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Anirudha Dutta
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Corporate India and CSR

The Companies Bill 2012 has been passed by the Rajya Sabha in the monsoon session of the parliament. This will bring in big changes in the regulatory stance towards corporate social responsibility (CSR), as well as responsibilities placed on the corporate sector. Enough has been written about the pros and cons of the CSR provisions, although my own view is that there is over-emphasis on Outlays, with limited thoughts, if any, on Outcomes.

Outlays or Outcomes?
Outlays are easy to mandate and easier to track, if all the boxes of right intent are ticked. The government does not seem to be equally bothered about the outcomes. For them, the CSR requirement is like another tax’ on the corporate sector and they have done their bit for the aam aadmi.

In many ways, it is the companies that will determine the Outcomes and therefore the success of the CSR. The Tata group has been involved in such activities for over a century, although it didn’t have the same nomenclature then. After decades of CSR, a company like Tata Steel realised that there were limited benefits of spending money without:

  1. Measuring the outcomes; not just immediate but also over the long-term.
  2. The community to which helping hand is being extended needs to have `skin in the game’. This corporate jargon would be anathema to social sector workers, but is increasingly being accepted. Giving away anything for free doesn’t work.

So Tata Steel changed and tweaked the way the programs are directed. I do not have all the details; but from what I know– If a water pumpset (made famous as “Lal Bahadur” in the movie Peepli Live) was installed in a village, they would make sure the villagers contributed something to it – either by way of labour, material or money.

Hidden returns
Many promoters and managements look for “returns” from such spend. There is nothing wrong with this. When I spend on my immediate community, I benefit from a harmonious relationship with the community and hopefully a stable work force. NGOs do that too. Whenever I have quizzed Vinayak Lohani of Parivaar about why he spends money on non-core (another corporate jargon!) activities in the surrounding villages, his rationale is like a corporate – harmonious relations with the society he operates in.

The concerns arise when people start expecting favors, like concessions from the government or politicians in return.  In an interview to the New York Times, the chairman of a large Indian group said that his group may have given scholarships to bureaucrats children. Now prima facie there is nothing wrong with it. It would be wrong if an independent audit had found that a majority of the scholarships given over a 10 and 20 year period have gone to bureaucrats children and therefore, may have been given to win potential favours.

A friend recently met the patriarch of a large reputed group in South India to raise funds for a venture which works in public policy. The group is well-known for donating money to education. The first question the patriarch asked was, “How will we benefit from this?” He went on to hint that their donations and philanthropic activities had pay-offs and they did not fund anything just for the larger good.

A shot in the arm for crony capitalism?
Given the way crony capitalism has gripped India and resulted in the present stasis (read Two to clap by T N Ninan and Pratap Bhanu Mehta’s When business bats against itself), CSR could well go the same way depending on the intent of the corporate or the business  house. Can we de-link this by asking for mandatory disclosures or audits.

Finally, it is clear that the direction will depend on good men for outcomes and there may not enough of them, whether in the government or in the corporate sector. A Nandan Nilekani or Ajay Piramal or Azim Premji don’t need to be forced by a new law to give away part of their wealth; an Infosys Foundation was started much before CSR became a buzzword; Jamsetji Tata spoke about the good of the larger society over a hundred years back. But sadly even today many business groups talk about “hamara faida“.

In a country that is the beneficiary of global outsourcing, the government is today busy outsourcing much of its governance to hide its failures in the garb of rights and entitlements. Given the nexus between business and politics, CSR funds could in fact, give rise to more crony capitalism. Publishing CSR reports will not achieve anything. The Vedanta group, for instance, produces some of the best CSR reports. Its Tuticorin smelter has been shut down after a prolonged battle. What value do such reports have, if large scale environmental violations are taking place for decades? My views in this case are based on media reports, But this seems to be just another tick in the box activity

Legislations like the RTI have exposed a lot over the last two years. Whether it breaks the nexus of crony capitalism or increases the cost has to be seen. Part of the increase in cost may come from CSR funds, especially for groups that think of only “hamara fayda“. Others will continue with good work they are doing – mandatory or not.

The market has been largely indifferent
The second point that I would like to dwell on is about how the markets perceive CSR, While companies have, at least on paper, concerns for all stakeholders– the promoters have their eyes on the stock price.

Do analysts care about CSR? The answer in one word would be a firm No. Analysts care mostly about financial numbers and what their clients want. A 2% “tax” on profits would result in one-time downgrade of earnings estimates and then building it into all future forecasts. Therefore, I do not think it will matter much in terms of valuations and stock price impact.

The more important question is do investors care? And we all know the answer. During my career as an analyst, I have come across  very few asset management houses that are concerned about CSR or corporate governance, although a lot of lip service is paid to the latter. Most fund managers are worried about stock market performance (that is what counts) and unless there is a serious violation or a fallout over sustainability or governance issues, it really doesn’t matter to them. This is the reality whether we like it or not.

The fund houses that are different are so for two reasons:
1. First, they have found a niche to differentiate themselves and to promote their business.

2. Second, certain asset allocators, notably from the Scandinavian countries, have become very conscious of sustainability and governance issues.

Winds of change?
However, as we become more conscious of these issues, Fund managers will surely demand greater scrutiny of sustainability, environmental violations, labour-law violations and CSR. We examples of this on labour issues in developing countries. Companies that outsource manufacturing like Nike, Gap and others have been under serious regulatory scrutiny on labour practices at their partners’ manufacturing sites. This has often resulted in better employee conditions and less exploitation over a period of time. Consultants now vet the suppliers and investors find these studies and reports useful because it impacts their portfolio value. Hence, analysts pay attention to these issues.

