BY: TARUN KHANNA
The prospect of mandated corporate social responsibility (CSR), as directed by the India’s Companies Act, 2013, prompts revealing reactions from all and sundry. For the sceptics of organised, especially large-scale, enterprise, CSR is an oxymoron. For those who fear the encroaching hand of the state, it smacks of an incremental tax by another name (and, worse, another one that people will evade).
Nonetheless, CSR mandated by law is now a fait accompli, under the new Companies Act. Publicly traded companies exceeding certain size and profitability thresholds must spend 2 per cent of their net profits on CSR. Even prior to this, Indian corporations, like others worldwide, engaged in a spectrum of activities they deemed their social responsibility, for better or worse. Virtually all the websites of the top 10 (by revenue) publicly traded enterprises in each of India’s public and private sectors trumpet their CSR efforts. Companies feel that a stated commitment to CSR will burnish their brands and attract talent, or it might just be a managerial perquisite, that is, a licence for managers to spend on their favourite activities in the guise of doing something seemingly legitimate.
The amounts under the new law are large, conservatively estimated at Rs 15,000 crore annually by Minister of Corporate Affairs Sachin Pilot. An annual flow of this amount ($2.5 billion), suitably levered, represents a game-changing fund dedicated to infrastructural investments, anywhere in the world, certainly in India. Some introspection about how this money is used seems sensible, notwithstanding ambient scepticism about the wisdom of the mandate in the first instance. Therefore, the World Bank and the government of India’s department of public enterprises organised a seminar on CSR in Mumbai in February, under the auspices of Harvard University’s South Asia Institute. The workshop was directed towards the large PSUs, including the navratnas and maharatnas, which do spend, and stand to spend, vast sums.
A week of immersion with luminaries from the PSUs, along with some senior managers from Indian and multinational private sector enterprises, and a collection of NGOs, left me with a renewed appreciation of how much wastage is already inherent in the dispensation of CSR funds. Companies have no knowledge of other organisations’ related activities. A stylised example might be of a medical centre being established with little knowledge of pre-existing facilities that could be more usefully augmented, or knowledge of impending duplicative plans that might well be launching concurrently.
Information sharing can help here. Publicising details on individual company websites is a simple step. This can be done more effectively if one can organise a pre-existing body that would collate such information, perhaps under the auspices of the ministry of corporate affairs, or under an industry body like FICCI or CII. It goes without saying that this transparency in what people are planning to do with CSR funds is a good idea in and of itself. It will minimise, if not prevent, the current meddling of some in the political classes seeking to divert CSR funds for their own private purposes.
There is another issue, even after accounting for greater transparency. Not every company is going to think of good uses for the amount it is mandated to spend.
In 2012, for example, six of the 10 largest PSUs were able to spend only one-third of their mandate of roughly Rs 1,200 crore. One might interpret this as good news, in that money presumably wasn’t wasted wantonly, but it’s hard to believe that there are no productive infrastructure-augmenting uses that such money could be directed to, were a mechanism to be divined.
Further, companies lack a process to allocate funds. Targeted investments should be driven by a knowledge of how CSR fits into company strategy. It often appears to be driven, rather, by the background of the line manager in charge. Only partly facetiously, an engineer will tend to build a bridge, for example, and a social scientist will tend to monitor schools. The lack of process means that even managers trying to do the right thing don’t have formal support to prevent unethical and inappropriate funnelling of so-called CSR funds for private purposes. Only a Pollyanna would have imagined otherwise in the India of today.
These processes will emerge over time. In the interim, perhaps it makes sense to consider a mechanism for companies to direct their CSR funds to opportunities shepherded by other companies, rather than forcibly wasting the funds themselves under some warped interpretation of “compliance”.
There is an intellectual precedent. In a nutshell, polluting entities in many geographic and industry jurisdictions have a choice — they either spend money to mitigate their ill effects, or they buy carbon credits, that is, the “right to pollute”, from those who are able to take this money and use it to offset the pollution (for example, by planting trees). The market for carbon credits determines the price of the right to pollute. If there are too many polluters, relative to those offsetting the effects of ambient carbon, the right to pollute becomes more expensive, thus creating a self-correcting mechanism. In economists’ jargon, the polluter internalises the “negative externality” it is otherwise imposing on society.
How might companies consider whether it makes sense to coordinate on occasion? Modest coordination of CSR can be done by industry bodies. The state-created National Skill Development Corporation (NSDC) provides useful proof-of-concept, albeit in a different context, by cajoling companies in several industries to agree to “skill” standards, and then working to catalyse these into existence.
A common fund to pool CSR resources to make sure the corpus is spent intelligently can also be useful. Of course, such a fund is not without its own issues. Those employees deriving intrinsic motivation from their direct involvement with CSR would be deprived of this feel-good effect. Companies that remit to a fund would lose control over how their money could be used, indeed, they would think of the mandate purely as a tax. Inevitably, such a fund will itself be subject to lobbying and corruption. This last factor can be partly managed through a board with representation from different sectors of society and some multilateral engagement. And the fact that companies, under this proposal, always have the alternative to eschew the fund in favour of direct CSR expenditure, will restrain egregious behaviour by the fund.
By Indian law, CSR is here to stay. So it’s time to move on, beyond debates between its aficionados and sceptics, and figure out how to make it work. Harnessing the spirit of the market to nudge it in the right direction seems feasible and efficient.
The writer is Jorge Paulo Lemann Professor at Harvard Business School and director of Harvard University’s South Asia Institute