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Compulsory Social Responsibility

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Mocha should be spelt Moca, which is also the acronym for Ministry of Corporate Affairs. And India Inc. is discovering that both can keep you wide awake. Murli Deora's ministry wants to propitiate a three-lettered divinity, CSR or corporate social responsibility.

Companies with net worth of more than Rs 500 crore or turnover of more than Rs 1,000 crore will have to set aside 2 per cent of their net profit towards this ritual every year. Even those with a net profit of Rs 5 crore will have to fall in line. Last week, in Mumbai, Deora invoked Rajiv Gandhi. The late prime minister, he said "wanted companies to help in bridging the wide gap between the rich and the poor. The party also wants companies to take their social responsibilities seriously".

It rankles J.J. Irani, who sits on the board of Tata Sons: "When we hear the word ‘mandatory', the first thing which comes to mind is, why?" He adds, "I find mandatory CSR a misplaced concept. It would lead to Groups (business) cooking up things and presenting them as CSR." For the Tatas, CSR is a matter of great pride, and not of atonement or penalty. Tata Sons — the group's holding company — spent $151 million in 2009-10 towards sustainable development programmes. Philanthropic trusts — the biggest being the Sir Dorabji Tata Trust and the Sir Ratan Tata Trust — hold 66 per cent of Tata Sons' capital.

Thumbs DownIrani is not alone. Naresh Chandra, one of India's most respected independent directors and who also headed the Confederation of Indian Industry's (CII) taskforce on corporate governance, too, is concerned. "Moca is hardly the ministry to push for fixing amounts towards social spending. It should come from the Ministry of Finance. The Companies Act is hardly the act to have such provisions." He feels that mandatory allocation "makes it a tax", in which case "the government should levy this (tax) on companies and spend it on whichever areas it deems fit". 

Click here to view enlarged imageThis raises a larger point: is it the duty of companies to step into an area that should be the domain of the government? Is CSR Version 2 a new PPP model? How should a company's shareholders react to it? Chandra rubs it in colourfully: "All of us must respect women. We should not drink or smoke. It's bad. But that does not mean that the government comes up with a law around all of this."

Top-notch corporate lawyer Shardul S. Shroff, managing partner at law firm Amarchand Mangaldas & Suresh A Shroff & Co, echoes Chandra's belief. "This (mandatory CSR) is a tax. I have no doubt that it can be and will be challenged in the courts by companies. You cannot legislate on social behaviour. Your first responsibility is towards your shareholders." 

Azim Premji, chairman of Wipro Technologies, is blunt — it is "undemocratic. I do not think you can generate CSR by putting statutory requirements. I think there is enough social consciousness among the larger companies to drive it on the basis of what they consider is responsibility". Adds Irani: "This method of calculation becomes obsolete. If you are running a school or a hospital, you would not reduce funding even if your company's profits dipped." 

Rahul Bajaj, chairman of Bajaj Auto, feels, "CSR is a question of conscience. There is no case for making it mandatory." He does not buy the government's view that industry is divided on the issue. "No responsible industrialist can give a call for making CSR mandatory. There is no acceptable definition of CSR." 

Moreover, there is no separate head for CSR in local accounting procedures, though there is a category called ‘Charities and Donations'. Going by three-year records of donations as percentage of PAT, the toppers are JSL, Sobha Developers and HCC (see ‘The Givers' on page 85). But if one went by accounts, it would be a grey area. 

According to Chandrajit Banerjee, CII's director-general, making CSR mandatory may even prove counterproductive — companies will see it as merely legal, "rather than creatively innovating integrated strategies that create enduring sources of livelihood and other societal value". Zia Mody, senior partner at AZB & Partners, says it would lead to an artificial spend, which would ultimately find its way into sources that are not genuinely into CSR activities. "It is much better as a recommendation. Sensing peer pressure, companies are most likely to adopt this policy."

