CSR- Do right, the right way

Abstract: For all successful companies with a turnover of rupees one thousand crores   and profit of 5% in the previous 3 years the new companies’ bill is planning on making the CSR spend mandatory.  The definition of CSR as stated in the European commission 2004 is ; CSR is a concept whereby companies integrate social and environmental concerns in their business operations and in their interactions with their stakeholders on a voluntary basis’ (European Commission, 2004:3).Making the CSR spend as mandatory goes against the very nature of the definition of CSR which states it as voluntary. The question this paper attempts to ask is shouldn’t governmental involvement in CSR be only as an observer; playing a passive part? Studies have often revealed that the motive of CSR as being that of having a desire for profits. CSR is often considered to be a branding exercise. The next question this paper attempts to ask is  shouldn’t CSR be interpreted as a tool beyond the scope of pure economics?

 What will this new bill really achieve? Will this new bill   make the companies spend wisely? Will it ever motivate companies to spend more than the mandated 2%? Will it increase the mushrooming of NGO’s to provide kickbacks to the bureaucrats? Is there a rating for the NGO’s to ensure that funds actually meant for the society are not siphoned off? A special concern will be large organisations; especially the public sector organisations. Questions must be asked. These questions coupled with various issues and problems often associated with CSR form the central theme for this paper.

INTRODUCTION

Defining CSR:

Though Corporate Social Responsibility (CSR) is difficult to define there are a variety of definitions of CSR.

Wikipedia: “an expression used to describe what some see as a company’s obligation to be sensitive to the needs of all of the stakeholders in its business operations”. International Standards Organization (ISO): “balanced approach for organizations to address economic, social, and environmental issues in a way that aims to benefit people, communities, and society”.

World Business Council for Sustainable Development: “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”.

The leading British supermarket chain Morrisons claim that its CSR focus is on ‘managing the social, ethical and environmental issues that are material to our commercial performance, through a programme of continuous improvement.

Thus, CSR is the company’s decision to significantly decrease harmful effects and/or increase its perceived beneficial impact on society and/or the environment.

In the update Stephen Timms, Minister for CSR in the Blair UK Government, writes: There are many definitions but we are all talking about how business takes account of its economic, social and environmental impacts in the way it operates-maximising the benefits and minimising the downsides. He argues that ‘the main focus of CSR should continue to be a voluntary one’(Scott, 2007).

This is in line with the definition by the European Commission. CSR is defined as “the voluntary integration of social and environmental concerns into business operations and into their interaction with stakeholders” (European Commission 2002)

The definition from Hopkins is crucially important since it makes clear that a necessary condition of CSR is ‘preserving the profitability of the corporation. Thus what is not asked of organisations is to do CSR at all costs, the primary responsibility is to be profitable to enable the organisation to be able to look after its internal and external stakeholders. Doing right the right way and for the right reasons and not just as a means for branding or marketing(Scott, 2007).

The argument about CSR is the ‘S’-Social- which some companies have suggested detracts from their business related responsible activity by focusing on the social impacts(typically in the community area) while not giving due regard to the importance of their ensuring the company’s operations are run ethically or in a responsible manner(Scott, 2007).

The topic of CSR has received increasing attention in recent years. The practice of CSR is still controversial since it requires firms to undertake additional investments in CSR. These CSR investments are often examined through the economic cost benefit analytical lens, and assumed benefits from CSR activities drive CSR decisions. Some argue that CSR activities increase costs without sufficient offsetting benefits, hurt performance and compete with value maximizing activities.  Examples of these additional costs include making charitable donations, developing plans for community improvement, and establishing procedures to reduce pollution.

Advocates of CSR use the term ethics in their definitions. Yet there appears to be much cynicism concerning corporate and government ethical standards in the advanced capitalist economies. For e g British Ipsos- Mori attitude surveys are a useful source of public perception of corporate ethics in general and CSR in Particular. Some of the results are’ In the late seventies, the British public by two-to-one agreed that the profits of large companies benefitted their customers. Now the public by two-to-one disagrees…the majority of the public also believe that large companies ‘don’t really care’ about the long term environmental and social impact of their actions. Other than the traditionally despised politicians and journalists, business leaders are the professional group least trusted to tell the truth( Haugland, 2006)

Friedman says he want business to ‘engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.

The majority of CSR studies have focussed on examining the link between CSR and financial performance of a firm. Empirical results are somewhat mixed(Sun, 2012).

Early work by Cochran and Wood (1984) find a positive link between CSR and financial performance. McGuire et al (1988) document a positive association between CSR and accounting based and market based financial performance measures. In particular their results suggest that compared to a firms subsequent performance its prior performance is more closely related to CSR. Waddock and Graves (1994) use KLD data to measure CSP performance, Return on assets ROA, return on equity ROE, and return on sales ROS to measure financial performance and document two major findings.

