Corporate Social Responsibility and the new Companies Act; some thoughts on it

Thomas | 07 Nov 2013 | 10 min read

In the wake of the recent Companies Bill, there has been much writing on the provision for Corporate Social Responsibility (CSR). It has been taken up in right earnest by companies, industry bodies, think tanks and non government organisations. While the case for mandating CSR is well made, it is important to situate the CSR provisions of the Bill in a context and suggest possible directions for companies for whom CSR is a novel idea. This piece attempts to do just that.

INTRODUCTION

GLOBAL AND INDIAN ENVIRONMENT OF CSR

Global environment

The provision for CSR in the Companies Bill has to be seen in a global and an Indian context. Globally, many companies have acquired scale and scope that can compete with many governments and consequently it is important to acknowledge the externalities of companies on society. There is an articulated political demand for companies to acknowlege and be accountable for these externalities. This entails reviewing the business practices of companies through a framework of economic, political, social and environmental justice. This demand has led to a whole range of actions by many companies across the world including eliminating child labour from their supply chains, cutting down their energy consumption, contributing to development of the communities around the businesses etc. In order to encourage and guide companies globally in this area, the United Nations initiated the Global Compact. It has issued 10 guiding principles for companies who volunteer with the Compact. They touch upon promoting human rights, labour rights, environment and anti-corruption. Denmark is one of the first countries to make CSR reporting mandatory on Compaines. The Danish companies have been directed to work under the policy framework of the Global Compact of the UN. Most Danish companies have chosen to work in the area of environment and work place improvements. A significant challenge in reporting CSR activities has been that of developing a framework for measurement of results. Therefore, although reporting policies and practices has been done efficiently, reporting on results has been difficult.

Apart from such initiatives, there is also a large number of philanthropic activities that companies have undertaken. This has a much older history than CSR and the Global Compact. Examples include Ford Foundation and Rockefeller Foundation. They have made immense contributions to development activities across the world spanning across sectors like education, economy, human rights, health etc. They have partnered with governments and non government organisations of developing countries across the world for over 5 decades. They have been instrumental in setting up institutions of repute for research, action and consultancy in many sectors in many countries. More recent examples include the Coca Cola Foundation, Bill and Melinda Gates Foundation, Michael and Susan Dell Foundation etc.

Indian environment

The scenario in India has its distinct characteristics. Similar to the global scenario, there exists a similar demand on companies to acknowledge and be accountable for the externalities. But there is a relevant larger context that needs to be kept in mind. At this juncture of development in India, the government has created an enabling policy environment for companies to play a strategic role in the developmental initiatives of the country. What began as involvement of private Companies in infrastructure development, has given way to a policy environment of Public Private Partnerships in various sectors that are critical to development in India. The renewed focus on financial inclusion targets for banks, infrastructure projects in PPP model, inviting companies to mine the country's natural resources, initiatives like Rajasthan Education Initiative can be seen as part of this. At the same time, this process has also been accompanied by significant problems like displacement of people without adequate rehabilitation and compensation, corruption, environmental degradation, charges of companies engaging in 'crony capitalism' etc. The Indian CSR story has to be viewed in this larger political economy context. It has implications on the possible roles that Companies can play in the development agenda of the country and also on how Companies will be perceived by other actors like government, political parties and voluntary organisations.

Unlike the international experience with CSR, so far, there has not been many cases of businesses performing a thorough review and reform of business practices and policies with a framework like 10 principles of Global Compact or any similar frameworks. However, there are a few reported cases of strategic initiatives of this nature. ITC through its e-choupal model and its Agarbati business is an oft mentioned case. The dominant CSR activities in India seems to be about promoting employee engagement in voluntary activities like blood donations, planting of trees, awareness campaigns etc.
There are some significant philanthropic initiatives by corporate houses in the last decade or so. Quite often, this is referred to as CSR activity of companies in popular parlance. Corporate houses like ICICI, Wipro, Infosys, Reliance, Bharti etc have set up CSR operations which are primarily philanthropic in nature. So have many other companies. In fact, the provision on CSR in the new Companies Bill by asking companies to ear mark 2 percent of profits and suggesting a set of areas for philanthropic expenditure has reinforced this idea.

Having said that it is important to point out that companies playing a direct role in social development in India is a phenomenon that has a long history. It precedes the days of PPPs by decades. The contribution of corporate houses like Tata, Birla and others are immense and have to be acknowledged. For example, their two Trusts (SRTT and SDTT) are two of the oldest and still active Trusts financing development activities in India. Apart from these, they also have set up institutions like Tata Institute of Social Sciences, IISc, Tata Energy Research Institute (now The Energy Research Institute), Tata Institute of Fundamental Research, Tata Football Academy and many other institutions. Their contribution to the city of Jamshedpur is another example. Apart from such initiatives, many businesses have made contributions to religious and non religious organisations working on social development. (But these maybe more proprietorships than companies.)

