India amended Companies Act, 1956 in 2013 to include Section 135 that makes corporate social responsibility (CSR) towards society mandatory. This section spells out that companies whose worth is five hundred crore rupees or more or whose turnover is thousand crore rupees or more or whose net profit is five crore rupees or more should make a contribution of 2% of the net profits averaged over the last three years towards causes mentioned in Schedule 7 of the same act which provides an indicative list of ten items which is basically all the line items that are part of social spending the government is responsible for. This act can be criticized on two fronts – Section 135 will not work because it is not strong enough or that it can be prohibitive at worst and restrictive at best for the business community. This write up is more concerned about the raison d’être of this policy move. This is one more example how policy making in India is conducted ad hoc without being cognizant of what it is trying to address. The subsequent paragraphs will focus on some pertinent questions and possible reasons why this move is redundant and is likely to fail.
Firstly, it is unclear what this amendment trying to address. There are three possible possibilities. Is it to increase fiscal capacity? CSR spending accounted to a sum of 6338 rupees crore in 2014 (according to Press Information Bureau of Government of India). The Government of India can raise the same amount through taxation or cesses as they have done with motor fuel in the last year raising large sums of money when compared with CSR revenues. Is it due to inherent belief that private sector or businesses can provide creative solutions for social issues? This is a compelling argument, but my own interaction with managing director of medium sized companies, proprietor of small sized companies and country directors of large multinationals reveal that ‘triple bottom line’ approach that warrants CSR has not made any headway into their mindsets. Also, multinationals are outsourcing their CSR activities to local non-governmental organizations (NGOs). So in reality, this is as good as government funding the NGOs. When it is not discernible why the amendment was brought about, it is extremely difficult to scrutinize policy options. In such a scenario, typically the legislation takes life of its own and India’s ‘steel frame’, the bureaucracy becomes the inspector, a role it is adept at performing increasing rent seeking tendencies. Another variable that enters the scenario is national priorities. When prime minister and his machinery is working overtime to woo foreign investors to invest in India, CSR is last on the agenda.
While it may appear tangential, we need to understand the characteristics of corporate entities. While humanity has worked for over a century in developing the idea what corporation stands for, the unarguable point is their answerability to shareholders as mandated in most of national company laws including ours. So, this 2% profit donation appears contradictory as it affects the profitability directly for large companies whereas small companies can continue to grow. In addition, foreign institutional investors can move the capital to other countries increasing the risk of reducing the share value in stock market. These are the factors affecting the bottom line of the company.
Is it wrong to expect corporates to behave responsibly in the society they live in? This is a straw man argument. Can corporations polluting recklessly violating pollution norms and/or mistreating its employees perform CSR duties and be called socially responsible? We all agree that we need labour and environmental laws for this exact reason. Nationally and internationally, induction of environmental and labour obligations are grudgingly accepted by the corporations. CSR risks diluting the value of labour rights and environmental conservation. If Union Carbide had spent 10% of its profits on CSR, would it be absolved of what happened in Bhopal?
The next point to be considered is the mandatory nature of CSR as per Section 135. Even though the act currently requires just an explanation as to why CSR activities are not performed, we need to examine the parity argument. When government does not spend the budgeted expenditure on social sector, do we get to hear the explanation from government officials even though that is their part of job description? Similarly, how would we as a citizens react if there is a new act that makes community service mandatory. We would argue that we paid taxes and delegated the responsibility to the government. This Friedmanesque argument of social contract should be extended to businesses where they follow the labour norms, environmental norms and have no role in social responsibility, but profit making. Businesses contribute to the society by allowing them to maximize their innovation potential in the society they live in and profits should be incidental from the state’s point of view. This spillover effect was observed in the 1990s technological boom in India which led to corporatization of many businesses, professionalization of many government departments. No one demanded knowledge transfers through laws.
Lastly, why do big corporate giants engage in CSR and philanthropy? The reasons can be manifold. It maybe because they live in a community and their security is not guaranteed without their goodwill. It maybe because the entrepreneurs genuinely feel altruistic. However, never has there been a corporation of size mentioned in Section 135 which started its business with CSR in its mind, but most of them do engage in some form of CSR voluntarily. A good parallel is labour rights. In 1914, around two dozen Colorado miners were killed by Colorado National Guard during a strike. Despite public outrage, strike eventually died down due to depletion of funds. John D. Rockefeller, Jr., the owner of the mine and part of the famous Rockefeller family could have easily gotten away without any repercussion. However, in the event’s aftermath he engaged with labour relations expert W.L. Mackenzie King (who went on to become Canada’s Prime Minister) and reformed mines and towns by building paved roads, recreational facilities, improved worker conditions and generously funded Industrial Relations department in Princeton University to understand labour relations. We will never know why Rockefeller, Jr. did what he did. Maybe because the Rockefellers who were already known for their philanthropy were losing reputation. Maybe he genuinely had a change of heart and wanted to improve labour relations. We can ascertain with some confidence that it was not CSR rules which nudged him to do what he did.