legalizing it will eliminate the feeling of charity and philanthropy from the organizations which they used to do earlier to boost their morale as well as to build a good image.

Shift from public to private domain- Schedule VII of the Companies Bill mentions the areas where the companies have to spend their money for CSR activities. It includes activities like eradicating extreme hunger and education; promotion of education; promoting gender equality and empowering women; reducing child mortality; improving maternal health; combating HIV/AIDS; ensuring environmental sustainability; etc. These areas essentially come in the arena of the government and these facilities are to be primarily provided by the government agencies. It seems that with privatization and liberalization, the government is trying to shift the onus of providing welfare activities and public goods from its own sphere to the private players. Private companies would be providing the services which government had been providing till now and in lieu of that government would provide tax exemptions to the corporate houses. The provision of public goods by government or the private companies- which would be preferable and in the good spirit of the common people is a question which would be answered in near future.

Bureaucracy and red-tapism- The formation of corporate social responsibility committee and policy itself will involve a lot of bureaucracy and red-tapism. It will become a time taking and cumbersome process to form a CSR committee and policy and regularly review and monitor it. There is no provision of any external monitoring or international regulation. The CSR committee will be formed from the board of directors of the company itself. It would be very easy for them to manipulate reports and show fake progress.

Non-compliance- The Bill does not provide for imposition of any penalties in case of non- compliance with the rules. This is the weirdest thing about it. If a law is being passed, there should be penalties for non compliance. Otherwise how does the government ensure the effectiveness of the law? As for now the Bill only mentions that if the company fails to spend the stipulated amount of money, the board will specify the reasons for it in its report.

A fundamental question would also be asked that how far it would be possible to raise the status of CSR activities up to the level of social welfare activities undertaken by the government.

 Co-Author