From Philanthropic Act to Strategic Policy
Ever since the Industrial Revolution, businesses have often been perceived as an anti-social development – the empowerment of few, against the many. In India, because the industries came in along with colonialism, people’s perception of the sector has been adverse. It is a fact that industries and businesses have played a central role in the socio-economic development of the country and today India is counted among the emerging super economies. But as poverty continues to be the reality of more than half of our population, what is now known as the corporate sector, has been time and again touted as one of the reasons behind the yawning gap in the distribution of resources in the country. At the same time, its significant role in poverty alleviation in a market driven economy cannot be denied. What does the new Corporate Social Responsibility (CSR) mandate in the Companies Act 2013, imply in this scenario?
The Companies Act 2013, in its Section 135, has made it mandatory for companies (whether private or public) with net worth of = 500 crores or turnover of = 500 crores or net profit of = 5 crores to constitute a CSR Committee of the company board, along with CSR policies and spend 2% of company’s net profit (average) earned during the preceding three financial years, towards some social cause. This is just one among the new clauses that have been incorporated in the Companies Act 2013, pertaining to contemporary matters including fraud detection, investor security and corporate governance. Yet this is the clause that has generated much debate. Some have welcomed it as a long awaited development, while sceptics have called it “a waste of resources” among other things. It is important to realize that CSR is not a new concept in India which has been introduced by the Act, rather many companies had already been practising it long before. Then why the CSR mandate? And how does it affect the corporate world?
Benefits to the Corporate
Integrating social, environmental and ethical responsibilities into the governance of businesses ensures their long term success, competitiveness and sustainability. This approach also lays down the affirmation that businesses are an integral part of society and have a critical and active role to play in the sustenance and improvement of healthy ecosystems, in fostering social inclusiveness, and in upholding the essentials of ethical practices and good governance.
Corporate Social Responsibility is the continuous commitment of a corporate body to improve community well being through discretionary business practices and ethical contributions of corporate resources. It advocates the model of ‘trusteeship’, which allows businesses to harness the resources provided to them by society, and therefore, companies are morally liable to repay the society by manifold. Mallen Baker—writer, speaker and CSR expert—defines CSR as “a way companies manage the business processes to produce an overall positive impact on society.”
CSR initiatives become the Unique Selling Proposition for companies and facilitate them to build a dominant brand that reverberates with key peripheral stakeholders—customers, government and general public. In addition to this, CSR helps in boosting employee morale and building an empathetic corporate culture within the organization. The feeling of contentment and pride in corporate bodies comes by itself when CSR initiatives are implemented and this feeling trickles down to their employees, as well as in the long run, to their stakeholders.
CSR in India
CSR in India has traditionally been seen as a philanthropic activity, as a giving tradition, that was performed but not deliberated. The initial trend was inclined towards religious giving and in the second half of the 20th century shifted to institution building. Businesses established trusts for schools and colleges and helped in setting up educational, training and scientific institutions. The tendency of Indian corporate has always been towards making a one or two-time financial grant, without any further commitments towards the cause. But over the last few years, CSR has been taking a whole new shape and purpose.
After the 1990s’ globalization and economic liberalization, the increased growth momentum of the economy helped Indian companies grow rapidly and this made them more able and willing to contribute towards social causes. The practice of CSR in India today centres on community development, with most companies focusing their CSR activities in and around the welfare of the local areas they are based in.
With global influences and with communities becoming more active and demanding, there appears to be a discernible trend that CSR is getting more strategic in nature rather than philanthropic.
But while this practise had been adopted by some corporate, the majority was still aloof from the concept of CSR, whether as a philanthropic activity or strategic policy. Even for those corporate, who were involved in CSR initiatives, the proper utilization of funds could not be ensured, due to lack of a monitoring and evaluating system. This is where the CSR mandate comes in.
Towards a sustainable & inclusive economy
The Companies Act 2013 has ensured that CSR no more remains within the ambit of philanthropy or strategy alone, but in effect becomes what is meant to be – the responsibility of corporate towards society. This is an effort towards achieving sustainable growth of the country, where social development goes hand in hand with economic progress and the democratic ideals of equity are realized.
Clear guidelines are also provided by the Act to demarcate between what counts as a CSR activity and what does not – working in the areas of poverty, education, gender equality and women empowerment, healthcare, livelihood, environment, social business, education, socio-economic development, etc. would be included, while one-off events like marathons, awards, charitable contribution, advertisement, sponsorships of TV programmes, etc. would not be included. This leaves no doubt that only those endeavours which will have an actual, effective and long lasting impact on society and involve active involvement on the part of the corporate would be considered as CSR activities. There is also a significant thrust on local area development under the Act, since industries are located in India on the basis of research of raw market availability, transportation costs and crucially, the co-operative attitude of the local government. Intimate knowledge of the needs of the local communities would even be beneficial for the corporate.
To regularize and formalize CSR across the country and make the whole process transparent, disclosure of resources utilized under CSR in the company’s Annual Report has also been mandated under Section 135. Consequently, companies have now begun to include CSR as a core activity, rather than something subsidiary.
Corporate-NGO partnership: A win-win situation
But while corporate are now better informed and willing to contribute the requisite material resources and managerial proficiency for social welfare initiatives, the field of development, particularly in a country with a socio-cultural diversity as rich as India, either remains outside their expertise or does not make economic sense. Section 135 provides a solution – by sanctioning the collaboration of corporate with NGOs, for achieving their CSR goals.
Earlier corporate seldom kept partners or NGOs in mind while planning for CSR initiatives, which resulted in the reduction of their value and effectiveness. But over the past decades, NGOs in India have been commendably supplementing the government’s efforts in various fields of social development. Thus, more and more companies have now started partnering with NGOs to ensure successful execution of CSR initiatives. Credible NGOs which have been doing consistent good work can prove to be the delivery arm for corporate, effectively using their resources on the ground, in a way that is responsive to the needs of the people.
Corporate Social Responsibility forms the crucial bridge between businesses and society, and by making it mandatory, the Companies Act has opened up new support systems for social development. Around 8,000 companies are expected to come under the ambit of the CSR Mandate and the annual funding is expected to be between Rs. 15,000–20,000 crore. This has also paved the way for NGOs to learn from and utilize the management expertise of the corporate to bring transparency, efficiency and acceleration in their processes.
Since its very inception and much before the CSR mandate was conceived of, Smile Foundation has been following the principles of Good Governance and the corporate sector has been a natural partner for it, throughout its journey of bringing change. Smile Foundation’s development goals have always been aligned with the social responsibility of the corporate to ensure the highest Social Return on Investment (SROI). Rather than just channelize resources from a corporate, efforts are made to actively engage the corporate organization, the brand and its employees in the welfare initiatives of Smile Foundation.
India has become the first country to formulate the Corporate Social Responsibility mandate. If this initiative gains success, it could not only become the foundation of an ideal economy, but also an imperative step towards nation building, and soon India would be sharing its knowledge with other countries.