Voluntary to Mandatory Corporate Social Responsibility

Abstract
CSR in India has evolved from merchant philanthropy to social development oriented activities by companies. But CSR has always been discretionary in nature by the corporate organizations. Some companies have been outstanding in the CSR domain, while many companies involved themselves in CSR activities for image building. Yet many companies were unconcerned about their social obligations. The new Companies Act of 2013 made CSR mandatory for a class of companies effective from April 2014. This article discusses the CSR legislation of the government of India and its implications.

​Business and Society
The ever increasing global population looks to business for help in improving their livingstandards, and thus creating a better quality of life. Involvement by business in society would help solve multiple social problems. In turn, business benefits from a better social environment as Davis and Frederick (1984) illustrate the multiplier effect:

Business organizations respondto external social change in different ways, which are categorized into threestrategies by Post and Mahon (1980) : (a) an adaptive strategy, (b) aproactive strategy, and (c) an interactive strategy.The first strategy is usually adopted after somesignificant social change is already under way. Thecompany then tries to adapt to a change in its environment that it may not have anticipated.Often, company practices will be modified onlyafter strong pressures are applied. Proactivecompanies are a step ahead of those that merelyadapt in a reactive way, because they understandthe need to “get on top” of the changes that areoccurring in their environment. Such companiestry to manipulate the environment in ways that willbe to their own advantage; and these steps mayor may not be in the broader public interest. Whena company is able to anticipate environmentalchange and blend its own goals with those of the society it has adopted an interactive strategy. Aninteractive strategy promotes harmonious relationsbetween a company and the public by reducing the gapbetween public expectations and businessperformance. Post and Mahon conclude that in the long runan interactive strategy will bring greater, morelasting benefits for both business and society.

Sundar (2000) traces the historical evolution of corporate citizenship from merchant charity,which has been in existence in India even before the advent of industrial revolution and it has been largely a story of family business groups. CSR, as is understood now, was pioneered by the Tatas. JamsetjiNusserwanji Tata not only founded the Tata Steel, but also created the city of Jamshedpur that created a niche for itself as a model township.  Established in 1907, Tata Steel introduced the eight - hour work day in 1912, and a provident fund in 1920 for employees’ social security. Prestigious academic institutions like the Indian Institute of Science and the Tata Institute of Social Sciences are the creations of the Tatas. In India, CSR is largely confined to the philanthropic space. Some companies have, however, shifted focus to education, research, health, community development, environmental protection and skill development programmes. In the developed nations,CSR evolved into a management concept where responsible businesses strive to achieve a balance of economic, environmental and social imperatives, while at the same time meeting the expectations of the shareholders and other stakeholders. CSR is viewed as a strategic business management concept that is built into core strategy and business operations, and increasingly, the thrust is on profit maximization without compromising the sustainability agenda. Even during the period of economic meltdown in the West caused by greedy corporations, some companies have invested in developing sustainable business models and achieved a win-win situation for both the business and the society. Ajith (2011) advocates that CSR in India should aim at creating a just social  order and sustainability of the environment should be its core element. The “Triple Bottom Line” or TBL (Elkington, 1977), consisting of three Ps : Profit, People or Planet, captures a spectrum of criteria for measuring organizational success: economic, ecological and social.

Corporate social responsibility (CSR) has now become an integral part of the business lingua. In a short span of one decade, CSR has become high on the agenda of any assessment of corporate performance. The evolution of sustainable corporate social responsibility from unstructured corporate philanthropy has been demonstrated by the contribution of many Indian companies embracing the well-being of a wide spectrum of stakeholders. At the same time, many companies are indifferent to their mandatory and moral responsibilities towards society and the environment.

Leading industrialist Mahindra (2012) says that there is an “outcry across the world for businesses to be more alive to issues larger than profits, especially after the big bad wolf image that business earned during the recession”. Parliamentarian and industrialist Aga (2012) observes that in many instances there is only lip-service paid to CSR. The state stepped in at this stage making CSR mandatory.
 
