CSR: An equal responsibility of SMEs

SMEs play a critical role in generating millions of jobs, especially at the low-skill level. It is imperative that India works towards making the smaller enterprises CSR compliant.

Samit Jain  |  Mumbai  March 27, 2014 Last Updated at 12:34 IST

Over 8,000 large companies complying to Corporate Social Responsibility (CSR) has been a remarkable policy adoption by the Indian Government. This move has put India in league with countries like Sweden, Mauritius and Norway who have robust policies on CSR for industries. But where India lags behind these countries is that the Companies Act does not successfully bring CSR into the mainstream.
  
 India is a country of SMEs. Schumacher said, “Small is Beautiful”. We need to make the small beautiful in India too. It is imperative that India works towards making the smaller enterprises CSR compliant. Employing close to 40% of India's workforce and contributing 45% to India's manufacturing output, SMEs play a critical role in generating millions of jobs, especially at the low-skill level. The country's 1.3 million SMEs account for 40% of India's total exports. SMEs have a much wider spread, hence a wider reach across communities. We can extrapolate and comfortably say, that the geographical reach through SMEs is vastly higher than through the larger enterprises.

UNIDO on its website on CSR defines Corporate Social Responsibility as a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders. The SMEs need to realise that CSR is not just about spending money. It is an ‘attitude’. The excuse of being small will only prevent the SME from becoming world class.

SMEs are equally responsible towards making living conditions better for their employees and their families. What SMEs do not realise is that CSR is the only way through which the company can achieve a balance of economic, environmental and social goals. As we move ahead in the 21^st century – India can achieve its dreams, and turn its burgeoning young population into an asset only if each company big or small takes on responsibility for social, educational and environmental upliftment at large. This will go a long way in creating harmony between workers and the management, while at the same time addressing the expectations of all stakeholders in business.
 

E-waste management, Courtesy: Pluss Polymers

The smaller enterprises need to not always spend in rupee terms for CSR. They have to first educate themselves on CSR. The UN through its UNIDO programmes in developing countries has successfully defined a Triple Bottom Line (TBL) Approach, which has proven to be a successful tool for SMEs in the developing countries to assist them in meeting social and environmental standards without compromising their competitiveness. The TBL approach is used as a framework for measuring and reporting corporate performance against economic, social and environmental performance. SMEs need to realise that profit alone will not drive them to become successful. They have to successfully integrate environment and society with economics.

UNIDO continues to articulate very appropriately that “A properly implemented CSR concept can bring along a variety of competitive advantages, such as enhanced access to capital and markets, increased sales and profits, operational cost savings, improved productivity and quality, efficient human resource base, improved brand image and reputation, enhanced customer loyalty, better decision making and risk management processes”.

At a whopping approximately 48 million, India has the second largest number of SMEs in the world, after China. While SMEs are the predominant form of enterprise in India, it is essential that they also comply to CSR standards and are reportable to the government. The government should consider modifying the Companies Act to ensure at least a reporting by SMEs on what they have done. This will force them to begin to think on those lines.

Forcing, however, undemocratic it may sound, is often a tool to initiate and change thought processes. CSR could for beginning be within their organisation – More often than not, SMEs tend to ignore the environment within the company itself. They could even look at motivating and training employees on health, sanitation, skill development, environment - these would change the immediate environment and benefit their families which in turn benefits the company.

Figure 1

CSR initiatives will begin to result in higher motivation and loyalty among employees. This in turn will lead to better production efficiencies, lower employee turnover, and eventually lower costs for companies. Very soon, organisations will see an increased sales turnover due to the competitive advantage derived from a good CSR policy.

Compliance to CSR will ensure that the bulk of SMEs undertake the following to help produce quality products and derive customer satisfaction, thereby improving the overall environmental and social surrounding of each one of them (refer Figure 1).

Large corporations have significant impact on society and environment. They are concerned about their brand reputation too. Therefore, they invest in CSR. However, it is important to appreciate that social and environmental impacts are interconnected. The two are related and have to be treated as one by everyone, whether an individual, small enterprise or large enterprise. CSR has to evolve into ISR – Individual Social Responsibility - eventually for India to become developed. Hence, it is imperative that SMEs take on this responsibility. It is the government’s responsibility to enable such a revolution, by bringing in the SMEs into the CSR act in a careful and responsible manner. The rules have to be enablers and not irritants for the SMEs.

It is a no brainer that in India SMEs have frequently abdicated their environmental and societal responsibilities. This statement in no way implies that large organisations have become sustainable and are responsible. However, it will be fair to say that more and more large organisations have taken or are taking steps to reduce their environmental impact and in the process giving back to society, which is the very reason for their existence.

To create the sweeping change in education, environment and society that India needs, the returns from focussing on large organisations are diminishing with time. The focus has to shift to enabling SMEs to make an impact on the society and environment. The changes they can bring about, as they have done in manufacturing and contribution to the GDP, in turning India into a developed country through making an impact within their organisation and their immediate neighbourhood is enormous.
 
This, in no way is to imply that large organisations have become ‘sustainable’, or cannot do much to reduce their environmental or societal impacts. However, it is fair to say that a number of large companies have progressively undertaken steps and measures to improve their social and environmental performance.

Pluss Polymers' Samit Jain

It is also well known that the large organisations, being forced to disclose their wider sustainability impacts, have increasingly passed on the burden to the SMEs which form their supply chain. The significant environmental and social impacts of large organisations are hidden in their supply chains! This is because of increasing cost competitiveness. So, the government and auditors really need to get to the root of the problem.

India along with other developing countries is known for unsustainable practices of suppliers of raw materials (eg in electronics manufacturing, electroplating, dyeing or polymer recycling) or the unethical labour practices of production which is outsourced (eg in retail and clothing). These companies do not garner the same scrutiny as their large customers.
 
With a changing global economic landscape and the rising aspirations of the middle class in India, it is high time, SMEs begin to change themselves and factor in an attitudinal change towards the society and environment and do their bit in the progressive change required to turn India to a better place in the near future. SMEs should remember, if the society and environment around them fails, businesses will fail too. They should also consider CSR as minimising negative impact and creating positive impact in what they do every day of the week. If they begin documenting this, CSR will happen not just automatically, but within their existing resources!

CSR Rules: Ambit Of The Act Enlarged?

