Is CSR a sustainable business model?

Feb 3,2014

The concept of social responsibility and philanthropy has been a part of charitable initiatives of the Indian business houses, as also by the zamindars in the days of the permanent settlement as a tribute to God. A later phase was triggered by the Gandhian movement and the initiatives of industrialists of that time, such as, Birlas, Tatas, Modis and Dalmias who were inspired in undertaking similar initiatives as a part of the Gandhian philosophy starting with dharamshalas and places of worship.

These initiatives were undertaken under the Indian Trust Act, based on the principles of trusteeship and the fiduciary requirement to provide a return for the gains of business. It is only in the new Companies Act (2013) that statutory provisions and responsibilities pertaining to corporate social responsibility (CSR) have been made mandatory under law, requiring companies having a net worth of Rs 1,000 crore or more to constitute a separate Corporate Social Responsibility Committee of the Board, of which one member has to be an independent director. As privatisation waned due to policy changes in the nationalisation era, the public sector became an active player in setting up schools and hospitals in their townships.

Though the productivity of the public sector plummeted in the eighties, with privatisation, the public sector still remains active in its social initiatives and the large corporations, such as ONGC and Indian Oil Corporation continue to serve the community in various ways. The revival of CSR in the 1990s can be traced to the upsurge of environmental concerns, which fathered the initial public interest litigations, and more recently the Green Tribunal. Auto manufacturers and others engaged in industries which involve pollutants tend to be targeted, and the Mahindra's are one of the foremost in CSR as Maruti.

The question is whether CSR is warranted and corporates are happy with CSR featuring in the Companies Act being made mandatory. There are divergent views. Certain companies believe CSR provides an opportunity for being inclusive and the process benefits the outlook of employees as well as customers. Essentially, it is the state's duty to provide welfare to society under the Constitution. It is another matter if a corporation decides to utilise its funds in social welfare, without being coerced by regulations. There is also a difference in green investing and social projects. If the company's activity involves production or use of alternative natural resources and other environmentally conscious business people or invest in given mutual funds, that itself goes a large way.

If the company's business is healthcare, then pro-bono work in that sector also has its positive business indicators. But the CSR schedule to the Act involves unwarranted expenditure by corporations in certain activities in respect of issues which are not within their domain expertise. There is also an element of intrusion of investor rights in introducing mandatory CSR. Both the investor and the corporation are taxpayers. Investment decisions are not made on the basis of CSR projects, but on the dividends issued by the company and the net value. In the zeal for corporate governance and other forms of compliances, lawmakers should not lose sight of the purpose of a limited liability company.

For multinationals that operate in a global market, it is not possible to have separate approaches and staffing for their social responsibilities. Every jurisdiction has its specific regulations for companies and their compliances. In addition, there are international CSR standards and guidelines to comply with, all of which is a full time task, particularly, if it has no nexus with the corporations business.

Undoubtedly, there are other worthy activities in which companies' funds may be deployed such as self-regulation and good governance. A business ethics initiative is more important for business and also a worthy cause. Businesses are fighting for survival in adverse conditions. This is not the appropriate time to engage in expenses which do not bring value addition to their businesses and eat into profits