For a large majority of companies, the new Act will take them to uncharted territory of social development. Even for companies that are already exposed to this, the setting up of a Committee of Directors to guide the CSR activity, the ear marking of a minimum of 2 percent of profits, the reporting requirements are likely to result in some significant reorientation in their approaches. Added to this is the possibility of increased pressure from governments, political parties and NGOs to direct the CSR funds to their preferred areas. The Chhattisgarh state government's recent policy on CSR funds being directed to Chief Minister's funds can be seen as an instance of this pressure.

POSSIBLE DIRECTIONS FOR COMPANIES

An honest effort on the part of the companies to implement their Corporate Social Responsibilities would come with multiple challenges to all actors in companies. The CSR provision in the new Companies Bill is premised on identifying the larger society in general and specifically the surrounding community as an important stakeholder to a company. This is, in effect, a quiet burial of the idea of profits as the only purpose of companies in India. This shift from pursuit of self interest to a broader purpose has implications on shareholder's expectations on return on investments, the manager's role of balancing interests of one more stakeholder in the form of communities, and the employees' sense of contributing to a larger purpose in a very visible way. Since the Companies Bill predominantly favours philanthropic activities, the suggestions in the following pages will be primarily in line with that.

Defining a space

First and foremost challenge would be the question of defining the space that they would want to occupy in the area of social development. Some of the 'common sense' ideas that direct a company's business strategies might be useful here. Drawing from the logic of diversification, companies should consider 'adjacent' areas – areas where the company's existing competencies can be leveraged on. For example, a manufacturing company could consider supporting micro-enterprise units to achieve scale, market their produce, improve quality standards etc. This could be achieved through identifying opportunities in existing supply chains or distribution networks. An example for this kind of an engagement already exists in ITC Limited in its Agarbati business and e-choupal initiative. A bank could invest into the area of finanical inclusion through well designed programmes to take financial services to the poor.

Scaffolded entry with partnerships

Even when companies are entering adjacent areas, they would do well to tread carefully in these areas. The practices that have been developed by the companies in the crucible of their markets may not always be fully suitable in the new context. For example, they would be dealing with people with different skill sets and of different socio-economic profile, different ownership structures and governance mechanisms, different constraints in resources, different kinds of external scrutiny etc. The companies must be willing to examine the underlying assumptions in their practices and the contextual factors that aid their partnerships and retool their existing practices or invent new practices. It is here that partnerships with organisations that have previous experience in these areas help. There are many committed, intelligent organisations working in different sectors across the country who can be approached for partnerships. Their assistance would be invaluable for companies to learn how to operate in this area.

On partnerships, it is important that the government and the non government organisations who partner with companies understand the structure of companies, its nature and operational style. The artefacts of a business organisation's culture can come in the way of forming strong partnerships. This is apart from the eminently possible ideological conflicts possible since governments and non government organisations in India are of varied ideologies and persuasions. The companies should also show the necessary sensitivity to the concerns of government and non government organisataions. The perception issue described earlier will prove to be a major challenge in this. The onus is on all actors to engage with the other in a fairly objective and case by case basis without falling to the perils of stereotypes.

Building internal capacity

While partnerships is a recommended approach, it should not be seen as a substitute for building capacities internally. It is important that the Companies take on the responsibility to not just finance but also lend their competencies in managing scale, building brands and efficient operations to the developmental goals. For this, the Companies will have to perhaps revisit their vision and mission and modify their strategy to incorporate the agenda of social development. The preamble of the Indian Constitution does give one a good starting point in this exercise. It could also be seen as an opportunity to revisit the existing business practices so that they do not contradict with the redefined vision and mission. In this, the companies could use the 10 principles of the Global Compact as a guiding framework. Additionally, diversifying the talent pool within the organisation to bring in people with appropriate competencies is also an important step in building the right set of competencies. The country has some fine institutions in the area of Social Work, Development Studies, Rural Management, Economics, Political Science, Sociology, Philosophy, Education, Gender Studies etc where adequate talent can be found at entry level positions. There is also a considerably large pool of workforce with years of experience in social development areas which can be drawn upon. This is apart from the technical skills that might be required.

Another question that organisations should seriously consider is the specific role that they would be playing in their chosen area. There is a wide menu of choices that companies have including financier/funder, implementer, research and development institution, organiser etc. It is here that the mention in the law of 'preference must be given to local areas in which the companies operate' sound like an unwarranted constraint. There are two very practical difficulties which are worth mentioning. What does local mean for a company with a national foot print? For example, a bank with branches across the country. Also, the area of operation of the Companies may not be the place which best deserves the attention of Companies. Two, it does not draw from the rich history of Indian businesses engagement with nation building and social development. Some of the pioneering contributions mentioned above do not fit in with the idea of 'local areas in which the companies operate.'

On this last point about the history of Indian businesses' engagement with social development, it is important that these engagements are documented, well research and publicised. They have the potential to serve as beacons and sources of knowledge for many companies to whom this is a new area. Academic institutions, industry bodies and consultancy firms have an important role in facilitating this process. Last but not the least, Companies must embrace this idea of expanding their horizons, raising their vision to see a large part of this country that still languishes in unacceptable levels of misery and taking the challenges head on.