CSR Rules: Ambit Of The Act Enlarged?
Published on Tue, Mar 25,2014 | 18:15, Updated at Tue, Mar 25 at 19:12Source : Moneycontrol.com

By: Harinderjit Singh, Partner, Price Waterhouse

In Corporate Social Responsibility (CSR), a firm engages in actions that further social (and environmental) good, beyond the obvious interests of the company, its business relationships and that which is required by law. The Ministry of Corporate Affairs, Government of India has formally notified CSR provisions under the Section 135 of Companies Act 2013 (the ‘2013 Act) and the related rules effective from 1st April 2014. To decide the applicability of Section 135, audited accounts of any financial year will be taken into consideration with effect from 1 April 2014. Since the CSR spend amount is based on the average net profit of the last three years, companies can plan its CSR expenditure well in advance. The Companies Act, 2013 follows an ‘apply or explain’ approach. As per the provisions of section 135, a company with turnover of INR 1000 crore or more or a net-worth of INR 500 crore or more or net profit of INR 5 crore or more in any financial year shall constitute a CSR Committee and would be required to spend at least 2% of their average net profits of the past three years on CSR activities. If for any reason a company is unable to do so, they would be required to explain the reason for that. An annual report on CSR activities must be included in the Board Report of a company spending on CSR. The Schedule VII (the Schedule) of the 2013 Act states certain new activities that could be classified as CSR activities.. It elaborates in respect of certain existing activities and the scope of certain others has been enhanced. Still, the Schedule is restrictive in nature in terms of choice of the company. Many existing CSR programmes have to realign their activities with the newly amended Schedule VII. The Government should have permitted the companies to have their choice of CSR activities. The contribution of any State setup funds, social business projects has been removed. Further, it seems that the concept of shared value proposition has been ruled out, for instance, a company cannot choose a project which also support their business object. If a water purifier company do CSR in the area of providing safe drinking water and run a campaign to create awareness regarding safe drinking water, this will have a shared value proposition. Such company also derived some value for its future business prospects. It would have been better, if this shared value concept would have been recognised in the rules.The ambit of the Act does not specifically cover foreign companies, but Rules clearly includes foreign companies having its branch or project office in India. As per Section 135(1), CSR apply to every “company” who qualify as per mentioned thresholds criteria. As per Section 2(20) “company” means a company incorporated under this Act or under any previous company law. It seems that by this reading, we cannot infer that every “company” also includes foreign company. However, as per CSR Rule 3 (1) every “company” including its holding or subsidiary, and a foreign company defined under clause (42) of section 2 of the Act having its branch office or project office in India, which fulfils the criteria specified in sub-section (I) of section 135 of the Act shall comply with the provisions of section 135 of the Act and these rules. Section 2 (42) defines “foreign company” means any company or body corporate incorporated outside India which has a place of business in India; and conducts any business activity in India in any other manner. By the combined reading of above provisions of the section and rules together, it can be said that CSR provisions are also applicable to Foreign Companies having branch office or project office in India. However, the legal question is, can rule making power under Section 469, relax (exemption for Pvt. Companies from independent director requirement in CSR committee) or enhance the scope (CSR provisions applicable to Foreign Companies) of the provision of Section 135?The net worth, turnover or net profit of a foreign company of the Act shall be computed in accordance with balance sheet and profit and loss account of such company prepared in accordance the provision of clause (a) of sub-section (1) of section 381 and section 198 of the section. And, the CSR spend must be reported as an annexure in the balance sheet. CSR Committee of a foreign company shall comprise of at least two persons of which one person shall be as specified under section 380(1)(d) of the Act and another person shall be nominated by the foreign company.Further, CSR activities have to be carried out in India only to be qualified as CSR spend under the Companies Act 2013. Foreign companies having a branch office or project office in India are required to undertake CSR activities need to take approvals under the Foreign Contribution Regulation Act 2010 (FCRA). Such approvals under FCRA are administered by Ministry of Home Affairs. This CSR spend requirement will also trigger an amendment in the Foreign Exchange Management (FEMA) Regulations, as Indian branch of a foreign company can undertake only eight specific activities and CSR isn’t being part of those one of the specific activities, requires Reserve Bank of India (RBI) approval. Also worth noting is that Foreign Direct Investment (FDI) isn’t permitted in case of a trust or societies.Further the Rules are silent over the tax treatment. There is no clarification on the tax treatment of the CSR expenditure in the Rules. The request for clarification by the industry was based on the interpretation that if CSR is not “normal course of business”, such expenses may not be tax deductible expense.There is a provision in the CSR rule which says that companies may build on CSR capacities from their own personnel, subject to a maximum limit of 5% of the total CSR expenditure of the company in a financial year. It is not clear as to whether the time-value of the company’s personnel for CSR activities is allowed under this 5% limit.CSR is very novel concept and having a statutory provision regarding CSR in the law is very unique in the world. The Rules has been very prescriptive in nature, it spell out clearly as what is included as CSR and what will not be considered as CSR. The provision related to independent directors not being applicable to private company is a welcome change and relief to the private companies. The Rules allowing pooling of resources enabling companies to enhance their spend capacity to take bigger CSR project is a good idea. The recent notification under the Act along with ‘National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Businesses’ released in 2011, this development is already being considered one of the most forward looking and futurist framework in recent times to help businesses become more responsible.

With inputs from Gajendra P Singh, Associate Director -Price Waterhouse

CSR / Sustainability - Do new leaders have sustainable answers?

Do new leaders have sustainable answers

Top companies have a vital role in stimulating growth, but it must be inclusive

Last September, at the UN Global Compact Leaders’ summit in New York, we published the global findings of our study of 1,000 CEOs’ attitudes towards sustainability. Since then we have discussed the findings in Davos, in January, and published specific findings in February in both China and India — with the Global Compact Network India.

Reflecting on the discussions, we have noticed a distinct change in tone throughout: from one of crisis and survival in the recent past, to a determination to tackle issues of sustainable growth and to look forward, albeit with a cautious optimism.

It is fair to say that this determination has been particularly evident in Indian business leaders.

Communities, the key

With a rising fiscal deficit and slowing GDP in India, the challenge of sustainable growth has put the spotlight back on business. We know that leading companies have a critical role to play in stimulating growth, but also that this growth must be inclusive. It is no surprise then that 63 per cent of Indian CEOs see communities as their most important stakeholders in the next five years.

The message from Indian business leaders seems to be that philanthropy is good, but it is not enough and not the same as driving sustainable core business. Indeed, only 16 per cent of Indian CEOs feel that consumer demand is motivating them to take action on sustainability at the moment (a stark contrast to the ‘global’ average of 47 per cent). But this may change.

Around half of the CEOs said that consumers would become a major stakeholder within five years. Again, that’s less than the global average (64 per cent) but it’s still a big growth.

The study also demonstrated that business leaders are frustrated at the pace and scale of change on sustainability. Of the 32 Indian CEOs we spoke to, only 22 per cent felt that the global economy was on track to meet the demands of a growing population. Although 66 per cent felt that sustainability would be ‘very important’ to their future business success, only 44 per cent believed that business as a whole is making sufficient efforts to address sustainability challenges. Many describe a recurring ‘pilot paralysis’, and the parallel danger of overly celebrating these undoubtedly powerful examples as if the change was already happening at scale.

