“The responsibility of business is to increase its
profits,” was the title of a New
York Times article by Nobel
laureate, economist, and the evangelical supporter of free enterprise Milton
Friedman in 1970. Friedman wrote that a corporate executive is an agent of the
shareholders and his responsibility is to make as much money as possible, while
confirming to the basic rules of society, embodied both in the law and ethical
system.
His important
qualification of embodiment of law and ethical system is good enough to justify
fulfilling corporate social responsibility (CSR). In fact, CSR efforts help a
company attain the Triple Bottom Line (TBL) of profit, people and planet.
Shareholders are interested not only in the single bottom line figure of profit
in their books of accounts because they recognize that profits are organically
linked to communities and environments, without which a company cannot operate
effectively. More than two centuries prior to Friedman, another free trader and
father of modern economics, Adam Smith, had already echoed the social
responsibility aspect of business in his 1759 treatise, The Theory of Moral Sentiments.
In India, Mahatma
Gandhi evoked the notions of trusteeship and voluntary individual philanthropy,
which were prevalent in the culture and history of the nation. The prevalence
of dharamshalas for travellers; common animal sheds called panjrapols for animal health; the construction of
ghats along the rivers; and the establishment ofpathshalas by trading communities were examples
of this approach.
After India’s
independence, a modern but statist model advocated by Jawaharlal Nehru
characterized social responsibility as a completely overarching state-driven
endeavour. Market failure arguments, even if correct in principle, were
overemphasized and the state started dictating terms in every sphere of life.
The experience of seven decades since Independence has showed the glaring
failure of the state in these efforts.
And today, while the
government is rightly restricting itself strictly to the market failure sphere,
guided purely by economic logic, it is co-opting the private sector through
“mandatory trusteeship.” According to the new Companies Act of 2013, if a
company has a net profit before tax (PBT) of at least Rs.5
crore, or a net worth of at least Rs.500 crore, or turnover of at least Rs.1,000
crore, then it is required to spend 2% of its average net PBT of the preceding
three years on CSR activities.
As detailed in the
Act, a company covered by the Act is required to establish a CSR committee, set
CSR objectives, monitor CSR activities and report the same in their annual
financial statements. If the company wishes, the activities can be performed
through a foundation formed by the company specifically for this purpose. The
Act specifies quite a few types of CSR activities, including those that
encompass training, education, health, sanitation and environmental
sustainability. An important caveat for these activities is that CSR
expenditures must be spent on external stakeholders. That is, the activities
cannot be aimed at welfare of company employees. Moreover, the activities
should not be in the region or area of operations of the company. Besides, a company
can make contributions to state or central government funds such as the Prime
Minister’s National Relief Fund.
It is not surprising
that many large companies have already been engaged in CSR activities for many
years. In fact, many of them have created their own company foundations for
this purpose. Quite a few of them already spend more than the mandatory 2% of
their net PBT on such activities. The difference is that now they will have to
make sure that these amounts are spent on activities that are not related to
welfare of their own employees. If they spend on their own activities, it will
be in addition to the 2% norm.
The implementation of
CSR norms is in its early stages. The ministry of corporate affairs had
expected that CSR expenditure of about Rs.10,000-12,000 crore would have been generated during
2014-15. (However, the actual figure may be about half of this amount.)
Companies that have not been spending on CSR activities or have been spending
less than 2% of their net PBT have to gear up to comply with the Act as quickly
as possible.
While reporting of
the CSR spending in annual reports is mandatory and there are no specific
penalties for not spending, the Act has certain general penalty provisions
which the government could potentially invoke. Though the mandatory CSR norms
may seem coercive in nature, the intention is to institutionalize philanthropy
and bring in accountability.
Gearing up for CSR
spending would involve engaging with non-governmental organizations (NGOs) that
undertake social, developmental and educational activities and/or form
specialized foundations to do such tasks.
In the short-run,
while companies can choose from the different philanthropic activities listed
in the Act, CSR activities constitute only one of the three different channels
of TBL efforts. In the medium to long term, companies can engage in two other
channels of TBL activities.
For example,
improving efficiency within the organization can lead to energy conservation,
and would not only help companies save on costs but promote environmental
sustainability as well. Companies such as Infosys Ltd have started using building materials,
paints, interiors and windows that are designed to prevent energy loss. The
company has started other initiatives, including the recycling of heavy metals
such as mercury from used CFL bulbs/tubes and installing biogas plants that use
canteen and kitchen waste.
The third channel of
TBL activities is to create shared value among business vendors and suppliers.
For example, Jain Irrigation Systems Ltd helps farmers in improving their
irrigation practices through drip irrigation technique and procures improved
quality agricultural produce from them for their other operations. This has
resulted in shared value creation for the company and the farmers. It also
promotes water conservation and prevents environmental (land) degradation. When
a company such as Ambuja Cements
Ltd mines lands
for cement, it also helps neighbouring farmers in the water-recharging of those
lands. This improves both environmental sustainability and land productivity.
While some companies
are engaged in the second and third channels of TBL activities described above,
it may take some time to establish these channels into the list of acceptable
CSR activities as per the Act. Despite this, companies can engage in all the
three channels irrespective of whether or not they are covered by the Act, for
it would help them improve their TBL—create a brand image for themselves,
create shared value among the other stakeholders and protect the environment.
To include the second and third channel in the approved list of CSR activities,
impact assessment audits will have to be institutionalized first.
All in all, the new
Act has certainly made companies think of TBL. The three channels mentioned
above would take them in the right direction to promote their profits, improve
people’s lives and protect the planet. While one talks of CSR and TBL,
inadvertently, the attention gets focused only on large corporations. However,
small and medium enterprises (SMEs) are also an integral part of the Indian
economy. Today, SMEs account for about 40% of India’s exports and 45% of
India’s manufacturing output, and contribute about 10% of India’s GDP. More
than 100 SMEs are listed on a separate platform on BSE and the National Stock
Exchange, with a market capitalization of more than Rs.10,000
crore. Many private limited SME companies make profits more than Rs.5
crore, one of the limits stipulated by the Act for mandatory CSR spending.
Quite a few SMEs that are in the export business face international pressures
to conduct their business keeping TBL in mind; otherwise they risk threats of
import bans.
SMEs act as nurseries
for entrepreneurship and provide a natural habitat for burgeoning enterprises
that will grow large in future. Therefore, from all the three perspectives of
TBL, SMEs also have to inculcate social enterprise initiatives, irrespective of
whether or not they are covered by the mandatory norms. While establishing
separate foundations may not be feasible for SMEs, they can pool resources
among themselves through philanthropic organizations such as the Rotary Club
and the Lions Club. They can also tie up with foundations of other large
companies, and coordinate efforts among SMEs through industry associations such
as the Confederation of Indian Industy and the Federation of Indian Chambers of
Commerce and Industry.
In the immediate
future, until they get geared up for TBL processes, SMEs covered by the Act may
comply with its requirements by contributing to the Prime Minister’s National
Relief Fund and similar funds of state governments.
-live Mint
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