The myopia of India’s CSR requirement. How the law is a good first step but ultimately misses the mark

It’s been over 4 decades since Milton Friedman’s treatise on corporate social responsibility, but despite the time the obligations of business in society is still a hot topic of debate.

In India, however, that obligation has been laid out explicitly in new regulations set to take effect on April 1st. The bill, which was officially passed into law on August 29th, 2013, contains updates on a broad range of issues. Of interest is section 135 which outlines a company’s CSR requirements:

  1. Form a CSR committee with at least three directors, one of which must be independent. This committee will be charged with reviewing a company’s CSR policy, making expenditure recommendations, and providing oversight.
  2. The company must spend at least 2% of the average net profits during the 3 preceding financial years on CSR activities outlined by the board. Preference must be given to local areas in which a company operates.
  3. These requirements will apply to companies with a net worth of 500 crore (USD $81 million) or turnover of 1000 crore (USD $162 million) or a net profit of 5 crore (USD $810,000).

Based on total economic activity, some estimates place the total amount to be earmarked for social causes around US$2.5 billion.

There are some problems with this view. First, CSR is treated as being analogous to corporate philanthropy. While this is partially true it only addresses one facet of CSR. Social responsibility is a much more holistic view of the actions of a company within a society. Simply earmarking 2% of profits for government-approved causes represents the purest form of a social tax Friedman espouses in his article.

For example, CEOs who pay their employees well above the market rate may feel that they are contributing to society but the commission has already ruled that employee compensation will not be counted towards the CSR quota.

Compare this to CSR practices in many Nordic countries whose companies frequently top the list on a variety of CSR performance indices. The corporate attitude has long been one of “implicit” CSR, where social impact is built into the foundation of how a firm operates.

Trond Giske, the Norwegian minister for Trade and Industry captured this succinctly in his remarks for a 2012 conference, “Many elements of CSR are at the core of the Nordic Welfare model, such as decent work, gender equality, involvement of citizens and social dialogue.” Surely an Indian company acting out these values could be said to be fulfilling its social contract, but how does one quantify and count these actions towards the required 2%?

Education contribution is a primary area declared as a valid CSR category for the spending requirement. Poor facilities and lack of technology has been cited as a cause for India’s poor educational system; something that philanthropy could address. However, these elements mean nothing if a student can’t go to class because their family relies on them to contribute to the family’s income. This is especially true in poorer areas as one report published in 2009 noted an average absentee rate of 25% among rural students, compared to 10% among their urban counterparts. While corporate philanthropy can begin to address educational issues, it will take a more fundamental change in philosophy to improve the more systemic causes such as poor wages.

The law restricts a business’ ability to be strategic with its social contributions. Economic, social, and environmental sustainability is achieved when a firm can align its altruistic actions with core business objectives; a concept outlined by Michael Porter as creating ‘shared value.’ Unfortunately, the shared value approach requires the commitment and alignment of all organizational functions; a state of being that is not achieved when simply contributing 2% of profits.

With that said, India is still breaking new ground by formalizing a CSR policy but at this point it still represents little more than a tax and not true innovation.

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Three ways corporate social responsibility can benefit your business

When speaking to business leaders, the problem with CSR is inherently one of communication. On one hand, a business must be able to communicate its social value to a consumer but equally important the value of engaging in socially-oriented activities must be communicated to executives. A lack of the former leads to poor return on investment and a lack of the latter leads to CEOs unwilling to sustain a commitment to a social initiative. Therefore, it is imperative that both scholars and practitioners understand how CSR can drive value generation.

A few days ago I attended an annual conference hosted by the St. Louis chapter of the American Marketing Association. Aside from learning why the state of my Linkedin account is acting like a boat-anchor for my career, I had an opportunity to talk to Gordon Fowler, the president and CEO of 3Fold Communications. Among 3Fold’s myriad of social practices is, as Fowler puts it, a “community tithe,” in which the company gives 10% of its 3 t’s (time, talent, and treasure) to the communities in which it operates. If you’re wondering how a company can remain competitive when it is already at a 10% disadvantage to the competition, Fowler says that he’s developed a competitive advantage from CSR based on three important points:

Community involvement exposes business opportunities

Like an artist who paints what they know, an entrepreneur sees opportunity in areas where they are familiar. Many people who’ve started successful businesses or developed innovative products would like to chalk their success up to intuition, but in reality it takes technical knowledge and experience with the market to understand where potential value lies. A good corporate citizen, one with strong ties to community stakeholder groups, has a level of understanding of their potential customers which would be hard to gain through marketing surveys or focus groups. In addition to 3Fold, Fowler is a serial entrepreneur who has started multiple businesses around Sacramento. He says that his charitable work through 3Fold allowed him to network with a wide variety of individuals and exposed numerous business opportunities. Eventually these connections lead to a variety of new ventures. Therefore, don’t underestimate the relationship building potential of community involvement

Customers respect your brand

Fowler says that 3Fold communication stayed committed to its business model even in the face of extreme financial pressure. During the recession in 2009, 3Fold was basically operating month-to-month in terms of its ability to pay its bills. Yet despite the stress, 3Fold still turned away contracts from clients whose businesses were not in line with 3Fold’s values, and still maintained its 10% community tithe. New and old clients, Fowler says, noticed and rewarded the firm with commitment and positive word of mouth. The 3Fold approach may be a tough sell in trying times but the research supports the result. In a 2011 review article published in the Journal of the Academy of Marketing Science, John Peloza and Jingzhi Shang note that time and again, CSR leads to better brand evaluations, better customer retention, and greater instances of product choice. However, a one-time donation to the local food bank is not going start generating consumer interest. It takes time and commitment to cultivate sincerity but customers will respond well when they believe a brand is exercising its values.

You build better employee relationships

Time and again it’s been shown that employees want work to be rewarding. Yes salary level still matters, but it’s not the cure-all for employee motivation and retention.  Social involvement humanizes a company and gives it a purpose that many employees can find value in and connect with. In a survey done by LBG Associates, 71% of employees that participated in employer-sponsored volunteer programs reported more satisfaction with their companies. This is on top of recruitment benefits a strong CSR reputation provides. An article in the Journal of Business Ethics reported that mobile employees, the highly sought after knowledge workers crucial for a business, were more likely to apply to a company that prominently displayed its community involvement. At 3Fold, Fowler says the strong culture of citizenship molded employee attitudes as well, making them more willing to sacrifice for a company they felt was already beneficent. He stated that nearly every member of the company talked to him and volunteered to take a pay cut when they learned how lean the times were in 2009. That’s the kind of value driving commitment many companies covet but few can produce.

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