Introduction
Growing population, increasing economic and social inequities, and above all, pervasive environmental degradation is contributing to complex global crises. Growing global consumption and unsustainable practices are depleting our resources at an unprecedented pace affecting species, water supplies, quality of soil and forestation. With the pandemic affecting almost all nations across the world, the responsibility of organisations has widened from creating employment to sustaining employment, including social safety and security.
As corporate governance becomes increasingly driven by legal and ethical norms and the need for accountability, and Corporate Social Responsibility (CSR) adapts to prevailing business practices and legal framework, a potential convergence between them surfaces (Verma and Kumar, 2012). Organisations largely relate to the importance of CSR as majorly driven by the dramatic increase in public image and information about the CSR activities of firms. Reports of firms’ behaviours with regard to CSR are often contrary to their stated standards of social responsibility. There is a need for organisations to link their business strategies to the social responsibility practices. There are a number of organisations which have initiated efforts to link their business strategies to the social dimension of growth and market establishment, yet there are a large number of organisations who are unable to do so.
According to the Organisation for Economic Co-operation and Development (OECD), the governance structure specifies the distribution of rights and responsibilities among different participants in a corporation, such as, the board, managers, shareholders and other stakeholders spells out the rules and procedures for making decisions on corporate affairs (ECB, 2004). As a part of corporate governance, CSR has gained a vital importance in regard to responsible business conduct. The Indian government has fully subscribed to this by making CSR mandatory under the Companies Act, 2013 (the Act) in Section 135. The origins of Section 135 of the Act could be traced in the CSR guidelines issued by the Department of Public Enterprises, Ministry of Heavy Industries and Public Enterprises, Government of India in 2007 which were revised in 2009 and 2011. Section 135 of the Companies Act 2013, has been revised in 2014, 2016, 2019 and radically transformed in 2021. India has proudly taken the lead in the world by making CSR spend mandatory with the focus on comply and disclosure or explain. However, this has to be credited in the background of the Social Contract Theory by Rousseau (1989) which emphasises the relationship between business and society and posits that business has to be accountable to society by contributing to its welfare.
Comparative studies of CSR are relatively rare, certainly as contrasted with other related fields, such as comparative corporate governance or comparative corporate law. CSR can be defined as the “economic, legal, ethical, and discretionary expectations that society has of organizations at a given point in time” (Carroll 1991).This still holds true practically even in today’s scenario even though CSR, is still in its “emergent” status (McWilliams, Siegel and Wright, 2006). Literature review talks about the lack of constituent definition of CSR. This lack of consistency of CSR definitions across studies makes it difficult to evaluate and compare the findings from different studies because they usually refer to different dimensions of CSR. World Business Council (2006) has defined CSR as ‘the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large.’ Porter and Kramer (2006) have argued that corporate charity should be rooted in enterprises’ competence. The competencies of an organisation mostly related to its business areas. Once corporate strategy combines with CSR, enterprises should inform all stakeholders (Perrinietal, 2006).
History reveals the journey of legislations supporting social agendas. During the 1970s, most social issues became public policy matters and legislations were passed to address health and safety at work, environmental protection and consumer protection rights. Since the earlier twentieth century, European member states had developed legislations to control the relationship between employee and the firm, health and safety at work, issues of environmental interest, discrimination and equal opportunities at workplace (Mishra et.al., 2020). Across Europe, state owned companies were created to pursue commercial and social objectives, whereas private sector companies were allowed to pursue their commercial objectives almost exclusively. Legislation, regulation and taxation have been preferred tools employed by government to promote and protect social objectives (Mishra et. al 2018).
Researchers, practitioners, representatives of the society and politicians are trying to understand the meaning of CSR and its forms (Carroll, 1979, 1999). Scholars and managers in recent years have devoted greater attention to the strategic implication of CSR. McWilliams & Siegel (2001) defined CSR as situations which instigate a firm to go beyond compliances and engages in services for social cause beyond interests of the firm and compelled by law. Frankental (2001) in a study argued on the vagueness of CSR stating that CSR can mean anything to anybody and has no meaning by itself. Vanhamme &Vogel (2005) defined CSR as an important act of corporate to account for their behaviour, Products, Brands and Reputation in terms of social responsibility. None of the numerous definitions of the CSR clearly underline the various activities that can be considered as CSR activities which are making theoretical development and measurement of CSR difficult.
With 170 aspirational districts in India, CSR mandate is of immense significance and contemporary relevance. People residing in rural villages lack basic amenities and infrastructure, the CSR effort and task for nation building and development is mammoth. Companies Act, 2013 listed varied activities and now efforts are being made to provide facilities like education health care, sanitation, livelihoods, water availability, agricultural improvement etc. to rural populace. The onus of scaling up the rural development interventions and initiatives at macro level undoubtedly lays with state but the corporate play the role in fulfilling their social responsibility in the vicinity of their operational plants and addressing needs of community living their rural vicinity.
