Tuesday, October 15, 2013

Will Rule Based CSR be Effective?

Will Rule Based CSR be Effective?

In 1975, in the wake of emergency, Mrs Indira Gandhi, the then Prime Minister thought of a slogan to win the masses – ‘Garibi Hatao’ (eradicate the poverty) and it worked her win the elections back from the barracks. At that time she shifted the budgetary responsibilities to the banks and newly set up State owned corporate entities – a Minorities welfare corporation, a corporation for SCs, another for STs and the other for Women and so on. All that these corporate entities were asked to do was to distribute margin money or grant assistance for the related individuals with a matching loan from a nationalized bank. The trick worked and she continued her rule for more than a decade later. Now, stung by huge scandals and scams, Union Government hastened the enactment of long pending comprehensive Companies Act 2013 shifting the responsibility of the government to provide education and health within the reach of the unreached in the name and style of CSR.
Most corporate undertakings express the view that their main business is to focus on its core activity and enhance value to the shareholder. But is that all? For whom is the company creating products or services? For the vast diverse consumers, whose interests guide the future of the company and in turn contribute to the value to the shareholder. Then does not the society matter? Yes; it does and history has proved many a time so. The companies that cared for the welfare of the society developed niche markets and eventually became icons of permanence in markets. Community is a larger stakeholder than all. Recognising this, even in the 1970s commercial banks like the State Bank of India, introduced innovative banking window to reward communities that guided the welfare of the citizens. Over the years this window has been strengthened in the name of Community Services Banking under which the bank helps blood donation camps through its employees and others; distributes medicines to the poor and the needy under the guidance of its own medical officers; it helps the resident welfare associations in their endeavor to help their members with state-of-art technology in some cases; furniture and fixtures; water coolers; summer camps etc. Canara Bank too has a long such history. The other public sector banks here and there have showcased some but not comparable to the SBI in the reach of CSR. It is not what percentage of the profit that goes to this end but how much of felt need of the community under its fold is met. Here the record is creditable.
The list is long and a careful evaluation follows. Same is the case with organizations like Tata group of companies, TVS Motors; Gujarat Ambuja Cements; Wipro, Infosys to site a few. Several leading pharmaceutical and chemical companies put up road shows of social responsibility though ironically we find several of the essential medicines are beyond the affordability of the poor and even the middle class for the most common ailments. Public sector companies like the IOC, Coal India Company, Steel India etc which are spending around 3-4% of their annual profit would reduce their commitment to the mandated 2%. This is what mandates can sometimes deliver the unintended results.
Rig Veda Samhita tells it all: “Wealth has to be won by deeds of glory”; “One who helps others, win wealth.”(p.198, ‘A Saint in the Board Room’ by R. Durgadoss and B. Yerram Raju)
“When the capital development of a country becomes the by-product of the activities of a Casino, the job is likely to be ill-done” avers John Maynard Keynes, the classical economist. Today no country is an exception to the ill-gotten wealth driving the ills of the growth of economies. But can laws and rules bring the overt acts of greed under control? Or will such acts be clothed in the garb of CSR commitments under Law?
Good Governance requires more than rule fixes.
Prof Colin Mayer of Said Business School at Oxford University feels that the model of corporation that developed as the 20th century unfolded is fundamentally flawed and is responsible for both the recent world financial crisis and the breakdown in trust in business that now exists. Taking an historical perspective, Mayer notes that corporations were originally established to serve public purposes and evolved into family-run entities with long-term holdings before coming under the control of individual shareholders. Later, companies became dominated by pension and life assurance corporations, but increasingly share registers feature a large number of short-term traders.
The current model, he says, aligns the interests of shareholders with management and those companies that on the surface have the best corporate governance structures, are often the worst offenders when it comes to the wider good.
Mayer says the corporations have to work with a remit wider than that of maximising returns for their shareholders and pay for senior management and have to consider the interests of a wide group of stakeholders including employees, customers, suppliers and society in general.
Profit, he argues, is a product, not a purpose, of the corporation that is derivative from its fundamental activities.
"We need corporations whose values we all value, for which we are proud to work, from which we are confident to purchase and in which we can expect a fair return on our investments," he says in an interview to Irish Times recently.
"We need companies whose shareholders appreciate that there are responsibilities as well as rewards for being owners and who are committed to promoting the interests of the corporation, not just their own.” The contextual discussion also takes me to the series of debates that the FT has been conducting lately on ‘Better Boards’, where several chairmen called for clarity over the status of corporate governance rules. “Governance should be rooted in laws, not codes: ‘comply or explain’ is too ‘fluffy’ and not practical when you are dealing with an international investor base.
The non-binding ‘comply or explain’ requirements of the Corporate Governance Code were deemed too vague and permissive of idiosyncratic behaviour by boards. This affects international investors who are unfamiliar with this model and are not able to deliver the style of stewardship that ‘comply or explain’ requires. It also means investors with a large number of small equity holdings do not have the capacity to fulfill their stewardship duties.”
Is this the raison de ‘etre for the Companies Act 2013 to prescribe the CSR as part of Law? One wonders.
This takes me to the provisions of the new Companies Act 2013 covering CSR.
The Law states that all the companies with a net worth of Rs 500crore ($80 million) or more, or turnover of Rs 1,000crore ($160 million) or more, or a net profit of Rs 5crore ($0.8 million) or more during the past three financial years must spend at least 2 percent of their average net profits from the three preceding years on CSR, or corporate social responsibility initiatives. According to Union Minister of State for Corporate Affairs Sachin Pilot, this stipulation makes India, the first country in the world to legally mandate corporate spending on social welfare. Many Companies feel that their dharma (the Hindu word for duty) is to provide value to the share holder to which a mention has already been made earlier in this article. Openly no company would go on record that this provision is either onerous on them or do not agree with, for the fear of being branded as anti-development.
Among the activities for CSR under Schedule VII are reducing child mortality and improving maternal health and contribution by companies to the Prime Minister’s National Relief Fund or any other fund set up by the central or state government for socio-economic development. Out of a total of 800,000 companies in the country, around 15000 of them would qualify for CSR activities and an amount of Rs.15-20000crores per annum is the likely spend on these activities.
Education is another area of the directed-spend. There were some who argued that art and culture as also religious activities should be in the basket. There were rightful protests against the religious activities in the garb of CSR. In effect, it means that temples, mosques or churches or gurudwaras cannot be built out of the mandated CSR.
In fact, whenever any expenditure is mandated it has a knack of compliance burden more than serving the noble objective behind it. But does the government have to go this way only to achieve the CSR when there are certain companies that have already distinguished themselves in charitable activities? After all, all the contributions to the Prime Minister’s or Chief Ministers’ National Relief Fund programmes enjoy hundred percent tax rebates. On the other hand, would it have not achieved much more by making the lobbying bodies like the CII, FICCI etc responsible to ensure such goal? It could have. But the Act and Rules are now in place and therefore very little can be on the argument side. The purposes need not be mandated under the rules. In fact the budgetary responsibilities should not be passed on to the companies under the garb of CSR. It should be the responsibility of each Board to resolve on which items it should spend and not necessarily out of the basket it suggested. Remember, the targeted spending on this count is as much as half of the disinvestment programme of the Government during the current year. Employee participation in CSR would depend upon the HR policies each company adopts and the comfort it gives. Some companies have established separate trusts to take care of the CSR to which the Board transfers every year specified sums for such purposes. The Government would do well to allow all options for the companies to implement CSR as a noble and voluntary effort.
Published in the Business Advisor dated 10th October 2013.