The same will likely happen with CSR if there is an impact on the stock price, for the better or for the worse.

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What I want to understand is how the companies are actually involved in CSR? Do they hire consultants to advise them on which sector would fetch them most social benefits after investment? Whether to go philanthropic, or social business? And overall, what is the trend of CSR spending going to such consultants?
The need to track outcomes is well taken. Strong institutional base and anchor incubating and scaling these initiatives as well as high credibility in the market and with the government agencies woven with deep knowledge base is required for these initiatives. After all these initiatives typically seek to address many challanges where other agencies have failed to deliver or have not reached yet.. Covergence of these efforts across sectors and lessons from these if shared by way of AN EXCHANGE will benefit CSR new initiatives or continued ones as well. CSR strategy should ge a evolving one.....We see most organizations stuck to their themes for decades where as the world would have moved on...

Pingback: CSR & the Companies Bill: India’s Corporate Struggle | The Political Bouillon

With the CSR policy in place it is now important to find PROJECTS/PROGRAMS that are genuine and beneficial. Everybody is aware of 'problems' facing society in terms of sanitation, pollution, water, education, healthcare, etc. But the crux is identifying SOLUTIONS that really work on the ground. Many of our NGOs should go beyond theatrics and award functions. The corporates must be vigilant and avoid the temptation of being clubbed with the 'celebrities of social work'. They should take the trouble to identify VIABLE PROJECTS presented by start-up NGOs and support causes that really make a change - not just a 'Green' TV show where Bollywood stars are paraded to sell things like Solar Lamps that are eventually discarded and become dangerous pollutants because of the lead poisoning caused by batteries! I request the Corporates to work with LOW PROFILE social activists who are seriously engaged in meaningful programs.
Excellent post. Yes. More and more Corporate Companies are now involved in CSR. It enhances the reputation of the Comany as well. Dr.A.Jagadeesh Nellore(AP),India
Thank you, Dr Jagdeesh. It indeed does, but that is not the only reason corporates do CSR. the incentivisation is some economic or social benefits to itself and the larger ecosystem it operates in. CSR mandated by law is unlikely to work, although I hope it does.
I wish CSR could focus on two urgent needs of rural India such as rural healthcare and education including adult education and skilling. Instead of individual company spending their mandatory amount separately, they may join foundation of Premji or that Shiv Nayar for education and Dr. Devi Setty for healthcare, for example. I agree that the reporting of the CSR amount must appear distinctly in the annual report, otherwise all sorts of work will be included in the heading, as many corporates have been doing that in the name of R&D to get tax benefits. They may start with villages all around their own plants, but their work in the remote rural India lacking the facilities will be more adorable.
Thank you, Indra. Corporate India will do what it has to. this mandatory compulsions usually result in unintended consequences and that is what I am afraid of.
Examples of lack of ethics in Indians which will result in failure of CSR policy. 1. In Gujarat we repaired a road leading to a village as part of CSR. Other Villages then blackmailed us into repairing their roads. They said unless we repair their roads they will block our movement. 2. In Maharashtra an MLA forced us to donate to schools run by him. This way he projects himself and also makes money of us. 3. In Rajasthan villagers force us to hire only their manpower and vehicles in much larger numbers than we need and at rates which are much higher.
Hi Vijay, Thanks for your comments. I would also tend to be cynical given our general experience; but let's hope for the best. It would be much better if the government instead of outsourcing its job of social development continues to mask its failures by legislating all sorts of laws. The corporation has a limited mandate and it pays taxes etc to the government to do what the government should do. Without mandatory rules also a corporate works for social development when it feels it has something to benefit from it.
CSR is not healthy in a democracy like India. I would rather the Government take this 2.5% as taxes but ensure zero corruption and freedom to operate legally for Indian Infrastructure Industry. Also we need to automate land data.
 
 
Anirudha Dutta
Anirudha Dutta is former head of research at CLSA India Limited, a leading foreign brokerage house. While every number tells a story, there are many stories beyond numbers and both are equally important. This blog will attempt to tell some of these stories.
 
 
 
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December 09, 2013 12:21 pm by Ankur Sohanpal
What I want to understand is how the companies are actually involved in CSR? Do they hire consultants to advise them on which sector would fetch them most social benefits after investment? Whether to go philanthropic, or social business? And overall, what is the trend of CSR spending going to suc...
September 21, 2013 11:58 am by Pompy Sridhar
The need to track outcomes is well taken. Strong institutional base and anchor incubating and scaling these initiatives as well as high credibility in the market and with the government agencies woven with deep knowledge base is required for these initiatives. After all these initiatives typically ...
September 18, 2013 00:04 am by CSR & the Companies Bill: India’s Corporate Struggle | The Political Bouillon
[...] Anirudha Dutta summed up the problem of social welfare initiatives in India in his blog post, ‘Corporate India and CSR’. Corporate corruption, embezzlement, the twisted attitude towards charity all show that without accountability and without mandatory disclosed audits, the CSR initiat...
August 20, 2013 11:23 am by Vijay SJ
With the CSR policy in place it is now important to find PROJECTS/PROGRAMS that are genuine and beneficial. Everybody is aware of 'problems' facing society in terms of sanitation, pollution, water, education, healthcare, etc. But the crux is identifying SOLUTIONS that really work on the ground. Many...
August 19, 2013 22:43 pm by Anirudha Dutta
Thank you, Dr Jagdeesh. It indeed does, but that is not the only reason corporates do CSR. the incentivisation is some economic or social benefits to itself and the larger ecosystem it operates in. CSR mandated by law is unlikely to work, although I hope it does.