India has mandated corporate social responsibility under Section 135 of the Indian Companies Act 2013, setting thresholds based on net worth, turnover, profit and age.
India, it is often said – not inaccurately – has too many laws and too little justice.
In 2010 India joined a league of over 135 countries which have legislated guarantees to provide free and compulsory education to children. Seven years later there’s not a lot to show; a UNESCO report indicates that of the 124 million children and adolescents worldwide who are out of school, 17.7 million – or 14 per cent – are Indian. Even among those who get into a school the actual learning outcomes are dismal. According to the Annual Status of Education Report (ASER) fewer than half the children in Class 5 can read a Class 2 text.
India is also the first country that has actually mandated Corporate Social Responsibility under Section 135 of the Indian Companies Act 2013, setting thresholds based on net worth, turnover, profit and age. Compliance has so far been patchy but luckily no corporate body has been penalized!
Two questions that beg themselves: first, what exactly is ‘Corporate Responsibility’ and second can ‘virtue’ be mandated?
Business people argue – forcefully, and with irrefutable logic – that the first and foremost responsibility of any corporation is to make a Profit. And do so ethically by delivering ‘value for money’ to its Customers, without harming the environment, providing a safe, congenial work environment where employees are paid fair wages and afforded opportunities to grow, providing the owners (shareholders) a fair return on their investment commensurate with the level of risk and opportunity cost of their money, have a surplus to invest for future growth while paying all due taxes to the exchequer, and do so complying with all laws of the land in letter and spirit. Difficult to disagree with that!
Yet, Section 135 requires a corporation (above the threshold) to spend at least 2% of its profit on specified activities or at least donate that amount to the Prime Minister’s Relief Fund. They are also required to set up CSR Committees and formally ‘report’ what they’ve done!
There are some corporations – especially those with long established family associations – which have always had a tradition of philanthropy. Most notably, Tata Trusts – the principal shareholders in most Tata companies (through Tata Sons) were established by Sir Dorab Tata the elder son of Tata Group founder Jamsetji Tata in 1932 to plough the earnings into socially relevant causes. As the venerable Seth Jamnalal Bajaj used to say, “Society must Profit back from Profit itself”. Note, he did not shy away from the word ‘profit’ that many PR specialists avoid like the plague!
But those are the exceptions; with native ingenuity inherited through generations of business knowledge and experience most corporates either ignore Section 135 altogether (“we’ll see what happens”) or more often create illusions through smoke and mirrors to paint pictures that are way rosier than the facts on the ground. Professional PR Agencies spin stories of the wonderful things their clients have done. Some even get awards at well-choreographed events widely publicized through the media. A few cleverly divert funds to NGOs set up by spouses or other relatives … and happily keep it all in the family!
Does being ‘socially responsible’ even matter? Does anyone really care? How many potential customers base their buying decisions, or lenders make their lending decisions or financial analysts make ‘buy/sell/hold’ recommendations depending on the social initiatives (or lack of those) of a company? The answer is: very few.
Yet, the ‘health’ of the Society in which a corporation functions is vital for its long term survival; that’s where it draws it customers, employees, suppliers, investors and other stakeholders. A safe, healthy, prosperous and happy society is a productive society – but that’s the job of elected governments. It’s ironic that in India the government runs hotels and restaurants and expects businesses to improve Society!
However helping make it one is a sound business decision. Increasingly many corporations are realizing this and taking baby steps in that direction. The easy way for many is via philanthropy. Write a cheque to a charity or NGO doing what you would have done; in other words ‘outsource’ the job. While this could well be regarded as another ‘make’ or ‘buy’ decision, and perhaps justified on the grounds of letting the experts operate where they have the requisite domain knowledge, in the long term this is essentially unsound. Let me explain:
There are three fundamental principles of any CSR program: first, it must fit into the overarching Business Strategy and aligned with goals, Vision and priorities of the Corporation. Second, there should be a clear well-articulated definition of ‘What Will Constitute ‘Success’. And finally, there need to be simple, objective and well defined metrics for measuring ‘Success’. Remember: what gets measured, gets done. And all this can only be done by those inside the company with a thorough knowledge of its core values, traditions and needs.
Finally, the million dollar question: can ‘virtue’ be mandated? Absolutely not. Section 135 flies in the face of all senses – business, legal and common. It is absurd, impractical and unenforceable and needs to be repealed without further ado. It actually erodes the credibility of the other provisions of the Act.
This article has been taken from here.