When I take an uberPOOL (shared taxi) in India I try to sit in the front passenger seat. There’s more legroom, I can aim the AC vents directly into my face, and I can generally avoid having to interact with other passengers. I say “generally” because some weeks ago I shared my ride with a woman who was not at all put off by our less-than-ideal seating arrangement (she was sitting immediately behind me), and proceeded to engage me in conversation anyway. Turns out I should have taken the back seat after all – we soon were having an interesting chat about her work in a corporate social responsibility (CSR) consultancy firm, and much neck-craning could have been avoided.
In brief, CSR is a concept that has come about in response to the idea that firms not only have a lot of power, but also have real social impacts, so they ought to play a role in resolving those social impacts and use their power for good. The aforementioned conversation piqued my interest to learn more about what was happening in India in this realm. My POOL companion mentioned that CSR was actually mandated in India – something I’d never heard of before, since in Canada it is up to companies to voluntarily undertake CSR initiatives.
It turns out that India’s Companies Act, 2013, “requires (on a ‘comply-or-explain’ basis) that firms satisfying specific size or profit thresholds spend a minimum of 2% of their net profit on CSR.” (i) In today’s figures, this applies to companies with a net worth greater than about USD 77 million, or net profits over about USD 770,000. The act also mandates the creation of a Corporate Social Responsibility board to ensure compliance with the Act.
Activities outlined (non-exhaustively) by the Act that companies may claim as CSR are those related to:
- Eradicating extreme hunger and poverty
- Promotion of education
- Promoting gender equality and empowering women
- Reducing child mortality and improving maternal health
- Combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases
- Ensuring environmental sustainability
- Employment enhancing vocational skills
- Social business projects
- 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 for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women
- Such other matters as may be prescribed (ii)
India is one of the only countries that legislates firms when it comes to CSR. In 2014 the European Union issued a directive on the disclosure of non-financial data “relating to, as a minimum, environmental, social and employee matters, [and] respect for human rights.” (iii) I could not find other examples of legislation, with most countries like Australia and the U.S. relying on guidelines and recommendations rather than laws. India is certainly the only country that has gone so far as to require a threshold of expenditure.
While on the surface it appears that this Act could mobilize much-needed funds to ameliorate the multitude of social issues India faces, it is not without its critics. In the 2014 Mumbai Declaration, the Global Reporting Initiative wrote:
“A recent government bill stating that 2% of company’s net profit must be devoted to corporate social responsibility may be welcome, but that still leaves 98%. Indeed, the rest of the business also needs to be sustainable. The 2% ruling could lead to forced philanthropy, ‘tick box ’ behavior, tokenism or even corruption, and masking of data to avoid having to comply.” (iv)
Another argument against the Act compares it to a tax by another name. Indeed if these companies are all compelled to spend 2% of net profits, then it could be seen as a tax of sorts. The difference is the Act implicitly assumes that firms will make better decisions about how to spend that 2% than the state will.
But how is the Act working in practice? There are some issues. Some companies have created trusts that launder their CSR expenditures and funnel it back into the business. (v) It is has also been seen that “firms initially spending less than 2% of their profits on CSR increased their CSR activity, while those that were initially spending more than 2% reduced their CSR expenditures towards 2% after [the Act] came into effect.” (vi)
Even so, overall CSR spending has increased – this is despite the fact that of the 100 largest firms in India, only about one third spend the 2% or more stipulated by the Act, the rest opt to explain rather than spend. This behavior is permissible under the “comply-or-explain” clause of the Act whereby only constituting a CSR committee, disclosing the composition of the committee, formulating a CSR policy (etc.) are mandatory, but actually spending 2% of net profits is optional pending explanation. In one study, the authors found that “the explanations provided are generally not very detailed and often not particularly compelling.” (vii)
In his paper Neoliberalism and CSR, author Steen Valentin argues:
“Mainstream CSR represents a critique of corporate capitalism that is, at most, moderate in the sense that it rests on voluntary action and makes a case for corporate self-regulation (as opposed to government regulation and laws limiting the scope of private self-determination). Hence, it presupposes freedom and argues that freedom can be an enabling vehicle for the development of innovative business solution to the pressing social and environmental problems of the day.”
Mainstream CSR would be the variety I am familiar with – as it’s practiced in Canada and North America more generally. To legislate CSR as India has done is to remove some elements of freedom from corporations, and is a move against corporate self-regulation. What you think about the act then rests individual ideological leanings. Would the market, left to its own devices, “develop innovative business solution[s] to the pressing social and environmental problems of the day”? And of those solutions, would they be the best solutions? Or is there a role for the state to play in legislating the social behavior of firms, though acts like this one? If so, does this act go far enough?
As I see it, most importantly the act doesn’t promote social responsibility at a corporate level per se, rather it only promotes philanthropy. In their critique the GRI ask about the other 98% of the profits – indeed for a business to be considered “socially responsible”, I think responsibility must be integrated into the entire organization, from the mission statement to the value chain. How profits are generated matters far more than any philanthropic endeavor that they are used for – and sustainability especially requires mindfulness of the social and environmental impacts of how those profits are made. This act also could encourage a myopic view of CSR that misses the opportunities for integration with corporate strategy, the business case that exists for socially responsible behavior, and triple bottom line thinking.