Corporate Social Responsibility

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Corporate Society Responsebility - The Corporate Misers of India - Sankalpa: Journal of Management & Research... Data · December 2014 DOI: 10.13140/RG.2.1.1285.1280

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SMJV's CKSV Institute of Management, Vadodara, India

II

Corporate Social Responsibility The Corporate Misers of India

SMJV CENTENARY 1 9 1 5 -2 0 1 5

B i CA Durgesh Pandey I Partner, DKMS & Associates, Chartered Accountants, Research Scholar, Gujarat Technological University. Email: [email protected] ■ Dr. K N Sheth I Director, Venues International College of Technology; Dean Interdisciplinary Research, Gujarat Technological University. Email: [email protected] Abstract

The Concept

India is undergoing phenomenal paradigm change. Replacing old onerous and colonial influenced law have become need of the hour. Economic equality is the new mantra. To embed the equality quotient Corporate Social Responsibility (CSR) has been made part of the Companies Act 2013. Though certain large companies spend amounts on CSR as giving back to society, however such contribution is insignificant when compared to the mandated amount as per the Act. Focused and more balanced approach is needed for such CSR spending. Majority of the company don't have CSR policy which has to be formed and it will then serve as a model guideline for attaining the broad objectives of CSR policies. Care should be taken that mere green washing doesn't constitute as CSR spending. The triple bottom line approach of people, planet and profits has become the need of the hour. There is a contrarian view that welfare spending is government's prerogative as they collect taxes for that. The concept may sound weird but has its own deliberations. The government is imposing on companies' task what it couldn't achieve. However it would not be wrong to call Indian corporates, barring few, as misers on this front. The spending needs to be viewed with pragmatic vision. A small proportion of 2% of profits may seem minimal but if spent judiciously and for welfare, it shall go a long mile. The companies should see this as an opportunity to partner in building nation ratherthan an onerous task.

The Commission of European Communities, 2001 which had the highest frequency counts search on Google defines CSR “A concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis” . Another popular definition by Business for Social Responsibility 2000 “ Business decision making linked to ethical values, compliances with legal requirement and request for people, communities and the environment.” The definitions stated are almost congruent and have similar five dimensions of the CSR aspect namely Voluntariness, Stakeholder, Social, Environmental and Economic. These five dimensions shall form as pillar to examine any case to whether it falls as CSR activity or otherwise (Dahlsrud, A. 2008). Another theory propounded is that whether CSR spending impacts buying behaviour? The answer to this question has raised more questions than answers; however, it is a settled argument that mere CSR initiative cannot be a decisive factor influencing buying behaviour. The buying behaviour traditionally is dependent upon quality, usability and price of the product. There also exists need for educating the consumers about the CSR initiatives of companies in order to influence buying decisions (Mohr, L. A et al 2001). With mandatory implication of section 135 of Companies Act 2013, these theories further need to be examined. To understand concept better it shall be imperative to analyse position stated in the Act.

Keywords: Corporate social responsibility, CSR policy, triples bottom line approach, CSR ranking Indian Companies Introduction Corporate Social Responsibility or CSR simply put, is responsibility casted on corporate entities to payback to society. The rationale behind such objective is that corporate draws its profits from the society at large, so there has to be some obligation imposed upon the corporate to return back to society. However, this argument fails its tenability on the basic premises that it is the tax contribution of these companies by which the government does its welfare spending. Considering the widespread debate and the recent mandate by The Companies Act 2013, the topic merits discussion.

Table 1: Snapshot of Corporate CSR Company

Initiative

ITC

E-Choupal - Empowerment of Farmers

Ashok Leyland

Hydraulic Bus for Differently abled

Hlndalco

Check dams and Drinking water

TCS

Adult Computer Education

Mahindra & Mahindra

Nanhi Kali - Girl education

(Source: Company's Annual Reports)

