Rishabh, a student of USLLS, GGSIPU discusses the CSR policy and its flaws whilst suggesting improvements to the policy.
About corporate social responsibility, it is known that big corporate houses consume natural raw materials on a large scale and this mass consumption depletes the natural resources that are at our disposal whilst having a detrimental effect on nature, giving rise to pollution.
Since, in order to carry out their businesses, the corporations unwillingly harm the environment they are under the obligation to contribute towards making positive social developmental changes and in order to make up for these losses various large corporations come up with certain schemes and set of goals that seek to contribute towards social development. Funds for the same are generated by reserving some part of the profits earned by them.
Section 135 of the Companies Act, 2013, Schedule VII of the Act and Companies CSR Policy Rules, 2014 states that Every company having net worth of rupees five hundred crore or more,turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.
Every company is bound by the section to spend at least 2% of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy.
(A financial year is a period of 12 consecutive months after which every government, organization, business entity calculates its profits, losses, and budget during that year.)
Basically, about corporate social responsibility, policy instructs the corporate houses to contribute to the social development, particularly in the area in which it operates and also the areas which are backward.
Certain activities have been listed under this policy, which needs to be taken up by the corporate houses as part of their CSR activities. They include eradicating hunger and poverty, promoting education, promoting gender equality and empowering women, reducing child mortality and improving maternal health, and combating HIV virus, AIDS, malaria and other diseases.
The Act was gazetted in 2014 and since then, according to the Ministry of Corporate Affairs (MCA), companies have spent Rs 5,922 crore, Rs 7,549 crore and Rs 8,446 crore in 2014, 2015 and 2016 respectively on eligible CSR activities.
FLAWS IN THE CSR POLICY
Currently, the funds for CSR activities are being used in a discretionary manner, free of external interference as long as the desired parameters are met.
Now the question arises, would a better (proposed) model be to instead pool the CSR funds to create a larger fund that could be used for a collective purpose?
There are three main reasons for asking this question.
Corporates fail to understand the meaning of the term, social development
One, corporates are not experienced when it comes to social development. Since it is not a part of their business and even if they are genuinely committed to the social upliftment, this is not an activity they are trained to lead or manage; although they do hire resources to bridge the gap so created, by this lack of experience. There are many entities that have a better understanding of social issues and much more capable of distributing the CSR funds.
Second, the MCA (Ministry of Corporate Affairs) data shows that the majority of the CSR money (almost 75%) is allocated to only three areas- education, health(including sanitation and water), and rural poverty. These are indeed the issues which have troubled our country for a long time.
However, this raises questions. Is there a duplication of effort? are the corporations trying to come together for their personal benefits?
Third, the MCA data also reveals a bias in the distribution of the CSR funds. Almost 40 percent of the money goes to a few well-developed states- Maharashtra, Gujarat, Karnataka, Tamil Nadu, Andhra Pradesh and Telangana. This is not surprising given that India’s most profitable companies (Reliance, Infosys, Wipro, ITC, HDFC) invest regularly and actively in these states and section 135(5)of the act encourages companies to “give preference to the local area and areas around it where it is based or functions, for spending the amount that has been reserved for the CSR activities. ”The current policy, in short, worsens rather than improving the existing regional and social disparities.
Odisha was the most attractive state for investment in 2013. It accounted for over one-fifth of project proposals in the first 10 months, valued cumulatively at ₹4.7 lakh crore, according to data from the department of industrial policy and promotion (DIPP).
Of the 30 districts in Odisha, the three relatively more developed districts of Ganjam, Jajpur, and Jagatsinghpur, which attracted the largest investors, already have an industrial presence. With literacy rates of 81, 80, and 87 percent respectively, their development indicators were better.
On the other hand, a ministry of home affairs (MHA) report identifies six districts as Naxal-affected. The most backward — Malkangiri — with a literacy rate of 49 percent and almost 80 percent of the population belonging to the SC/ST communities, is not likely to attract investments. What hope is there for communities in such districts?