Yet, if Moca has its way, India will be the first country to have a mandatory CSR practice for companies with turnover of Rs 1,000 crore and above, with minimum expenditure of 2 per cent of net profit. This is similar to a law in Saudi Arabia, wherein companies have to give 2.5 per cent of their capital and later, revenue, to the government as CSR tax. But the government has a mandate to spend the money. 

A VOLUNTARY ACT: The planned industrial steel city of Jamshedpur was set up in 1908 by Jamsedji Nausserwanji Tata, who was very clear about the way the town should be planned. Even today, the city runs without a municipal corporation (BW Pic By Alokesh Bhattacharyya)

Prashant Modi, chairman and managing director of Great Eastern, is dismissive: "Saudi Arabia is hardly an example to follow. It has an autocratic regime; we are a democracy." In Europe and the US, such spends are usually the result of peer pressure. In fact, for the past half a decade, there has been a push for its declaration. "One needs to look for the reporting of CSR spends," says Bharti Gupta Ramola, executive director at PricewaterhouseCoopers. A Depth-charger?

What's at the heart of CSR? It is a belief that business cannot be just about business. Says Praful Patel, minister for heavy industries and a member of the National Congress Party: "The purpose (of CSR) is to deliver the benefits of economic progress to the backward." 

CSR's strings were first plucked by a member of the BJP's ‘India Shining' orchestra — former finance minister Yashwant Sinha. It entered into bureaucratic lexicon when Sinha mooted the idea as head of the Standing Committee on Finance while discussing the Companies' Bill. It got into the redraft when the committee returned it to Moca in August 2010. The Congress-led United Progressive Alliance (UPA), too, has been shrill about inclusive economic agenda. Like the decision to provide electricity to villages within a 5 km-radius of a state-run power station — all BPL (below poverty line) households get to pull free power. 

The argument is not against CSR but how to go about it. As a framework, there are only the CII guidelines based on Chandra's recommendations. Is it a clever depth-charger to nudge India Inc. to come up with out-of-the-box solutions? Deora's ministry is yet to spell out the specifics of the bargain. But can it? "Globally, there is no definition for CSR activities. In practice, many say that providing sachet version of shampoo or toilet soaps for rural consumers could be part of CSR, or providing uniforms for their workers. But we know that this is a balance-sheet exercise. It would benefit only the corporate, and not the society at large," says Ramola of PwC. 

Anirban Roy, managing director of Seed Infra, a firm that offers CSR solutions, says, "The social issue might lose its relevance. It might lead to non-relevant spends as the idea would just be to spend 2 per cent of the net profit."Patel takes the high moral ground. "The government or public-sector enterprises alone cannot carry on such acA VOLUNTARY ACT: The planned industrial steel city of Jamshedpur was set up in 1908 by Jamsedji Nausserwanji Tata, who was very clear about the way the town should be planned. Even today, the city runs without a municipal corporation (BW Pic By Alokesh Bhattacharyya)tivities to support sustainable development and inclusive growth. India, along with the rest of Asia, needs to focus on long-term investment in sustainability." 

State-run companies second Patel. Arup Roy Chaudhry, chairman of NTPC, says, "I am sure NTPC spends more than 2 per cent on CSR." R.S. Butola, chairman of Indian Oil, says, "We are committed to CSR. Most of the big state-run units already spend amounts more than 2 per cent. I am sure, so do we." 

US: It is mandatory for every company under Section 404 of Sarbanes-Oxley Act to give details of spending. But only reporting is mandatory, no amount is fixed. Moreover, the exchanges have different indices to indicate a company's performance on sustainability programmes.

UK: Most FTSE companies report to the index. It is a voluntary exercise. Sustainable development exercises are considered vital to valuation of a company, along with profit and loss performance. 

Belgium: Reporting is mandatory under the corporate code. There is a choice of methods, the most favoured being Global Reporting Initiative (GRI).

Saudi Arabia: The department of revenues levies a special tax that is 2.5 per cent of the capital. But the department has to spend this on the government's socially beneficial practices. It is the only country with a fixed CSR tax.