CSR Legislation
The new Companies Act, 2013 which is operational from April 2014, will require a certain class of companies to mandatorily spend on CSR activities. Section 135 of the Act mandates every company having a net worth of Rs. 500 crore or more, or a turnover of Rs.1,000 crore or more, or a net profit of Rs.5 crore or more to spend in every financial year at least 2 percent of the average net profits made during three immediately preceding financial years. Though there are more than 8, 00,000 registered companies in India, the CSR provisions of the Act apply only to 2 per cent of these. Now about 16,000 companies will fall within the ambit of CSR law. Chaterjee (2013), CEO, Indian Institute of Corporate Affairs, and the architect of the CSR law, says: “We are evolving a model that is truly Indian, developed for India, by India and in India. The idea is to address the lack of social and economic development in many areas, as also to reach out to the poor and the marginalized….. The corporate social responsibility legislation provides an opportunity to refocus by catalyzing a process of national regeneration, wherein Corporate India can work hand in hand with the government”.
 
CSR Activities
Schedule VII of the Companies Act prescribes the following activities which the companies are expected to include in their CSR policies.

1. Eradicating hunger, poverty, and malnutrition, promoting preventive health care and sanitation, and making available safe drinking water;

2. Promoting education, including special education and employment enhancing vocational skills especially among children, women, elderly, and the differently abled, and livelihood enhancement projects;

3. Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens; and measures for reducing inequalities faced by socially and economically backward groups;

4. Ensuring environmental sustainability , ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water;

5. Protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts;

6. Measures for the benefit of armed forces veterans, war widows and their dependants;

7. Training to promote rural sports, nationally recognized sports, paralympic sports and Olympic sports;

8. Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central government for socio-economic development, relief and welfare of the Scheduled Castes, Scheduled Tribes, other backward classes, minorities and women;

9. Contributions or funds provided to technology incubators located within academic institutions which are approved by the Central government;

10. Rural development projects.

The government will also prescribe other activities under CSR from time to time as has been announced during the last week of June, 2014 (Times of India, June 26, 2014) including slum redevelopment, road safety awareness, consumer protection services, supplementing government schemes like mid-day meals, and interestingly donations to IIM, Ahmedabad for renovation of class rooms. Activities which are exclusively for the benefit of the employees or their families are not CSR activities.
 
CSR Committee
The companies are required to constitute CSR committees with directors of companies as members. The CSR committee should consist of a minimum of three directors of which one should be an independent director except those companies which are not required to appoint an independent director. A private company having only two directors on its Board should constitute its CSR committee with two such directors.
 
CSR Policy
The CSR Committee should prepare the CSR policy of the company which should include the following;

a) A list of CSR projects and programmes which the company plans to undertake during the implementation year, specifying modalities of execution in the areas/sectors chosen and implementation schedules for the same.

b) CSR projects/programmes of the company may also focus on integrating business models with social and environmental priorities and processes in order to create shared value.

c) Specifying that surplus arising out of the CSR activity will not be part of business profits of the company.

d) A transparent monitoring mechanism for ensuring implementation of the projects / programmes.
 
CSR Implementation
A company may carry on CSR activities directly or by setting up a company or society or foundation or any other form of entity operating within India to facilitate implementation of its CSR activities. A company may also implement its CSR programmes through trusts or societies, operating in India, which are not set up by the company itself. Companies may also collaborate or pool resources with other companies to undertake CSR activities and any expenditure incurred on such collaborative efforts would qualify for computing the CSR spending. All CSR activities are to be undertaken within India.
 
CSR Reporting
The Board’s report of a company should include an annual report on CSR containing particulars specified in the Annexure of the Act. Companies should disclose the contents of the CSR policy in their reports and the same should be displayed on the company’s website.
 
Punishment
Not spending on CSR or failing to report it to the Ministry of Corporate Affairs would attract a fine of Rs.50 lakh and even imprisonment of two years.
 