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The present scenario Under present regime there is no mandate for any spending for CSR. The only CSR initiatives enforced by government are through environment protection laws and pollution control laws. However, several companies have taken up responsibility upon them and spent on the CSR activities (See Table 1- Snapshot of Corporate CSR). Ashok Leyland operates Funbus in New Delhi and Chennai. This bus is equipped with hydraulic lift which helps differently-abled children to travel. Hindalco Industries has constructed check dams, ponds and bore wells to provide drinking water. It touches 26 lakhs lives in this endeavour. Mahindra and Mahindra through its philanthropic initiative 'Nanhi Kali1support education of 75000 under privileged girls. TCS has taken an initiative for providing adult functional literacy in computers. The scheme has benefitted over 1.2 Lacs people. ITC has conceptualized and started a program called e-choupal which bridges the gaps between farmers and whole sale markets. It has been most effective tools for farmers' empowerment to have real time data about price, weather and market conditions for their produce. Based on this farmers can take informed decision leading better price for their produce. ONGC offer's community based health care services in rural areas through 30 Mobile care units. It also undertakes deer conservation project under the aegis of ONGC - Eastern Swamp Deer conservation project to protect the rare species of deer in Kaziranga National Park in Assam. Infosys, the technology behemoth, gives annual prize to honour outstanding achievement in field of science and engineering. In one of the initiatives, the company sponsored surgery for 100 teachers in Karnataka who were suffering from arthritis. IOC runs Indian Oil Foundation, a not for profit entity, which works for preservation and promotion of country's heritage. Though above examples may seem as lauding efforts by our corporate sector, but the same when compared with what is expected of them, from new provision as envisaged in the Act, is very small amount of spending. A study of the top 10 Fortune 500 companies 2012 has given startling and grim figures. The report shows (See Table 2 - The present philanthropy) that these 10 Fortune 500 companies together put have a whopping deficit of 53% than what they are expected to spend on CSR activity. This figure is again an estimate as they have studied previous year's profits against three years average profits as mandated by the Act. Nevertheless 53% translates to an amount of Rs. 7780 Million. On the brighter side leading the pack of CSR spenders is Tata Steel which has spent an amount of Rs. 1460 Million in the year 2011-12. The company's stipulated 2% profit (not three year's average as mandated by the Act) comes to Rs. 1078 Million. This translates an additional spending of Rs. 382 Million by Tata Steel which is phenomenal. However, on the bottom of the list is also Tata group 110

company Tata Motors which has a short fall of Rs. 2703 Million. In another study by Forbes India where similar study was conducted for Top 100 companies out of the Fortune 500 companies, the companies have spent Rs.17650 Million (Excluding loss making companies) against mandated Rs. 56110 Million. The above statistics shows a not so healthy picture of the CSR spending. Also it has to be kept in mind that all analysis above is for the major and large companies. The big vibrant other companies which do satisfy certain criteria notified by the government are not covered in this study. In certain cases where the CSR activity is undertaken can also fall under the concept of green washing. Green washing is a concept where by companies deceptively promote marketing campaign to portray an image that their products and policies are environment friendly. However, the same is not true. A classic example of the said activity can be placard in the hotel room for re-use of towels ostensibly to save environment, which in practice they are not doing. This fact can be confirmed from the non-reduction of the cost of such activities. However, with introduction of the new law, things are bound to change, at least it looks like they are bound to change. Table 2: The present philanthropy 2% of CSR Variance PAT Variance Spend % 2 0 1 1 -1 2 2 0 1 1 -1 2

Nam e of the Company

PAT 2 0 1 1 -1 2

Tata Steel

53898

1460

1078

382

+35.4

Larsan & Tubro 44565

700

891

191

-21.5

Reliance Industries

197240

2880

3945

1065

-27.0

Hindalco Industries

33970

280

679

399

-58.8

Bharti Airtel

42954

330

859

529

-61.6

Mahindra & Mahindra

28790

220

576

356

-61.8

Maruti Suzuki

16352

120

327

207

-63.3

TCS

104135

510

2083

1573

-75.5

ICICI Bank

76429

240

1529

1289

-84.3

Tata Motors

135165

150

2703

2553

-94.5

Total

7 33498

6890

14670

7780

-53.0

(Source: CSR 10 India Index 2012)

The changing paradigm Prior to the introduction of Companies Act 2013, spending for