Whether it be at the UNGC summit, at Davos or at publication launches around the world, the same questions seem to be on CEOs’ minds: How can we get beyond pilot projects and incremental change? How can we work together to recognise and reward sustainability leaders? And what would that look like in the most important emerging economies such as India?

Finding answers

Our study, comprising contributions from more than 1,000 CEOs worldwide, demonstrates that some companies — the ‘Transformational Leaders’ — are beginning to find answers to these questions. Not just societal benefits, these leaders are outperforming their peers on measures of traditional economic and sustainability leadership.

On profitability, for example, these leaders on average outperform 59 per cent of their respective sectors, and 65 per cent of their sectors on total shareholder returns, over three- and seven-year time horizons.

At the same time, on average, they reduced absolute carbon emissions by 13 per cent from 2008 to 2012, while reducing carbon intensity of revenues more than four times faster than their peers.

Already in India, we can see signs of leaders exploring new opportunities while delivering social and environmental value to local communities.

A good example of the power of partnerships is a joint venture among Bharti Airtel, IFFCO and Star Global to provide a ‘Kisan Sanchar’ service, allowing the operators to extend coverage into rural markets, while providing information on weather, prices and farming techniques to farmers. Similarly, Unilever’s ‘Shakti Ammas’, ITC’s e-choupal, and the Tata ‘Swach’ water filter, are stellar examples of sustainable innovation.

Distribution losses cut

Likewise, Tata Power’s roll-out of smart grids at its Delhi network has significantly reduced distribution losses, as well as showcased a pathway towards the low carbon Indian economy of the future. We are also seeing an increasing focus on demand side measures, but with the global carbon price collapse, some of these investments could be precarious without the right incentives and markets.

As many as 63 per cent of Indian CEOs already see difficulties in operating environments as the most significant barrier to sustainability implementation and nearly all of them (97 per cent) want governments and policymakers to provide market signals that support green growth.

In the innovations of these leaders, we can see the seeds of a new approach to sustainability. But few, if any, of these transformational leaders are seeing their impact add up to speed and scale required for aligning markets with sustainable development.

Nonetheless, there are important lessons here for Indian business leaders on where future opportunities and competitive advantage in driving both business results and sustainability will lie on an Indian and global stage.

Peter Lacy is Managing Director, Strategy and Sustainability Services in Asia Pacific, based in Shanghai. Pranshu Gupta is a Senior Analyst in Accenture Sustainability Services, based in Delhi.

(This article was published on April 1, 2014)

Utilise CSR for social change and brand-building

 

 

 

 

 

 

 

 

 

 

 

Mar 31, 2014, 05.47AM IST

 

(Starting tomorrow, an estimated…)

  Ravi Venkatesan Starting tomorrow, an  estimated 16,000 companies will finally have to start discharging their corporate social responsibility (CSR) as per the new Companies Act, 2013. If most companies actually comply with the requirement of spending 2% of their profits on CSR, an estimated Rs20,000 crore and substantial expertise will flow to the social sector.

This tidal wave is both an opportunity and a challenge. Clearly, the funding will be of immense help given the ocean of needs in India. However, there is also a high risk of money being misspent and stolen. India has nearly three million NGOs. However, many are fraudulent and even many genuine NGOs do not have the capacity to absorb substantial funds.

On the flip side, the vast majority of companies, even otherwise-sophisticated and well-intentioned ones with a long tradition of philanthropy, do not have much of a clue about how to put their money and talent to good use. They often confuse CSR with charity and end up practicing "chequebook philanthropy" — which is simply writing cheques for random requests without any real strategy and, therefore, with very little sustainable impact. Unfortunately, many other companies are busy finding all the loopholes that will enable them to evade their responsibility.

Given this backdrop, how do you approach CSR sensibly?
First, it's important to realise that CSR isn't just about compliance with a new Act. It is strategic. Done well, CSR contributes to building corporate reputation and trust. This is critical because trust in businesses is very low, and people are disgusted with corrupt business practices and crony capitalism.
CSR is also a fantastic way of engaging employees. There is a growing desire among educated people to "give back" to society, and a company's social initiatives are an excellent outlet for this desire.

Test Run
Working on tough social challenges is also a good way of rounding out rising leaders, and companies that develop a reputation for doing well and doing good are able to better attract talent. Finally, CSR projects can be an important source of innovation.
Microsoft's work in digital literacy has not only helped nearly 40 million children, it has also inspired product innovations such as Multipoint Server that enables many children to concurrently share a single PC.

Similarly, Hindustan Unilever's work in rural markets has resulted in the Shaktiamma rural distribution model that today drives 10% or more of the company's revenues.

Second, it is critical to have the right leadership for your CSR work. The new Act specifies that a company must set up a board committee to oversee CSR with at least one independent director on it.
This is mandatory, but insufficient. You also need to appoint a credible leader who will help shape your CSR strategy, evangelise this to employees, build external partnerships and communicate the impact being created. This cannot be accomplished by a junior manager tucked away deep in the HR department. It has to be a capable leader, well regarded in the organisation and with ready access to the CEO and senior leaders of the company.

 

It is equally important to pick the areas of focus for your CSR work. Investing in vocational training or literacy in communities around the company's facilities is an obvious area.

Picking areas adjacent to your core business has great merit because these have the greatest potential to sustain. So, if you are Nestle or ITC, initiatives that help farmers is natural.

However, there are a number of desperately underfunded and important areas that are important to consider, for instance, support for performing arts or support for NGOs that are working on human rights or governance. This is a uniquely opportune time to imaginatively create a portfolio of areas where you want to have impact.

Cheque Writer to Investor
The most important thing, though, is to graduate from chequebook philanthropy to impact investing. Your company is going to be spending 2% of its pretax profits. This is a big deal and needs to be approached with the rigour of a venture capitalist. You need to have a disciplined approach with clear criteria for making grants to the most deserving non-profits.

Structural Strength
Mutual expectations and impact metrics must be documented in a simple but stringent MoU. There must be a good process for involving employees to work with each grantee to help build capacity in specific areas like finance, IT or marketing.

Finally, there must be a disciplined annual review of each grantee as well as the whole portfolio that drives necessary course correction.

Instead of seeing CSR as an onerous imposition and a 2% tax, see it instead as a 2% investment in building corporate reputation, employee engagement and innovation. Real CSR not only renews the implicit licence to operate given by society to your company, it helps create a functioning society that
we can all live in.

The writer, former chairman of Microsoft India, is chairman of Social Venture Partners India

 

 

 

Feedba

CSR - How commexes can bring social, economic changes

by..... Nilanjan Ghosh

 

1

Their potential in aiding cluster development is immense

March 20, 2014:  

 

Michael Porter and Mark Kramers’ magnum opus “Creating Shared Value” (CSV) is different from corporate social responsibility (CSR).