  1. Better financial performance leads to better future CSR performance and
  2. Better CSR performance leads to better future financial performance(Sun, 2012).

A recent literature review (Beurden and Gossling, 2008) and meta-analysis (Orlitzky et al, 2003) both conclude a positive relationship between CSR and financial performance. They suggest that being socially responsible can bring firms economic benefits that contribute to wealth maximization. CSR activities improve relationships with stakeholders which can ultimately lead to improved returns. A socially responsible firm may have improved relationships with their investors, bankers and government officials. The above factors suggest that firms that care about their social responsibilities may perform well in today’s society.

So, doing the right thing is beneficial to the organisation.

What is needed is to move towards a challenging measure of corporate responsibility where we judge results not just by the input but by its outcomes: the difference we make to the world in which we live and the contribution we make to poverty reduction. ( A Government Update-2004)

Thus CSR ought to be for the 5 themes:

  1. Responsibility to the community and society
  2. Promoting democracy and citizenship
  3. Reducing poverty and inequality between the rich and the poor
  4. Employee rights and working conditions
  5. Ethical behaviour ( Scott, 2007)

In the light of the above views we need to understand what the new companies bill proposes with regards to CSR and will it really prove to be beneficial to the society.

In the long run the social and the economic goals are not mutually independent, but integrally connected. The motivation for CSR is a business one, CSR is promoted if profitable eg because of an improved reputation in various markets. On the other hand if philanthropic intitiatives are not based on genuine belief it will be a waste of money(Haugland , 2006).

Companies Bill: CSR spending sounds good, but has problems:

The tabling of the new Companies Bill will bring in the much needed focus on corporate governance and corporate social responsibility (CSR) initiatives as it would make it mandatory for companies to spend 2 percent of their profits on social welfare.

Under the Companies Bill, corporates that make an average profit of at least Rs. 5 crore  or have a worth exceeding Rs 500 crore, or their turnover exceeds Rs.1,000 crore in the last three years will have to allocate funds. Under this proposal, both private and public companies will be treated alike.s society

Moving the bill for the consideration of the Lok Sabha, Corporate Affairs Minister Sachin Pilot, said private companies while maximising their growth, have responsibility towards society besides equitable and sustainable growth of the country, adding that CSR would be mandatory for companies like their tax liabilities. Pilot also said that companies should voluntarily undertake CSR activities and not fear that the legislation amounts to return of “inspector raj”.

Corporates are not likely to take this well since two percent of a company’s average profits is a significant chunk  especially when there is no clarity on whether such spending will be eligible for tax deduction from the income of the company.

“It should be ensured that the CSR initiatives in the Bill do not get bogged down in complicity between companies or lead to too much government intervention,” said Zia Mody.

If companies are unable to meet CSR norms, they will have to give explanations. In case, the companies are not able to do the same, they have to disclose reasons in their books. Otherwise, they would face action, including penalty.

Disapproving of “vulgar display of wealth”, Pilot said the law provides that remuneration of a director of a company should not be more than 5% of the net profit. This may inadvertently increase the profit amount  and thus make it available for CSR.

Mackays description of CSR as a ‘marketing strategy’ in the service of ‘good business’ ie profitablility. For most organisations , CSR is looked at as a marketing and branding exercise. Very rarely is it done for the right reasons. 80% of a class of 70 students in an MBA programme when asked , said that organisations do it as a marketing exercise.

The New companies Bill

The idea is not novel. The mining Bill, also under parliamentary scrutiny, sequesters a proportion of corporate profit and all of royalty for sharing with project-affected local communities. Both are unexceptional in their intent — to put it in clunky government-speak: “corporates in general are expected to contribute to the welfare of the society in which they operate and where from  they draw their resources to generate profits.”

There are two points worth noting. First, as anybody with a rudimentary knowledge of commerce will point out, profit is a derived figure. It is better if such spending – if it should be mandated at all – were linked to a percentage of a corporation’s sales or turnover. In fact, it might be better to do so because it is tempting for corporations of a certain bent to show a “loss” to escape such obligations (as many do for tax purposes).

Second, how will such spending be monitored, surely a critical point if such expenditure becomes mandatory (although parliamentary committee recommendations are not binding on the government)? The Bill had said every company with a net worth of at least Rs 500 crore or turnover of at least Rs 1,000 crore or a net profit of Rs 5 crore in any financial year “shall make an endeavour” to spend on CSR (the parliamentary committee amended this to the more definitive “shall ensure”). The Bill prescribed that these companies try to spend at least two per cent of average net profit in the preceding three years on CSR every financial year.

If the data provided by Sameer Mulgaonkar of the Business Standard Research Bureau is anything to go by, the task of monitoring will be huge. Among listed companies alone, 520 have a net worth above Rs 500 crore; 536 companies have a turnover of more than Rs 1,000 crore and 1,068 companies have a profit of more than Rs 5 crore.