Sankalpa: Journal of Management & Research (ISSN No. 2231-1904) + Volume 4 + Issue 2 + July - Dec 2014

SMJV's CKSV Institute of Management, Vadodara, India

CSR activity was voluntary for Companies. Government on its own had taken up the responsibility of protection of environment and natural resources and hence had enacted several laws for protection of such assets by way of environment protection laws and Pollution Control laws. These laws directly don't relate to CSR spending but the broad intent behind these laws is to prevent or at least mitigate the adverse impact caused to the natural resources of the country. Such mitigation causes cost to companies which could be categorised as spending incurred for CSR activity. India is only country where the CSR spending has been made as part of the law. Except for India, Denmark has provision under its law for reporting spending made on CSR activities. The regulation, for Denmark, was enacted in 2008 with implementation of reporting activity from the year 2009. But there is no mandate under the Danish Law to spend any amount. Mere disclosure of spending or otherwise shall suffice requirement of the law. Also such reporting was made mandatory only for 1100 large companies (Press release from ministry of economic and business Affairs, Denmark). On enactment of the Companies Act 2013, India has become the first country to have CSR spending mandate. Also the Indian Act has a detailed broad area where such spending should be made. As part of the Act these areas were chosen by the Indian Parliament based on the socio economic condition prevailing in the country. This in a way is good as the companies shall have model guidelines and specific areas to channelize their spending. However, it can also be argued that this provision shall restrict creativity and variety of areas where the spending can be made by companies. In Indian scenario, section 135 of Companies Act 2013, states that certain classes of companies shall be required to spend 2% of their net profits on activities specified in schedule VII of the said Act. The classes of the company so specified should have •

Networth:Rs.500croresormoreor

• Turnover: Rs.1000 crores or more or •

Net Profit: Rs. 5 crores or more

If any company during any financial year satisfies any of the above criteria, such company has to • Constitute a CSR committee of the Board which shall consist of minimum two or three directors as applicable to the class of company. Also one of such director has to be an independent director where appointment of such director is necessary. •



Formulate and recommend to the Board, a CSR policy which shall broadly indicate activities to be undertaken by the company as specified under schedule VII to the Act. Earmark and spend at least 2% of the average net profits (computed under section 198 of the Act) of immediately preceding three financial years.



Institute a transparent mechanism for implementation and monitoring of the CSR activities as stated in the CSR policy.



Explain in the Board report made under section 134 (3) (o) of said Act, reasons for not spending amount earmarked for the year.

• Spend the amount as far as possible in the local area where the company operates. • Spend the amount in India. Spending in foreign locations does not qualify as eligible expenditure underthis section. •

Display the CSR activity on its website.

• As perthe rules notified dated 27th Feb 2014, the CSR activity can be other than those specified in schedule VII, However, the broad areas should be welfare of public at large and not just specific stake holders like employees of the company. The Act envisages entire implementation and monitoring mechanism via the CSR committee. Also, the broad guidelines for the expenditure should be laid down in policy document. Further, schedule VII to the Act specifies that amount earmarked forCSRto be expended for i. Eradication of extreme hunger and poverty ii. Promotion of education; iii. Promoting gender equality and empowering women; iv. Reducing child mortality and improving maternal health; v. Combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases; vi. Ensuring environmental sustainability; vii. Employment enhancing vocational skills; viii. Social business projects; ix. Contribution to the Prime Minister's National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development and relief and funds forthe welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; and x. Such other matters as may be prescribed. Though the list is fairly comprehensive in terms of nature of welfare activities, however last clause (x) is a residuary clause which can cover any activity which is explicitly not prohibited under sections 135 and rules formed there under. The Other Side As discussed above it may seem that CSR concept is one of the most revolutionary and practicable concept. On the mere face value it looks as potential transformation tool for a developing economy. In a country like India this at least looks as a potential