 

CSR programmes essentially emerge as necessary expense for a firm in a market economy to improve its reputation. CSV, on the other hand, reflects on the interconnectivity between societal and economic progress, and according to Porter and Kramer, “… has the power to unleash the next wave of global growth”. CSV postulates that competitiveness of a firm and the social development indicators are interdependent.

 

According to Porter and Kramer, the market economy can unleash the next upsurge of global growth only when societal concerns enter into core strategic decision-making of firms. There are three key ways in which firms can create shared value opportunities: by reconceiving products and markets; by redefining productivity in the value chain; and by enabling local cluster development.

With this premise, one needs to look at the core business of commodity exchanges. The principal objectives for which commodity exchanges have been set up in India are hedging and price discovery. While hedging is a micro-level function of the exchange, price discovery is a macro-level function, both of which, if performed properly points to inextricable entrenchment of the commodity exchange in the business of creating shared value.

 

Reconceiving Products
Firms can meet social needs while better serving existing markets, accessing new ones, or lowering costs through innovation. Commodity exchanges in India are doing that, though not truly to the full potential. Exchanges have been proactive in re-conceiving products such as mini- and micro-contracts thereby enabling small traders and SMEs’ access to cost-effective risk management. Services such as Exchange of Futures for Physicals (EFPs) have also been conceptualised. The potential in this domain is huge, but existing regulations act as limiting factors for further innovation, as only plain vanilla futures can be traded in the Indian commexes, and products such as options, indices, and other exotic products are not allowed.

 

Redefining productivity 
While performing their desired macro-level and micro-level functions, in certain commodities, the commodity exchange has opened new vistas in the form of separate marketing channels. The emergence of efficient marketing channel has unlocked significant value in mentha oil, benefitting mentha farmers, processors, exporters, and consumers. The profoundness of this impact can be made out from the emergence of India as the major exporter of processed mentha crystals, displacing China. Mentha oil futures allowed processors to manage raw material risk – price, quantity and quality risks – all of which enabled Indian exporters to provide better price and delivery commitments to international buyers. Such a facility helped them consolidate at a time when Chinese exporters were defaulting on export commitments. Moreover, the high export prices of processed mentha crystals have been transmitted as high farm-gate prices of mentha oil due to the competitive structure of the trade channel, which has ultimately benefitted farmers.

Cluster Development

While documented evidence on this ground is less, there is no doubt that the potential for the comexes for cluster development is immense. It needs to be appreciated that the electronic platform makes the business operate at national levels, rather than local levels. Local cluster development, therefore, need not be thought of as merely having local suppliers or developing local infrastructure. Rather, cluster development needs to be viewed through the prism of community development. The gold ecosystem, by itself, has benefited substantially from gold futures by the process of price discovery/ dissemination and hedging, but the most critical driver of this ecosystem development is technology. Through the business model itself, there has been ecosystem development in the form of warehousing, testing, assaying, etc. According to an estimate of 2011, the commodity exchange business has given rise to employment of around 1.5 million through ecosystem development.

 

The movement from here
 That a development of an institution like the commodity exchange brings with itself social, economic, physical, and philosophical changes was best exemplified by the history of evolution of the Chicago Board of Trade in US. While development of CBOT led to the various demands for infrastructure development, the development of enabling infrastructure also helped CBOT emerging as the prime trading forum. The importance of CBOT thus emerges from the changes in the institutional practices not only in the domain of agricultural marketing, but from the impacts that it created at the socio-politico-economic stratum of human existence. Can we see Indian exchanges moving towards that direction?

 

(Nilanjan Ghosh is Chief Economist at MCX (I) Limited. Views are personal.)

CSR, out of the box

The new Companies Act of 2013 stipulates that all companies with a net worth of Rs 500 crore or more, or a turnover of Rs 1,000 crore or more, or a net profit of Rs 5 crore or more in any financial year will have to constitute a corporate social responsibility (CSR) committee of the board. With the help of this committee, the board shall ensure that such a company spends at least two per cent of its net average profit of the last three years on activities that have been designated as CSR activities by the government. Newspaper reports suggest that the government has identified 10 areas in which such expenditures will be eligible to be considered as CSR spending. These include eradicating hunger, poverty, malnutrition and promoting preventive health care, promoting sanitation and availability of safe drinking water, promoting education, promoting gender equality, ensuring environmental sustainability and protection of national heritage.


 A technical problem has arisen. At one level, the law stipulates that the (central) government will decide what legitimate CSR activities are; however, another part of the Act states that the company's board can identify the CSR activity that the company wants to undertake. The law ministry wants to ensure that the company chooses one from the activities mentioned and that there is no scope for the company to interpret what CSR is. In the meantime, however, the minister of corporate affairs is reported to have said that since the amount spent on CSR is the company's money, it should be the one deciding on how that money should be spent.

The theoretical literature and empirical studies on CSR have systematically shown that CSR plays a significant role as an important part of a company's competitive strategy. Companies can compete by lowering prices without reducing the quality of the product, or by improving the quality without any significant increases in its price. Extending this logic, one hypothesises that when people are conscious about a company's participation in the improvement of society, the company can compete by doing more for society. Indeed, the economics literature on voluntary environmental practices by firms strongly supports this hypothesis. The same has been found for firms following fair labour practices in production. Firms use their social activities as a signal to win over consumers who stay loyal to them and employees who prefer to work for them. However, such signalling works as a competitive strategy only if participation in such activities is voluntary. If such participation is made compulsory, it is no longer a strategy - for it cannot be used by stakeholders outside the company to distinguish among firms.

The two per cent CSR rule has become like a tax on medium and large firms. Just as outside stakeholders do not distinguish among firms by the taxes they pay (unless the companies are hauled up for non-payment of taxes), CSR expenditures will no longer be a distinguishing feature of a firm unless it is hauled up for not meeting its CSR responsibilities.

If CSR was a strategic choice, then firms would participate in those social activities in which they had expertise. For instance, a company in the hospitality business could focus on running old-age homes (incidentally, I do not know if this would qualify), while a mining company could focus on paying institutions that improve forest cover or help in generating alternative livelihoods for displaced persons. Or a profit-making company involved in education could run village schools. Since these would have been voluntary, companies would have had to convince stakeholders about the efficacy of their non-profit activities. This would have forced companies to carry out independent impact evaluation studies and that would have helped policymakers understand what works and what doesn't. Now, since such activities will become compulsory, companies will no longer feel the pressure to justify such expenditures.

This is a very important aspect of what we are getting into. While the company is a legal entity, the company's profit is actually not the company's money, as the minister refers to it as, but the money of the shareholders. And the reason why companies voluntarily do CSR is that shareholders do not fire the managers who use the shareholders' money to do these activities but want their company to do them. So, essentially, what this law does is tell the shareholders of eligible companies that whether you want them to do so or not, your companies will have to spend this money in a way that the government wants them to do. So, instead of being a load on the company, it is actually a load on the shareholder.