CSR has been a controversial subject. People like the Nobel Prize Winning economist, Milton Friedman, held that business had only a single responsibility to their shareholders and that “the business of business was business”,i.e., the only purpose of a business/company is to do business.
The Economist magazine stated that the CSR policy was in trend among the corporate houses when the concept was first introduced. Corporates have regarded the CSR policy as nothing more than a necessity for keeping their businesses running. A “price” they need to pay to keep their operating license; a means of ensuring and making everyone believe that they are running the business that is in line with basic moral values; an important part of their public relations exercise. They did not spend money on social projects because they had committed to a social cause or moral values.
This attitude has undergone a small but significant change in recent years. It is believed that an increasing number of Indian companies, especially the large corporations which are managed professionally, have introduced and included social responsibility into their corporate values. Their leaders have discarded what Milton Friedman, the Nobel Prize economist, proposed.
They, of course, hold themselves responsible for their “business” but not to just work towards the benefit of the “business”. They recognize the responsibility they have towards stakeholders that fall outside the boundaries defined by the shareholder community.
(A stakeholder is a party that has an interest in a company and can either affect or be affected by the business. On the other hand, a Shareholder is a person who owns a share in a company)
It is believed that profits and principles can’t go hand in hand and believing that is ridiculous, for the two words somewhat contradict each other. This criticism may be strong but it does not discard the idea of increasing corporate involvement in social issues.
Way Forward – POSITIVE CHANGES TO THE CSR POLICY
To bring about a positive change to the society and to make the existing CSR policy more effective some improvements are needed.
CSR TRUST FUND
The corporates should pool their CSR funds into a common “CSR trust” and allow an authority, which doesn’t work under any other authority’s influence, to manage and distribute the funds. This body should include the corporates, NGOs, field experts, and government. Its role should be to define the CSR agenda, identify the CSR projects, select the local partners, allocate the resources and keep a check on the implementation of the same. This model would improve upon the existing model for the following reasons:-
- It would create a pool of knowledge and experience and a platform for sharing of best methods.
- It would provide a medium for learning from the experiences of NGOs and the local community.
- It would facilitate the coming together of corporations and no two corporations will make individual efforts towards a cause rather they will together towards that particular goal achieving the desired results in a short span of time.
- It would allow an equal distribution of funds to every part of the country.
- It would help provide effective solutions as multiple join forces, meaning the trust fund will be armed by the financial and non-financial assets of the corporations. For example, if Reliance JIO, TCS, Unilever and Larsen and Toubro worked towards improving education in a particular area then JIO can provide the schools with tables, chairs, and internet, IT support can be provided by Wipro, marketing skills by Unilever, vocational training by Larsen and all these companies can provide internships. Providing sustainable income generating opportunities for all.
- Having competing entities working together to accomplish a CSR goal would automatically ensure that the funds are not directed back to any corporation’s account, for every corporation will keep an eye on the other; this will create a system of checks and balances.
- If anything, accounting and auditing of CSR funds will be far more stringent and effective, since it is unlikely that corporations will let other corporations get away with any sort of foul play in terms of using the contributions for their personal benefits.
The government is responsible for social development. Corporates cannot replace them in this role. But governments need help. Corporations can make meaningful contributions to any social cause especially when they are provided with a platform which is conducive to such a work and which brings their technology, skills and, resources to use. The corporations will no doubt resist this loss of control over a fund of their annual profits but this resistance will weaken if they are assured that this collaborative effort will be more beneficial for them for achieving their respective CSR goals. The Niti Ayog can call for meetings between the representatives of the CSR trust and keep a check on the response from various corporations.
- Corporate Social Responsibility: http://www.mca.gov.in/SearchableActs/Section135.htm
- Over The Barrel: Because the business of business isn’t just business:http://indianexpress.com/article/opinion/columns/indian-companies-act-corporate-social-responsibility-funds-csr-activity-5202579/
- Flaws in in the CSR design:https://www.thehindubusinessline.com/opinion/a-flaw-in-the-csr-design/article20801239.ece1
- Corporate Social Responsibility: https://www.investopedia.com/terms/c/corp-social-responsibility.asp