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game changer. However the concept has its own share of pitfalls and criticism. The most prominent amongst that criticism is that the concept of starting for profit entity is to earn profit and maximize the share holders' wealth. The company earns profits after investing money entrusted to it by shareholders who undertook risk. They in turn follow all laws of land and pay various duties and taxes. Here moot question is why should companies be responsible for welfare activities despite paying all legitimate expenses and costs? From a company's point of view its responsibility ends once it has paid all taxes and duties. Enabling sustainable development and welfare activity is Government's prerogative. Companies should not be burdened for misdeeds or mis-governance of the political bosses. The CSR spending is further burdening the companies with a pseudo tax. Also only the companies earning profits are required to spend under the Indian law. This further puts profit-tax like scenario. The contradicting school of thought suggests that government with its all might and wealth should only under take welfare related activities. Further as observed, large companies see CSR as brand building activity rather than welfare driven. In a survey (Chadwick G 2005), 85% of the respondents felt that they have a more positive image of the company that made world a better place. CSR becomes essential strategy for ensuring the company's reputation. These companies use the entire framework of CSR to create NGO's which conduct so called independent research which are majorly funded by such companies to create positivity about their product and policies. Essentially, these companies create lobby group which work as their corporate lobbyist for promotion of product and policy. These companies' syndicate prevents in enactment of laws targeting industries in which they work. Wherever Government is not relenting to pressure of such group, they suggest on self regulation through such groups which turns out to be an eyewash. The entire branding exercise positions company in such a way that it becomes a favourite of all concerned stakeholders. Companies which promote CSR activity have become darling of investors, employees, customers and all other stake holders. Yes, CSR leads operational efficiency. It helps companies to save costs. Also, companies prioritise such CSR activity which saves cost for these companies. However, question needs to be answered about such activity which doesn't save cost rather entails costs. At the end, it seems that companies gain more from CSR activities than society does. The road ahead

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Bibliography 1. Corporate Watch Report 2006, 'Whats wrong with corporate social responsibility1, www.corporatewatch.org 2. Dahlsrud, A. (2008). How corporate social responsibility is defined: an analysis of 37 definitions. Corporate social responsibility and environmental management, 15(1), 1-13. 3. Gareth Chadwick, 'Profit with a conscience', Independent, 21/03/05 4. Mohr, L. A., Webb, D. J., & Harris, K. E. (2001). Do consumers expect companies to be socially responsible? The impact of corporate social responsibility on buying behaviour. Journal of Consumer Affairs, 35(1), 45-72. 5. Press release from the Ministry of Economic and Business Affairs, 16 December 2008 - New law brings Denmark in the lead concerning CSR 6. Public Sector Enterprises in India - Pursuing the triple bottom line 5, www.deloitte.com.in 2011 7. Smith Craig N (1990). Arguments for and against corporate social responsibility. Excerpted from Morality and the Market ( New York: Routledge, 1990) 69-76 8. Tiwari A., Shukla S ( 2013 ). CSR 10 India Index 2012, www.fundraisingindia.org; May 2013 Website-references

Serious as it seems, the new Act is deliberating implementation of the provisions envisaged. It seems that corporate sector shall walkthe talk and do good deficit in the spending. The triple bottom 112

line approach of people, planet and profits shall ultimately be achieved. Yes, giving back to society is important; yes, minimal invasion to the nature's balance is important; however nothing can abate the importance of earning profits. It is for the profits that the companies have been formed. A balanced approach is need of the hour and the latest legislation addresses it. A small proportion of 2% of profit may seem minimal but if spent judiciously and for welfare, it shall go a long mile. The companies should see this as an opportunity to partner in building the nation rather than an onerous task. Further, government should come out with model policy and reporting framework which shall help in standardizing the spending and reporting thereof. Liberal approach should be taken whilst devising the spending areas. The government also needs to improve upon the statistical surveys and information collection. Because it would be these surveys and statistics based on which informed decision shall be taken. A new avenue has come for spending several crores forthe welfare of the poor and downtrodden. Conducive environment and policy should be formulated to make the most of these opportunities.

http://forbesindia.com/article/real-issue/csr-report-card-wherecompanies-stand/34893/2

Sankalpa: Journal of Management & Research (ISSN No. 2231-1904) + Volume 4 + Issue 2 + July - Dec 2014