As a shareholder, if I have a choice between investing in a company that will just about be eligible and another that is otherwise identical but just not eligible, I will invest in the latter company, since it will save two per cent of its profits for me! This will, of course, translate into a higher capital cost for the first company.

This law reflects our mindset in two ways. First, we love "out-of-the-box" ideas because, by definition, they do not follow from anything and, hence, require no justification. Second, we love to target our policies - food security and health insurance only for below-poverty-line households, employment guarantee schemes only for the rural labour, relaxation of labour laws and other sops only for small enterprises, and so on. So, the two per cent CSR rule is only for particular types of firms, and not for all businesses. One of the reasons why there are so few "out-of-the-box" ideas is that while good ideas may be out of the box, most out-of-the-box ideas are very bad.

---

The writer is research director of IDF and director of the School of Humanities and Social Sciences at Shiv Nadar University

CSR Can Play a Positive Role

By Monica Vincent

Published: 19th March 2014 06:00 AM

 

 

Commencing this April, the new Companies Act, 2013, will require a certain class of companies to mandatorily spend on corporate social responsibility (CSR) initiatives. The statutory provision under Section 135 of the Act mandates every company having net worth of Rs 500 crore or more, or turnover of Rs 1,000 crore or more, or net profit of Rs 5 crore or more to spend in every financial year at least two per cent of the average net profits made during three immediately preceding financial years.

CSR in India, although not a new concept, is largely confined to the philanthropic space; the give-back to the society is voluntary and only after the profits are made. Some businesses have however shifted gears by contributing to education, health, cultural and research activities and community development programmes.

Globally, however, the concept of CSR has evolved considerably; internationally recognised definitions and guidelines propound that CSR is a management concept where responsible businesses achieve a balance of economic, social and environmental imperatives, while at the same time meeting the expectations of the shareholders and stakeholders. CSR is seen as a strategic business management concept that is built into core strategy and business operations and increasingly, the focus is on how profits are made without compromising the ability of future generations to meet their own needs.

Businesses are aware that CSR and the sustainability agenda are here to stay and such concepts are integral to business life cycle plans. Even in a climate of economic slowdown, some corporations have invested in developing sustainable business models and have attempted to achieve a win-win situation for both the businesses and society. Coming years will see greater emphasis on triple bottom-line approach (financial, social and environmental focus); and beyond unique selling points, sales and share prices businesses will have to invest in sound business strategies that will have an impact on societies.

The advent of this new CSR provision would drive many companies in India into uncharted waters—beyond charity and philanthropy. The Act, under Schedule VII, enlists activities that could be considered by companies whilst developing their CSR policy. According to the Indian Institute of Corporate Affairs, of the 1.3 million companies in India, about 6,000 to 7,000 companies are covered under the new CSR provision and an estimated Rs 27,000 crore will flow into grassroots development and social enterprise sectors every year, says a think tank. It remains to be seen how CSR capital will be channelised to gain the maximum return on investment.

Children in India constitute one of the popular target groups to potentially benefit from CSR initiatives. Children are considerably recognised as market force and businesses directly or indirectly interact with them daily. While it is universally recognised that businesses have a great potential to play a positive role in empowering the lives and livelihood of children, many of who are vulnerable and voiceless, a Global CEO Study on Children and Business by Boston Consulting Group revealed some disappointing trends. Thus, for many CEOs child rights were rather ad hoc than visionary. There was low level of awareness/knowledge and understanding of the value-add in addressing child rights. Business operations through the lens of children were narrowed down to child labour and for some, child rights was not of any relevance at all as their companies did not engage in child labour.
Addressing prohibition, and elimination of the worst forms of child labour is a no-brainer; however, it is equally pivotal for businesses to consider child rights in a comprehensive perspective. Responsible businesses ought to: ensure their products and services are safe, provide decent work and labour conditions for employees at all levels, ensure responsible marketing and advertising (including awareness on positive self-esteem, healthy lifestyles, non-discriminatory and non-violent values), ensure child rights is an integral part of consideration when acquiring or using land for business operations and so on. Such good practices can improve risk management, enhance brand reputation, garner consumer’s trust, impact on share prices and place the businesses in a good standing in society.

The inter-linkages between children’s rights and business principles is an emerging concept that widely recognises the potential of businesses to do greater good for children. Accordingly, businesses are encouraged to follow due diligence process to ensure children are not harmed as a result of their activities and relationships; and businesses are called to have a public policy commitment, strategic social investments, philanthropy, advocacy and a communications strategy. Given that children and young persons in India constitute a significant population, it is believed that through this new Act, a number of CSR initiatives empowering the lives of children will be up for grabs. Any CSR initiative on children should aim towards building the capacities of children in a sustainable manner; offering one-off programmes or token benefits will not alleviate inherent inequality and discrimination but only heighten poverty and exclusion. For example, access to quality education would require long-term commitment, sustainable investments and strategically designed proposals taking into consideration ground realities and partnerships.

To bring a lasting benefit it is vital that strategic business management must be home-grown and developed, implemented and monitored in partnership with local community not for profit. Sure, the government will reserve the paramount duty to protect, respect and fulfill children’s rights; businesses and other stakeholders will have a responsibility to do everything in the best interest of the children.

It is imperative to remind ourselves that children are equal stakeholders and not passive by-standers in any process aimed to bring changes in their lives. Further, well-defined focus on the most marginalised is crucial to bring positive and comprehensive change today as well in future.
Children are not looking for empathy or gifts; investments in their name should not be window dressing but promote sustainable and inclusive development. The age of socially responsible business is upon us; and it is about time for businesses in India to inspire, innovate and show leadership in addressing collective challenges. In doing so, businesses are called on to promote good practices and operate in a transparent and ethical manner; for, what is in the interest of children is everybody’s business.

The author is an analyst in law, public policy and international affairs and an advocate at the Madurai Bench of the Madras High Court

New CSR guidelines to generate 100K jobs in 6yrs

Do you have any qualifications or experience in poverty alleviation, environment conservation and management, gender empowerment or public health?

There’s good news for you and many other development professionals. Between now and 2020, India will need almost 100,000 people with these, and other development-related qualifications, to fill up new jobs that will be created.

How? According to the new Companies Act, from April 1, every company with a net worth of at least Rs. 500 crore, or annual revenues of above Rs. 1,000 crore or a net profit of more than Rs. 5 crore will have to spend at least 2% of their average net profits for the past three years on corporate social responsibility (CSR) activities.

Result: an additional Rs. 22,000 crore will flow into sectors such as education, healthcare, women and child welfare, etc. and companies and non-government organisations (NGOs) will need qualified people at all levels to manage the much larger social sector projects that this humungous sum will generate.

“This spending will also have a multiplier effect and generate many indirect jobs as well but we don’t have any estimate on numbers or sectors,” said Parul Soni, executive director and practice leader, development advisory services, EY, which has done extensive studies on the subject.

