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Focus on Private Sector: A new era for social responsibility?
  • Focus on Private Sector: A new era for social responsibility?

Copyright: Christian Als / Panos

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  • Corporate social responsibility is now mandatory for large firms in India

  • Existing CSR schemes that also benefit firms do not count and so may be dropped

  • As other countries show interest, more scrutiny of the law’s impact is needed

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In 2013, India took the globally unprecedented step of making corporate social responsibility (CSR) mandatory. The Companies Act, which came into force in April 2014, affects companies with a net worth over 500 crore rupees (more than US$78 million), or turnover of more than 1,000 crore rupees (around US$157 million), or net profits over five crore rupees (about US$780,000). [1] They must spend two per cent of annual profits on social responsibility — activities that span health, education, gender equality and the environment.

This sounds laudable. But with companies struggling to implement it, the law has come under increasing criticism, and the Indian government is now exploring whether to rewrite it. And, as other countries contemplate copying India’s approach, the need to scrutinise the law and why it might not work seems increasingly urgent.

One major problem is that the law threatens to disrupt existing CSR programmes. This is because it states that only services deemed beneficial to society and resulting in no benefit for the company will count towards the two per cent quota. So companies are being forced to reconsider existing in-house CSR efforts set up to mix benefits for the company with benefits to society, and to divert spending to philanthropic donations instead.

This is a significant shift. Indeed, integrating social, environmental and corporate benefit — the triple bottom line — has been a best practice CSR standard for many years. For example, Vodafone uses green energy to power its network, so improving the environment while reducing its costs; and Nescafé teaches villagers better methods for growing coffee, thereby increasing local incomes and helping to supply the company’s raw materials. [2]

“As other countries contemplate copying India’s approach, the need to scrutinise the law and why it might not work seems increasingly urgent.”

Maha Rafi Atal

Faced with the new act, firms have hired consultants to identify how, or if, mixed benefit programmes like these can survive. If they don’t, it would be a particular loss in the technology sector, where integrated programmes are a promising contribution to development. For example, the technology company Mindtree conducts research on cerebral palsy as part of its own R&D efforts: if a particular technology works, the company could pursue it as a new business offering. If companies curtail such programmes to fund the philanthropy the law requires, this is a step backwards.

Given the complicated new demands on companies, the easiest way to comply is to donate to government-approved nonprofit organisations or government agencies working on social development. State governments have been publishing nonprofit directories for companies to choose from. Maheshwar Sahu, head of CSR compliance in Gujarat state, tells me the government’s goal here is coordination: instead of several companies working on their own education initiatives, all companies can donate to a single programme. The result is that money can be pooled and channelled sensibly to meet communities’ needs, rather than one need being met repeatedly by different donors.

But if the goal is to strengthen centralised public services, why doesn’t the law simply tax companies directly? Of course, this model also has problems: governments could abuse CSR as a way to abrogate responsibility for providing basic services.

Questions remain, then, about the feasibility and wisdom of merging philanthropy and public service provision under the umbrella of CSR — questions that need some proper scrutiny if the Companies Act model is to be picked up by governments elsewhere.

Maha Rafi Atal is a PhD candidate at the University of Cambridge, United Kingdom, where she is researching the political effects of multinational firms acting as public service providers in the developing world. She was previously a journalist, including at Forbes, where she covered the intersection of business, development and international affairs. You can contact her on [email protected] or follow her on Twitter: @MahaRafiAtal


References

[1] The Companies Act (Ministry of Corporate Affairs, August 2013)
[2] Catalysing change through corporate social responsibility (The Boston Consulting Group, February 2015)
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