FinePrint: Corporate Czars And CSR
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Like the audience of a horror movie anticipating a beast beneath every bed, the Corporate Social Responsibility proposal in the new Companies Bill seems to have brought the conspiracy theorists to the front of the stage. Is this truly a new demon in the dark?
It’s certainly not in the Companies Bill 2011. Clause 135 says that every company with a net worth of Rs 500 crore or a turnover of Rs 1,000 crore or a net profit of Rs 5 crore has to create a corporate social responsibility committee of which at least one director must be independent. The good news so far is that since there is no such thing as an independent director, promoters can basically pack the committee with whoever they like to achieve the results they like. The bad news is that since Rs 5 crore of profit is peanuts, a lot of companies will be in the loop and jump the CSR hoop. The hoop consists mainly of creating a CSR policy, setting up a budget and monitoring its implementation. Once this is done, the Company has the onerous duty to “make every endeavour” to spend two per cent of the average net profits of the company in the last three years. Should the company fail to do this, the board has to explain why in a report. I do note that no one is getting prosecuted, paying fines, going to jail or otherwise being subject to coercive process for being heartless, selfish, insensitive or self-serving. Since the implementation of the CSR policy has to be put up on the company website, people will be able to see through your sanctimonious self-righteousness though!
So where is the beast beneath the bed? First, you don’t have to spend the money if you don’t want to; you only have to make up reasons why you didn’t. Second, if you do actually spend the money, you can find a whole bunch of self-serving stuff to do it on. Schedule VII asks you to promote gender equality and empower women, promote education, enhance employment vocational skills, ensure environmental sustainability or even run social business projects. The way I read it, if I spend 2 per cent of my profits training up a bunch of kids who I can then employ in my factory, I have discharged my burden. Or, if I spend time and money to develop vendors in a backward place, I have myself a brilliant social business project that I could easily profit from. Even at a superficial level, it seems to me that CSR can bring immediate short to medium reward for the generous of heart. What then is the problem?
For one lot of people, the main problem is that the government is telling them what to do with what appears to be a lot of money! I am somewhat arithmetically challenged here but isn’t 2 per cent of 5 crore more or less equal to the cost of the last summer’s vacation in Switzerland? Even if you prefer Leh to Interlaken, it’s only the price of the cheapest SUV that will get you there.
For a great many other people, CSR obligations take Companies out of their zones of core competence which is to make money and more money. It comes down to what we think companies are here to do: just make money for shareholders, or serve a wider ‘public interest’. The law doesn’t seem to agree with the narrow view. When the law mandates minimum wages, reasonable working conditions, maternity leave and so forth; it asks the company to foreswear profits and march to the beat of a more socially conscious drummer. When the law asks companies to control pollution and be more environmentally conscious, it assume that profits do not take precedence over public health or the protection of the mother earth. It’s now settled law that a company has a few owners but many stakeholders.
A third and probably more credible fear behind the horror is the sense that the government is burrowing even deeper under the corporate skin, perhaps looking for some other cow to milk, some other protection racket to run. So while there are no penalties for shirking CSR today, there really is a CSR department inspector lurking round the legislative corner. I can see the point. Sixty years of big brother sniffing in our bathrooms has left us believing that when Government walks in through the door, no good ever comes of it. But in a dynamic world of ever changing realities, to use the past to test the future, as any investment advisor will tell you, is specious business.
Globally, legislated CSR is slowly becoming quite the flavour of the month. UK’s Companies Act 2006 mandates disclosure on environmental, employee, social and community matters in the Business Review annexed to the Directors Report. In December 2008, Denmark amended the Financial Statements Act to mandate disclosure of CSR work in the annual reports of large companies, institutional investor and mutual funds. Germany spearheads its CSR initiatives through its Public-Private Partnership (PPP) Program of the Federal Ministry for Economic Cooperation and Development. Lately, in October 2011, the European Commission has published a new policy on corporate social responsibility.
Beyond the specious logic and the contrived argument, I think the horror of CSR is really about dharma, karma and the meaning of life. If the teeming masses of India are rotting in a chikungunya pools, then that is their sorry karmas to endure and all I need do is get on with the business of following my dharma of pursuing the creation of even more wealth. Unfortunately, nations cannot be built on this logic. I am not too sure that the future of my children can be secured on this logic either. One third of India is already under the sway of the Naxels: if I don’t change my attitude, how long will the other two thirds last? I can see at least two very good reasons why corporate India should not resist CSR. Quite the contrary.
First, to avoid CSR is to shoot yourself in the foot. We know that the Government of India is so busy spending money on itself just to keep its politicians and bureaucrats happy that that it is quite unable to find the money to pay for development. The little that it can spare is channelled through some collaterally motivated Rozgar Yojana or Udyami Mitra Yojana or Panchayat Shashaktikaran Abhiyan, the proceeds whereof are then promptly misappropriated as late Rajiv Gandhi so candidly revealed. What you have in the result are disgruntled people by the million with no opportunity and no hope ready to pick up a wrench and beat some poor floor manager at the factory to smithereens before setting him afire. Mind you, those are your privileged disgruntled folk. As for the marginaliaed ones, a Naxalite gun is the best hope they have of empowerment and there is a bit of that going on too. The corporate world needs to fix the country in its own self-interest in the same way that it needs to have a just and fair land acquisition law (see Pandora’s Real Estate Box #) so it can set up its factories. You can’t do everything in your power to criminalize the peasant and then accuse him of stupidity of he elects Didi to run your colleagues out of the state, can you?
The second big reason to embrace CSR is the ugly fact that we live in a world where the Government has abdicated a great many sovereign functions; leave alone the directive principles of state policy. It has outsourced the internal policing function (see Inflection Point 2011), is unable to protect its citizens from extortion (see Maul the Messenger) and does not want to educate its children (see Abandoning Aid ). Lately, as disclosed in the new Land Acquisition bill, it is refusing to even acquire land for development projects. If the Government will not discharge its basic duty to its citizen, should we allow ourselves to degenerate into a lord-of-the-flies Darwinism or should someone else take up the task? Is CSR extortion by another name or a great opportunity for the Corporate Sector to rise to the occasion and bring its managerial skill to the task of uplifting the people of India? The way I see it, the real question is this: should we sit around moaning about the Dhritashtra-like impotence of our rulers or should we instead put our money where our corporate mouth is and show the world how it’s done?
(The author is managing partner of the Gurgaon-based corporate law firm N South and author of the pioneering business book Winning Legal Wars. He can be contacted at [email protected] Many of the views expressed in this column are amplified in his forthcoming book “Bullshit Quotient: Decoding India’s corporate, social and legal Fine Print” due August 30th, 2012)