Many companies will have to increase their allocations for CSR. The Mahindra Group, for instance, which has been spending about 1% of its net profit on CSR activities since 2005, spent about Rs. 75 crore last year. “This will rise to about Rs. 175 crore next year,” said Rajeev Dubey, president, group HR, corporate services and aftermarket sector, M&M.

The Tata Group, on the other hand, spent over Rs. 1,000 crore on CSR over the last two years, and was by and large compliant with the 2% rule, said Mukund Rajan, member, group executive council and chief ethics officer, Tata Sons.

“This will be the new sunrise sector for job seekers,” said Nikhil Pant, chief programme executive, National Foundation for CSR, IICA.

Providing education for girls and underprivileged children, skills development and women and child healthcare, especially in far flung areas are high on the list of corporate philanthropists.

So, there will be many more jobs for teachers, health workers, doctors and volunteers as large sums of money are invested in new schools, health centres, potable water management schemes and rural sanitation projects, among others.

According to recruiters, a field officer can earn an average salary of around Rs. 3 lakh per year, junior and middle-level programme managers can earn Rs. 10 lakh while vice-president-level executives could be anywhere upwards of Rs. 50-60 lakh.

“I think this money can make a huge difference if companies synergise their skills and knowledge with those of non-profits who bring their understanding and experience of development processes,” said Rajan.

Firms have come together for maternal and child mortality projects. Analysts said more such pooling of resources are needed for CSR to have an impact.

“Let’s say, 13,000 out of the 16,000 affected companies, have just Rs. 50 lakh each to give. Individually `50 lakh will not go too far. We will see no major impact unless there is a pooling of resources,” said Noshir Dadrawala, CEO of Centre for Advancement of Philanthropy.

Many companies have now begun to evaluate their CSR strategies and are expected to redraw their plans (increasing spends, geographical and target areas etc) from the beginning of 2014-15, executives said. 

And that can only make the future rosier for job seekers.

CSR is part of doing business, says India Inc

Major players in the India Inc feel even as the government has mandated two per cent of the profit to Corporate Social Responsibility (CSR), the responsibility of corporate to the society is an integrated part of the value it offers through its entire business activities. It would be proper to call the initiatives as Corporate Sustainable Responsibility (CSR) rather than Corporate Social Responsibility (CSR), they said in a conference and exhibition on CSR, organised by Confederation of Indian Industry and Unicef.

Participating in a panel discussion on Business responsibility going beyond CSR, Vinita Bali, managing director & CEO of Britannia Industries, said, “There is nothing social about Corporate Social Responsibility. It simply has to be corporate responsibility. And what I mean by that is that in the course of our doing business, we can figure out a way of benefiting not just business, but also the larger stakeholder, the communities the employees and everybody else. ”  That is what makes business sustainable over a long period of time, she said.

Deliberating on the point, with the example of Britannia, she said the company has two insights – one with commercial sales of the nutritious fortified biscuits in the market and the other by serving the malnourished children with fortified nutritious biscuit through public private partnership with NGOs.

“I do believe that every company, irrespective of what they are doing, can and must find a model of embedding something which is a social issue into the way it does business everyday and we should think about Corporate Responsibility and not CSR,” she added.

Keeping the CSR and business separate has resulted in a general perception that in business one would do something commercially, potentially not so productive and useful, perhaps even damaging and pay a little bit through CSR, said Nachiket Mor, board member and head of financial inclusion panel, RBI who chaired the session.

“I believe that business itself is an important and critical force for the growth and development of the country and something that can have a transformative impact on what is going on around us. In some way we tend to think about business and CSR as two points of the pole,” he said.

Mukund Rajan, brand custodian and chief ethics officer of Tata Sons Ltd, has said that the brand of Tata Group has been built up on the trust it has earned from the people. “Community is not just another stakeholder in Business, but is in fact the reason for its existence. We have a commitment as serving as part of the community. If you think in the long term it is good for the consumer and society, we will pursue it and take the risks,” he said.

While the workers in the automobile sector has been typically looked after by the industry, the companies also has to take care of its customers and the drivers in case of trucks, said V Sumantran, vice chairman of Ashok Leyland Ltd.

“Mobility is a carrier of development and we think that our obligations do not just end with the customers, but also to literally thousands of drivers in the fleet of trucks,” he said. According to studies, the drivers of fleet trucks face huge amount of stress. The company is organising skill tests for the drivers, trainings and health checks, to help them better serve the customer.

Cognizant, an IT major with its Indian operations based in the State, in another panel discussion said that its employees have spend around 220,000 hours of volunteer hours last year and this has happened even without any mandatory instruction or condition by the company.

CSR - Corporates Should Live up to Responsibilities

By The New Indian Express

Published: 10th March 2014 02:00 AM

 

The government has done well to frame rules for corporate social responsibility (CSR) practices. In the absence of such rules, it has been an open sesame for corporates. The situation was so bad that any spending could be passed off as CSR activity. Under the new rules, it is now mandatory for companies with a certain minimum assets, turnover and profits to spend at least 2 per cent of their net profit on CSR. The rules will also be applicable to multinational companies operating in India. More significantly, the rules define what constitutes CSR activity. Public health, sanitation, old age homes, war widows’ welfare are some of the areas covered.

It had become common practice for the proprietors of companies to float NGOs run by their family members and divert CSR funds to them. Donations to political parties can also not be described as CSR spending. Besides, the corporates have a responsibility to the area where they operate. They cannot function in a vacuum. For instance, for every rupee they earn as profit, the community has to pay a higher price. It can be in the form of the polluted air they breathe and the polluted water they drink. Thus, CSR isn’t an imposition but a reminder that the corporates owe it to the people and environment for their profits.

However, in its enthusiasm the government seems to have overlooked the adverse consequences of some conditions imposed on corporates. For instance, it has been made mandatory for companies not to make any profit on its CSR activities. While it is proper to insist that profits should be used for additional CSR work, it is improper to rule out profit. CSR is not philanthropy. A distinction has to be made between the two. There are companies like Unilever which has increased the sale of soaps while popularising the concept of washing hands. After all the corporates have a responsibility to their shareholders also. There has to be a balance between the two.

CSR - Affordable, sustainable models necessary for India

Mysore, March 22, 2014, DHNS:

Pitroda speaks against aping Western developmental models; stresses on innovation
India cannot go on and plainly imitate Western models of development. India requires a developmental model, based on affordability, scalability and sustainability, said Sam Pitroda, advisor to the Prime Minister on Public Information, Infrastructure and Innovation, here, on Saturday.
He was delivering the convocation address, during the 94th annual convocation of the University of Mysore.

Today, the basic idea of development is being challenged. We need to keep our focus on Gandhian model of development, as the consumerism-based development models of the West are neither scalable, nor sustainable for India, he said.