China: Voluntary exercise. Many MNCs report to GRI; government companies report with their balance sheets. Most companies featured in the Fortune 500 list, voluntarily report. 

Japan: Voluntary reporting. Companies have been seriously following the regime, and such reporting has been a part of their annual disclosures since 1990s.

U.D. Chaubey, director-general of the Standing Conference on Public Enterprises, is categorical: "Companies have an unwritten contract with society. They would rather not pursue their immediate profit objective at the cost of long-term interests of society." He is blunt: "It appears that only those corporates that believe that CSR is a long-term investment, will survive. Those who don't, will become extinct with time." He adds that in case such a policy is not announced, "we expect that like in the case of environment protection, an order of the Supreme Court may not be far away". 

Yet the truth is that CSR, in the avatar now envisaged (compulsory social responsibility!), does not resonate positively. The World And CSRInternationally, the most accepted format for CSR is Global Reporting Initiative (GRI). It was set up as a project in 1997 by CERES (Coalition for Environmentally Responsible Economies) and UNEP (United Nations Environment Programme). In 2002, it was incorporated as an independent body in Amsterdam. GRI makes sustainability reporting routine (and comparable to) financial reporting. It is now accepted by 1,500 organisations across 60 countries. Only 35 Indian companies follow it — among them are Tata Steel, Dr. Reddy's, Jubliant Organosys, Reliance Industries and ITC. "Peer pressure is the best format for motivating anyone (corporate entities). They would realise it would add to their valuations, and any unfruitful exercise or bad investment in social spending would impact the stock's performance. All this would benefit more," points out Irani, who has served on the board of GRI. 

Another format is the Nasdaq OMX CRD Global Sustainability Index. It is designed to track the performance of companies that are taking a leadership role in sustainability performance reporting. Companies voluntarily disclose their carbon footprint, energy usage, water consumption, hazardous and non-hazardous waste, employee safety, workforce diversity, management composition and community investing, and how this impacts their revenue opportunities and future performance. Then there is Sarbanes-Oxley (SoX) Act, which says that US firms need to spell out social spends in their financial statements to investors. It is subject to Section 404 of SoX — companies have to both document and test the controls they have over the production of information. 

"CSR or sustainability information creation will become far more formalised and process-driven with correspondingly greater depth and quality. It will result in consumers of the information having greater confidence in it," says Jayanta Roy, president of Indian Chamber of Commerce and vice-president of Peerless Finance and Investments. "As regulators move towards greater reporting requirements, it is reasonable to expect the existing regulatory reporting regimes to evolve to incorporate such content and metrics," he adds. 

In the UK, most of the top 100 listed firms report their CSR performance to some extent. There was a similar debate in the UK in 2004 when its corporate code was being redrawn. The idea that CSR spends be reported to the London Stock Exchange and GRI, prevailed. Mary Francis, director general of Association of British Insurers, had said: "No one would get anywhere if we approach it (CSR) with a bossy-boots mindset that is determined to tell companies to behave in ways that we personally have decided is good for them. We are not qualified to set absolute standards, for emissions, for example, or to define how many cigarettes it is ethical for supermarkets to sell." She added that there was danger with legislation on corporate responsibility. "First, it takes away the right of companies to differentiate themselves by competing to be more responsible. Indeed, the very nature of the word responsibility suggests that there needs to be an element of free-will. Otherwise we would be talking about corporate compliance." 

Most bet on peer pressure. Says Bhavna Prasad, director of WWF (India): "If the government is serious, it should make it mandatory for companies to disclose their CSR activities and how much they spend on it. There is a need to change the behaviour of people who matter in the corporate world." Nick Main, global leader (sustainability & climate change services) at Deloitte Touche Tohmatsu, will settle for the  voluntary disclosures adopted in developed economies — GRI or other stock-exchanges listing agreements. "Peer pressure will force the corporate to increase spends towards sustainable exercises in a more meaningful manner."

The debate over CSR is really about forging a more compassionate India. It will be a pity if it degenerates into moral policing.