The Companies Bill of 2011, which introduced the concept, has provided for a CSR committee with a complement of independent directors. But for compliance, the government is relying on what it calls the “Apply or Explain” principle. This raises doubts about the government’s true intent: like the “gender budgeting” initiative of a few years ago which degenerated into a laundry-list compilation of initiatives, this, too, could become a proforma exercise.

Of course, many large companies spend far more than the prescribed amounts on CSR and have been doing so for years. But the temptation among hard-pressed smaller companies to “explain” rather than “apply” is high, given the unsurpassed detail set out in the National Voluntary Guidelines that were issued in 2011 (will these now become mandatory?). The Guidelines helpfully provide a suggested Business Responsibility Reporting framework based on nine principles with “core elements to actualise each of these principles”.

Much painstaking hard work has gone into these Guidelines — they abound in flow charts, diagrams and some genuinely thought-provoking case studies. But for the most part they ricochet between high-minded principles (“Businesses should understand the human rights content of the Constitution of India, national laws and policies and the content of International Bill of Human Rights”) and motherhood statements (“Businesses should take measures to check and prevent pollution”).

It is hard to escape the notion that the government’s effort to promote CSR is little more than a sop to a civil society increasingly and vocally restive about the government’s uneven record in human development, environmental regulation and an alarming penchant for crony capitalism.

The clue to its approach can be read in the message provided by Murli Deora, then corporate affairs minister, as a preface to the Guidelines. With due obeisance to India’s ancient past (including references to the Mahabharata and Arthashastra) and Mahatma Gandhi, he conflates personal charity and philanthropy with CSR. The hard-working Guideline authors could have told him he’s got it all wrong.

The Christian Aid report (2004): Should Government regulate CSR?

We have seen that companies and governments make theoretical CSR claims which are not matched by their CSR practice. This state of affairs has attracted criticism from NGOs and others. For example, the Christians Aid Report(2004), ‘Behind the Mask’ has  received considerable publicity. The report examines Royal Dutch Shell’s CSR claims, which include a commitment to ‘core values of honesty’ integrity and respect for people’. 1)Taking the view that Shell’s commitment is little more than a PR exercise, faced with a falling share price following the Ken Saro-Wiwa and Brent spar disasters, the report argues that for some CSR companies ‘the rhetoric and the reality are simply contradictory. 2) Coca Cola and British American Tobacco are also scrutinised in terms of their CSR claims in the Report. Unimpressed by the practice of all three companies, the Report concludes: ‘those who suffer the most as a result are the poor and vulnerable people in developing countries and the environments in which they live.’(Scott, 2007)

The report reiterates its call for regulation of CSR, since companies ‘can always walk away from voluntary codes’(Scott, 2007). So there are views that government regulation is needed.

Conclusion:

CSR is not charity; it is much bigger than that. It is about doing business in a socially responsible way. This may involve spending on “good works” in and around the area of operations (and, typically, the government has specified what these should be for public sector units), but that’s only part of the issue.  

Indeed, there is a school of thought that suggests CSR lies in merely doing business honestly, without discrimination and the minimum pollution, principles that sound easy but are the toughest to follow consistently. That is why CSR imposed by the government is unlikely to transform companies into model corporate citizens. The example of Enron, which spent heavily on local good works, remains a beacon of amorality.  Thus due to this new bill, it could so happen that organisations rework their balancesheet/ P&L so as to reduce profits and escape the mandatory giving.

Some of the issues with CSR are:

  1. Often the amount spent is not stated in balance sheets. (TBL- Triple bottom line accounting ie financial, social and environmental - needs to be introduced)
  2. Often the impact of the CSR activities is not measured i.e. is the corporate social performance.
  3. Making the activities sustainable is a common concern.
  4. Often it is not based on the needs of the community.
  5. CSR by organisations are often done as signing cheques and not being involved in the process and outcome.(Cheque book Philantrophy)
  6. According to research employees would like to volunteer some part of their working time towards CSR activities. However organisations treat CSR as a separate concern, not of any concern to the employees( Shantaram, 2011).

Given the concerns; CSR ought to be considered more holistically as an ethical concept. Organisations need to be motivated to do the right thing rather than for allowing CSR to be just an instrumental motivation to achieve an economic goal; as projected by this new bill.

CSR is only the best that society can hope for if we do not visualise and struggle for anything more… Responsibility for regulation of corporations should rest not with the corporations themselves not with NGO but with society through a genuinely democratic process.

We also need to have measure such as KLD for organisations in India. Also there needs to be a rating mechanism for NGO’s. The discussion (Q&A) given in the annexure gives you some more food for thought.

Every new act or policy is looked at with great hope , however will this new act with the mandate on CSR spending have the desired result, or would it have been better to just let the corporations do the right thing in the right way for the right reason.