However, the role of corporates in fulfilling their social responsibilities in the vicinity of their operational plants and addressing to the needs of rural neighbouring communities is imminent, for being a good corporate citizen, and acting beyond compliance. The value addition in rural development can be enhanced by corporates through their resources and skills sharing, and employee volunteering in rural villages, through building partnerships with implementing agencies/NGOs working in rural space.
January 2021 Amendments to Rules Making a Positive CSR Drive:
Comply and explain the reasons for not spending the specified percentage of profits is now restricted to only ‘explain’
The annual time frame has been extended from one year to three years
The CSR funds could be invested in short term projects one year extending long term projects of three years or more
The CSR investments could be undertaken by Corporates individually or collectively
Such investments need to have measurable impact
The Chief Finance Officer has to certify the appropriateness of CSR expenditure and related details
After the completion of CSR projects, the assets have to be handed over to the implementing agency within 180 days and not beyond September 30, 2021 for the FY 2020-21
The Board / CSR Committee has to monitor the CSR projects
CSR funds could be made available to research institutes working on COVID 2019 However, the expenditure incurred on the employees in regard to COVID – 19 are not admissible to be charged to CSR funds.
Some Facts and Figures – Adopted from Samahita (2020)
In 17-18, 289 companies spent INR 7,067 crore on CSR– even though these accounted for only 2% of liable and reporting companies, their cumulative spend amounted to 53% of the total spend on CSR in that year.
In 17-18, 24% of companies have their own foundation and 52% have dedicated CSR departments.
CSR towards government funds such as Swachh Bharat Kosh, Clean Ganga Fund and Prime Minister’s Relief Fund collectively accounted for just 5% of the total CSR spend over 14-15 to 17-18.
Education accounted for 30% of total CSR spending FY 14 -18. Healthcare was the second receiving 17% of funds, followed by rural development at 10%. On the other hand, women empowerment received 1%, training to promote sports received 1% and technology incubators received 0.13%.
CSR is benefitting the developed states like Maharashtra, Tamil Nadu, Andhra Pradesh, Gujarat, Karnataka, and Delhi and accounts for 40% of the total CSR expenditure FY 2014-18,
While Odisha, Bihar, Chhattisgarh, Madhya Pradesh, Jharkhand, and Uttar Pradesh have 58% of aspirational districts of India, yet received only 9% of the total CSR spent.
Conclusion
Being a good corporate citizen means that companies have to be internally well governed and externally responsible. In other words, CSR and corporate governance are two sides of the same coin. CSR is made compulsory by the government of India, expecting the corporate to participate in the developmental activities while, through governance they are regulating the corporates thus, within the purview of the guidelines given by the government 2% of the profit is made mandatory for the firms (Sec 135, Companies Act, 2013). Though the Act defines the expenditure, yet there is a lack of emphasis on the results of the expenditure. Across India several stakeholders have confirmed duplication of CSR effort. Most of the funding has been spent on education and health which is in consonance with the Human Capital Index 2020 ranking India alarmingly at 116th amongst 174 (Economic Times, 2020). The fact that many companies have not been reporting adequately, adopting ‘comply or explain’ as the norm has caused scams. It is here that the companies need to take a pause and rethink. The new amendment released on January, 2021 Rules have attempted to prevent malpractices through digitalisation of CSR processes and procedures. The CSR regulations could be light and tight for enhancing the impact.
The Way Forward
The amendments treat CSR as expenditure but not as a thought to bring about a change in the socio-economic and political changes in the communities. The ‘capacity gap’ incorporates, in terms of professionalism in CSR, is not addressed. What is surprising is that the amendments yet do not define CSR in the Indian context. A negative list of what is not CSR is given leading to lack of clarity. The amendments have been initiated to measure impact but not the results easier to quantify. CSR has to be necessarily filled in. Corporates not having registrations u/s 12 – A and 18 – G of the Income Tax Act cannot qualify for the CSR funding. Similarly, the involvement of small NGOs operating as social development organisations and which have proved to be very good in implementation but not so in compliance has not received the due attention. On the balance, it could be summarised that the suggested amendments would now lead to structured CSR which is intended to be measurable in terms of impact resulting from better monitoring and evaluation. However, any over regulation would mar the very basic spirit of CSR. What India requires today is not the linear but transformational and exponential CSR in the age of ESG (Environment, Social and Governance).
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This article has been authored by R K Mishra, Senior Professor, NLC Chair on Corporate Social Responsibility, ONGC Chair on Corporate Governance, Institute of Public Enterprise Hyderabad, Shulagna Sarkar, DCM/HR NLC India Limited (A Navratna GoI Enterprise) and Kiranmai, Head, Corporate Social Responsibility, Institute of Public Enterprise. The authors thank Professor P Geeta, Head of the Center for Public Policy and Governance, at the Institute of Public Enterprise, Hyderabad for her critical comments and Dr. M Maschendar Goud, Research Assistant, at the Institute of Public Enterprise, Hyderabad for research support. However, the authors are alone responsible for the views and opinions expressed in the article. This article is a part of RSRR’s Corporate Governance Blog Series.