Education and jobs
Pitroda listed the efforts made by the Indian government to improve opportunities for education. Due to such efforts, the number of children who went to colleges in India, will increase from 10 per cent in 2004 to 20 per cent in 2014, he said.

During the past one decade, several measures to strengthen educational infrastructure, such as expansion of premier educational institutes, creation of new universities and institutes providing education in specialised fields were taken up, he said.

With more number of graduates coming out of colleges, India will have to generate 10 to 15 million jobs a year. Young graduates coming out of colleges also have the responsibility to generate jobs, he said.

Challenges
India, as a country, has the challenge to lift 300 to 400 million people above poverty line. We need youth who can work for the poor, not just IT and communication companies. They must invest their efforts towards providing solutions in the field of alternative energy, genetics, food technology, etc, he added.

Reforms
He said, administrative, political, judicial, agricultural and labour reforms were essential to steamroll the country on to the path of progress. In order to improve the economy, we need further liberalisation and globalisation, he added.

“The destiny of the country will be decided in the next decade,” Pitroda said and added that he was both optimistic and concerned about the future. “If we build on the wisdom of Mahatma Gandhi, Jawaharlal Nehru and Vallabhbai Patel, we will build a country which we can be proud of,” he said.

He said that extensive computerisation in public offices was underway. “We are building a nation and it requires patience, consensus and energy. These things cannot be achieved overnight,” he said.

New CSR Rules....... CSR versus sustainability

CSR versus sustainability – the new law has missed out on something. 

 CauseBecause Bureau, New Delhi March 5, 2014

With the introduction of Section 135 in the Companies Act and corporate social responsibility (CSR) taking centre stage in the Indian business environment, many corporate groups are expected to initiate social programmes starting next financial year. Will all these CSR programmes be aligned with sustainability and how should the impact of such programmes be measured?  
In order to address such questions and find a way forward, Institute of Rural Management Anand (IRMA) is organizing ‘Round Table on CSR – The Road Ahead and Exhibition of CSR Initiatives’, a two-day event at the IRMA campus on 24–25 March 2014. The event will engage various stakeholders including corporate bodies, ministries and representatives from civil society and other relevant organizations. Concurrent with the Round Table will be an exhibition showcasing CSR initiatives of companies.  

Answering CauseBecause’s query on how IRMA sees the mandatory CSR spending clause, Dr Girish K Agrawal, convener of CSR Round Table, said, ‘One of the critical CSR activities covered under Schedule VII specifically talks about  ensuring environmental sustainability, ecological balance... maintaining quality of soil, air and water. This is the most positive feature among other scheduled activities and was not covered earlier. While other activities mentioned in the Schedule have been the focus of most companies engaged in CSR, this clause goes a long way in meeting the crucial need of the hour because negative externalities arising from depletion of common property resources are becoming alarming in view of environmental changes impacting India. China is already asphyxiating under air pollution.’  

When askedwhat will be the 'take away' from the event and why should corporate as well as development and social sector organizations participate, Dr Agrawal, who is also the coordinator of Center for Social Entrepreneurship and Enterprises and associate at Center for Rural Infrastructure and Corporate Social Responsibility, IRMA, said, ‘The background for this round table debate is when a company depletes common property resources and engages in CSR activities (as per the new law), does it serve the spirit and purpose of the Act while fulfilling development goals of the Government? Are these activities aligned with sustainability? In the event, the way forward will be underlined. We expect that some directions will emerge about policy changes that are required to redress any deficiency, if any, and how should Schedule VII activities be executed to so that they are sustainable.’  

Commenting on exclusion of ‘guiding principle’ in the new rules, Dr Agrawal said, ‘It is a disheartening change. It was in consonance with Part II operating provisions but has been deleted entirely. Now all activities that are undertaken in pursuance of its normal course of business are explicitly excluded. The result of such change may be that cola companies or junk food retailers whose main products give heavy doses of calories to consumers and create enormous healthcare costs on society have no further incentive to improve their business processes except those arising from consumer awareness, which take a long time to effect.’

The guiding principles in the earlier rules read: CSR is a way of conducting business, by which corporate entities visibly contribute to the social good. Socially responsible companies do not limit themselves to using resources to engage in activities that increase only their profits. They use CSR to integrate economic, environmental and social objectives with the company’s operations and growth.  
When questioned about the 'business angle' in CSR, Dr Agrawal stated, ‘The value addition to Indian businesses now appears to be remote and lies in the hope that customers will value companies' products more because they are spending money in scheduled or socially beneficial activities – a link that is at best tenuous in Indian consumers’ context since they are probably more price-conscious.’

Rise Of Corp Governance & Shareholder Activism In India

Rise Of Corp Governance & Shareholder Activism In India

Published on Wed, Mar 05,2014 | 13:34, Updated at Wed, Mar 05 at 13:34 Source : Moneycontrol.com

By: Umakanth Varottil, Assistant Professor, NUS Law

While corporate governance has acquired prominence in India for nearly two decades now, it has taken centre-stage more recently due to wide-ranging reforms. The new Companies Act, 2013 has ushered in significant changes in the way companies are to be managed and governed. Consistent with this approach, the Securities and Exchange Board of India (SEBI) has also announced changes to its corporate governance regime to bring it in tune with the new Companies Act. Governance issues have received impetus through market developments as well. Shareholders (particularly of the institutional variety) have begun to take on a more activist role in companies, and they are aided by a burgeoning proxy advisory industry that has established deep roots in India within a short span of time. A discussion on developments in corporate governance and shareholder activism in India could not have been timelier. At the same time, these developments ought to be considered in the context of global developments in corporate governance.

The discussion on governance reforms may be bifurcated into issues pertaining to the board of directors and those pertaining to the shareholders (where the phenomenon of shareholder activism occupies pride of place). Beginning with the board of directors, the spotlight in India has, among other things, been focused squarely on independent directors. The Companies Act, 2013 adopts a “regulation-heavy” approach towards board independence. It is considerably prescriptive regarding the number of independent directors, their appointment, their role, their duties and their liabilities. While the legislation addresses several pressing concerns regarding board independence, it is not clear if its implementation will be without difficulties. Corporate governance norms are dynamic in nature and require periodic reconfiguration to keep pace with the ever-changing business environment. Usually, while the basic governance framework is dealt with by statures, the details are dealt with in codes of conduct that are more flexible in nature. The question remains whether an attempt to address governance norms through legislation might lead to unnecessary rigidity in compliance and enforcement.

Internationally too, issues of board composition and compensation have occupied the minds of regulators. While board independence has become accepted practice, differences about as to the extent to which it is required and to be relied upon. The issue of compensation of directors, including independent directors, has become prominent following the global financial crisis, and the effort is still ongoing to arrive at the right balance that provides sufficient incentive to attract the right talent without creating any distortions that might adversely affect the interests of the company or its shareholders. While issues of board independence and director compensation are not new, they are likely to continue to be at the forefront of corporate governance debate in the years to come.