References:

Cocharan, R and Wood R (1984) “Corporate Social Responsibility and financial performance”, Academy of Management Journal, Vol.27 No 1 pp.42-56.

Beurden, P and Gossling, T(2008), “The worth of values- literature review on the relation between corporate social and financial performance”, Journal of Business Ethics, Vol. 82 pp. 407-424.

Graves, S and Waddock, S.A(1994), “Institutional Owners and corporate social performance”, Academy of Management Journal,Vol 18,pp 303-317

Haugland Smith K and Øystein Nystad (2006) ”Is the Motivation for CSR Profit or Ethics?”, Paper presented at the corporate Responsibility Research Conference.

Li Sun, (2012) "Further evidence on the association between corporate social responsibility and financial performance", International Journal of Law and Management, Vol. 54 Iss: 6, pp.472 - 484

McGuire, J .,Sundgren, A (1988), “ Corporate social responsibility firm financial performance”, Academy of management Journal, Vol.31,No 4, pp. 854-72

Orlitzky, M., Schmidt, F. and Rynes, S (2003), “Corporate Social and Financial performance: a meta analysis”, Organisation studies, Vol.24 No 3, pp 403-431

Ray Fisman, Geoffrey Heal, Vinay B Nair (2005) Corporate Social Responsibility: Doing Well by Doing Good?” Working paper

Shantaram, A ‘Ethical Practices in Organisations( 2011): Developing the List of Ethical Practices and checking for their Relevance and its Practice in Organisations’, New Delhi ,  pages 142-149

Simeon Scott, (2007) "Corporate Social Responsibility and the Fetter of Profitability", Social Responsibility Journal, Vol. 3 Iss: 4, pp.31 – 39

http://www.thehindubusinessline.com/opinion/article3988290.ece /

http://www.business-standard.com/india/news/kanika-datta-the-csr-%5Cmandate%5C/483370/

ANNEXURE 1

 What are the implications on the P&L and the balance sheets of companies? The corporate-social responsibility (CSR) expenditure now is nearly being mandated at 2 percent. I understand the wording is not mandatory, but companies may spend. Yet a board member will have to be in a committee, which will monitor this expense and give credible explanations, if that 2 percent is not met. Will this, therefore, begin to impact the P&L in some fashion?

A: There are two very important provisions in the clause. The first clause is that the board is mandated to ensure that the company will spend on the CSR. Second thing is that they have to give their explanation. So, effectively although there is no mandatory obligation on the company, but a responsibility is cast upon the board members.

Added with the responsibility, to give the explanation for non-implementation or implementation makes it mandatory. When you are not able to give a satisfactory explanation about not spending on CSR activities then the regulator will certainly have a power to question the roles and responsibility of the directors. So, effectively it gives a teeth, it is not just a provision on the paper, but it puts an obligation on the board, which they cannot easily get away. So, one thing is very clear that the new bill has looked into this provision extremely carefully. Although not mandatory, but a binding obligation is on the board to make sure that the company will spend on the CSR.

Q: After the Companies Bill being passed, what are the most common queries that you are facing from clients at this point in time? What are they most worried about in terms of adherence going forward?

A: The first query, which we are facing from the client, is about the CSR. The second is about the Memorandum of Association. They are also worried about the roles and responsibility of the independent directors. The fourth concern, which they are discussing, is the provisions pertaining to investor protection mechanism.

There is one very important provision. If you are obtaining the credit facilities and loan from the bank, if incorrect information is provided, it puts a heavy onus on the board. The queries are also directed towards the roles and responsibility of the independent directors. What is the responsibility, whether they are going to be liable, to what extent they will be responsible? The independent directors attend for the sake of attending and there is no positive contribution. For example, when you look into the various examples, you deal with the frauds in the corporate governance or the problems arising in the corporate governance and the independent directors playing just a role on the paper.

Q: If you can make it a little more specific for us, only touching on independent directors. I understand that clause 184 of the Bill requires way more disclosures compared to clause 299 of the Act, the one that is going out. What those disclosures are? How much more onerous they are? Are there are any stiffer penalties? How does the life of independent director become tougher?

A: Earlier, it was just pertaining to conflict of interest where they were just required to disclose only in the limited area. But now it has to be voluntarily. When they are facing a particular situation or resolution is placed before the board, the obligation is now on the independent directors to voluntarily provide every possible information, which can come into way of conflict with the board or where he is an interested party. So, the first obligation upon the independent director is about providing the information.

The second is about that if it is found that it has not given the proper disclosure and suppose if there is an action by the shareholders then there is also the penalty and provisions of special court. So, all in all, basically the disclosures are required from independent directors or the directors. The conflict of interest is concerned, that has been widened. The voluntary obligation, which has been cast, is very important because they do not wait, but they have to give upfront all the information.