Epilogue
Nobel Laureate and economist Friedman asserts that “Only people have responsibilities. A corporation is an artificial person and in this sense may have artificial responsibilities, but “business” as a whole cannot be said to have responsibilities”. Social responsibility of business is a “fundamentally subversive doctrine” in a free society, and in such a society, “there  is  one  and  only  one  social  responsibility of  business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engage in open  and  free competition without  deception or fraud” (Friedman, 2002).

Mahatma Gandhi (1947) advocated the ethical model of voluntary commitment to public welfare by companies. Economic analyst Aiyar (2012) observes that CSR means observing the highest standards in dealing with health and environmental hazards, and in presenting corporate accounts accurately. He adds that if a company cheats its stakeholders, fiddles its accounts and ignores hazards, then it is grossly irresponsible whether or not it spends 2 per cent of its profit on government approved activities. Consumers are often duped by CSR awards like the oil multinational British Petroleumwhich caused the biggest environmental disaster in history when itsMaconodo well exploded in the Caribbean Ocean because of its failure to observe many safety procedures. BP won many CSR awards. Corporate spending on CSR, far from being an evidence of business ethics, is often a cloak for gross misgovernance, warns Aiyar. The government on its part, should not abdicate its responsibility for the well-being of the people by trying to make CSR spending mandatory.

Porter and Kramer (2011) propose the concept of shared value which is defined as “policies and operating practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in the communities in which it operates”. Creating shared value (CSV) should supercede CSR in guiding the investments of companies in their communities as CSR programmes focus mostly on reputation. CSV, in contrast, is integral to the profitability and competitive position of companies. CSV utilizes the skills, resources and expertise of the companies to create economic value by creating social value.  Jamsetji  Tata, the founder of the Tata conglomerate, said: “In a free enterprise, the community is not just another stakeholder in our business, but is in fact the very purpose of its existence” (Tata Services, 2010).  Mahindra (2012) declares that “CSR is dead, long live shared values”.
 
References

1. Aga, A., 2012, “Companies and Development: the Widening   Universe of CSR”, NHRD Network Journal, 5 (1): 1-12.
2. Ajith, K.N., 2011, Corporates & Social Responsibility, Chennai:  Eeswaar Books.
3. Aiyar, S.A., 2012 October 21:16., “CSR: A Cloak for Crooks”, Sunday Times of India.
4. Chaterjee, B., 2013, “Views” CSR & Competitiveness. 1(6):14.
5. Davis,K. and Frederick,W.C., 1984, Business and Society : Management, Public Policy, Ethics, New York: McGraw-Hill.
6. Elkington, J., 1997, Cannibals With Forks: The Triple Bottom Line of 21st Century Business, Oxford: Capstone Publishing.
7. Friedman, M., 2002, Capitalism and Freedom: Fortieth Anniversary Edition, Chicago: Chicago University Press.
8. Mahindra, A.G., 2012, “Business and Societyin the Twenty- first Century- Beyond CSR”, NHRD Network Journal, 5(1), 36-40.
9. Porter, M.E. and Kramer, M.R., 2011, “Creating  Shared  Value:  How  to  Reinvent Capitalism And Unleash a Wave of Innovation and Growth”. Harvard Business Review, 89(1/2):62-77.
10. Post,J.E., & Mahon,J., “Articulated Turbulence : The Effect of Regulatory Agencies on Corporate Responses to Social Change”. Academy of  1980 Management  Review, 5(3):399-407.
11. Sundar,P., 2000, Beyond Business: From Merchant Charity to Corporate Citizenship – Indian Business Philanthropy through Ages.  New Delhi: Tata McGraw-Hill.
12. Tata Services Limited. 2010, A Journey Towards an Ideal, Mumbai.

K.N.Ajith
Vice-President (Human Resources), Mytrah Energy (India) Limited, Hyderabad 500 032.