Business Evolved

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 1^st. The bill, which was officially passed into law on August 29^th, 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.