The Companies Bill, 2011, will be reintroduced in Parliament in the monsoon session and, in all probability, it will be passed with the amendments suggested by the Parliamentary Standing Committee on finance. Some of the changes recommended are sound from the point of view of governance and social responsibility.
One such recommendation is that company boards should have at least one woman member. Studies by Catalyst and Harvard Business School, among others, have found that companies with women board members contribute significantly more charitable funds on average than those without women members; bring more diverse perspectives on fairness and distribution of resources to donation decisions, which, in turn, broaden a company’s commitment to Corporate Social Responsibility (CSR); and also develop more quality CSR initiatives.
However, the same cannot be said about the Committee’s proposal to make CSR contributions mandatory. While in the draft Companies Bill 2009, the CSR clause was voluntary, the Committee has now recommended that companies with net worth above R500 core or those which have an annual turnover of more than R1,000 crore must earmark 2% of average net profits of three years towards CSR. In other words, private enterprise is being forced to be charitable.
According to an estimate, Indian companies may have to collectively spend R43-R87 billion a year on CSR. But to date, the companies have not spent even R43 billion. While it is a fact that companies do not spend as much as they should on CSR, the wisdom of making contributions compulsory is questionable. It will amount to another tax on companies, and corporate India is not known for its tax compliance. Besides, being socially responsible is a matter of culture and willingness, and not legislation. Either a business organisation has it in its ethos or it does not. So long as a businessman pays taxes honestly, provides employment in a fair manner and does not subvert the system, he fits the definition of a ‘good corporate citizen’. Paying a sum of 2% of his company’s profits cannot make him a ‘good social citizen’.
It’s true that once such concepts are legislated upon, there is a need to add further provisions to protect such legislation. The Companies Bill, in this case, will have to provide a definition of what constitutes CSR, since every corporate should know the ends to which its funds are to be applied to be eligible to claim compliant status. Moreover, who will monitor compliance by companies — the State or an independent agency? In either case, it will mean an outlay of time and money which will reduce the benefit.
Moreover, it can lead to unproductive allocation of resources in order to meet legal requirements. Companies will pay lip service to the law and show all sorts of expenditure as CSR expenditure. To make CSR work in India, proper procedures and a transparent system of accounting must be put in place to spot window dressing. Even where there is no attempt at window dressing, companies may not have the bandwidth to devise imaginative projects to address real social problems. As a result, they may end up working — and spending huge amounts of money — on routine health and education projects.
The House panel has recommended the creation of a central fund for companies that are unable to spend the allocated funds. The unspent money will be parked in this fund for future schemes. But the recommendations are silent on the ownership and management of this central fund. Will the money belong to the government? Will the trustees include people’s representatives as well as those from the government and the private sector? Will the companies that put in unspent money get priority in future schemes? Will other development entities like NGOs get access to these funds?
By making CSR mandatory, it appears that the State is passing on its responsibility towards social development to NGOs and the private sector, asking them to chip in with supplemental funds and management expertise — and that too by coercing them to perform the State’s duties on its behalf.
The most basic flaw in the proposal is that it equates financial allocations and charity with social responsibility. While the new law may ensure more funds for development projects, it will not ensure ethical and responsible behavior on the part of companies or make them more transparent and accountable. Most large-scale corporate corruption cases usually involve the use of legal entities to conceal ownership and control of corrupt proceeds. Nor will it mean more tax compliance, better quality products and services for consumers, or better human resource practices. Above all, it will not meet the ends of social justice through more equitable distribution of corporate incomes, both within companies and externally. We don’t need more CSR funds, but more responsible behaviour, which requires more than just expenditures. It requires a reorientation of values and attitudes so that crony capitalism is transformed into an engine not only of economic growth but also of social change and social justice.
Pushpa Sundar is the author of the forthcoming book: Business and Community: The story of Indian CSR (Sage). The views expressed by the author are personal.
Sitaram Yechury’s column Left Hand Drive will appear on July 17.