Moving to shareholders as a constituency, activism on their part, a hitherto non-existent phenomenon in India, has become pervasive in recent years. This development has been aided both by efforts on the part of the regulators to encourage shareholder participation in corporate decision-making, and by growth in the activist stance of institutional investors in the Indian markets. This is part of a growing international trend, particularly in the wake of the global financial crisis.

Over the last decade, regulatory reforms have focused on promoting shareholder participation in corporate decision-making. This has been implemented through legislative and regulatory measures. While the Securities and Exchange Board of India (SEBI) initiated measures in 2012 to introduce electronic voting, the new Companies Act, 2013 provides for electronic meetings, minority shareholder rights to approve significant related party transactions and other forms of protection to minority shareholders such as the class action mechanism. These measures are expected to engender greater participation by shareholders in general meetings of companies.

Apart from regulatory measures, shareholders themselves have been proactively adopting an activist stance. They have begun to engage with management and promoters of companies to pursue corporate policies that may enhance shareholder value. Where mere interaction with management is found to be ineffective, activist investors typically advance to the next stage of voting against the company’s resolutions. The ultimate option of confronting management with efforts to displace them has been used elsewhere in the world, but in India such option is quite daunting given that most companies are controlled through a significant stake held by the promoter.

The activist investors are now effectively aided by the emergence of a set of corporate governance intermediaries in the form of proxy advisors. While proxy advisors play a significant role in influencing corporate decision-making internationally, the industry is still nascent in India (although it is gradually exerting its presence as a key corporate governance intermediary to reckon with).

These developments have brought about a paradigm shift in corporate governance. Anecdotal evidence suggests that managements can no longer take shareholders for granted when seeking their approval of significant corporate transactions. These may have the effect of raising transparency and governance standards in Indian companies, particularly where they are listed on a stock exchange.

This is consistent with the trend elsewhere. World over, shareholder activism has taken on a more vibrant role, particularly after the global financial crisis. While institutional investors have been gradually increasing engagement with their portfolio companies, the new brand of hedge fund activism has taken corporate boardrooms by storm. Influencing their actions are proxy advisory firms such as ISS and Glass Lewis, which are two predominant firms in the industry.

In all, these developments (particularly in relation to shareholder activism) have brought about a significant change in the way companies are managed. No longer can managements pay short shrift to governance concerns, as their actions (and omissions) will to put to strict scrutiny from the perspective of their effect on minority shareholders as well as other stakeholders.

Professor Umakanth Varottil and Sergio Sánchez Solé, Garrigues are co-chairing a session on the Rise of corporate governance and shareholder activism in India at the IBA M&A Conference in Mumbai, 21-22 March 2014

New CSR rules still has some grey areas

CSR still has some grey areas

SIDHARTH BIRLA

 A more flexible interpretation of what activities come under corporate social responsibility would be welcome

The much-awaited corporate social responsibility rules have been notified by the Ministry of Corporate Affairs and they allay many, but unfortunately not all, of industry’s concerns. For instance, exempting overseas branch profits from the calculation of net profit is an equitable step.

Similarly, the clarification on excluding independent directors in the formation of CSR committees for private and unlisted public companies is a huge relief for companies that are not required to appoint such directors under the law.

There are numerous companies in India which already have CSR initiatives in crucial sectors of the economy such as health, education, environment and so on.

However, when the rules come into force on April 1, 2014, around 8,000 companies in India will fall under the ambit of the CSR provision. This mandate will translate into an estimated CSR spending of $1,954-$2,442 million annually.

Therefore, the implementation aspect of the CSR provision is very significant; if implemented in the right spirit, CSR will facilitate the desired investment in human development.

India is one of the first countries in the world to have legislated this provision; it is a positive step paving the way for the corporate sector to play a larger and more conscious role in shaping communities and participating in the social side of the economy. The areas covered under the Revised Schedule VII such as healthcare, education, gender equality, environmental sustainability and rural development are critical for inclusive growth.

Rewriting business

CSR is increasingly being viewed as an important part of business operations. The growing importance of CSR has rewritten the relationship of business not just with shareholders but also with its stakeholders, including employers, supply chain partners, government, creditors, customers and communities.

However, as a concept it will evolve over a period of time. In order for it to be able to make a genuine social impact, it is important to integrate it with the model of ‘shared value’.

An increasing number of companies in India and abroad are making this concept an integral part of their strategy and the benefits accruing from this integration are manifold.

On the one hand, it enhances the competitiveness of a company while simultaneously advancing economic and social wellbeing in communities, therefore increasing the long-term sustainability of the company. On the other hand, it enhances the possibility of cooperation between business, society and government.

Corporate social responsibility in the form of shared value creation is the key to establishing a symbiotic link between corporations and communities and in taking forward the India growth story.

But for that, CSR should be embedded in the corporate culture which, in turn, requires inspiration from the leadership and commitment across the organisation.

Going forward, we hope the concept of ‘shared value’ in the CSR Rules is captured.

Being non-intrusive

The underlying intent of the new Companies Act is to promote self-regulation, non-intrusion and accountability. However, the rules have limited CSR expenditure to the activities listed under Schedule VII.

Even though the list is wide and covers a lot of sectors that have been neglected so far, industry expects that the implementation of the CSR provision will allow boards reasonable flexibility to decide their own CSR activities. Such flexibility will certainly facilitate greater participation and engagement of the private sector.

Industry has been a responsible proponent of CSR, called by whatever name, for decades. However it should be seen in the context of building deeper trust in society through a structured approach; it should also help institutionalise the practice as opposed to discretionary participation.

The Minister for Corporate Affairs Sachin Pilot has, on various occasions, assured industry that all steps will be taken by his Ministry to ensure that CSR expenditure does not impose itself as a kind of tax.

Industry views this with great optimism and hopes that the finance ministry will find it fit to ensure CSR spend remains tax-deductible, more so since this spend is a part and parcel of doing responsible business. India Inc anxiously awaits clarity and certainty on this matter.

While most concerns on CSR provisions have been attended to, there remain practical concerns on flexibility within legitimate boundaries, and how the monitoring and interpretation of companies’ efforts will take place.

The government has, till date, been receptive to legitimate concerns but will need to ensure a conducive environment so that companies can sincerely adapt to the new requirements.

 

The writer is the president of FICCI

CSR Reduces Crash Risk

Corporate Social Responsibility Reduces Crash Risk: Study

by Clayton Browne

March 07, 2014, 11:37 am

 

 

Academic study shows socially responsible corporations have less risk of a stock price crash

We now have empirical evidence that being socially responsible is not merely altruistic, but actually pays dividends, even in the business world. A forthcoming article in the Journal of Banking and Finance demonstrates a strong relationship between firms with strong corporate social responsibility performance and reduced risk of stock price crashes.

The authors of the article, Yongtae Kim, Haidan Li and Siqi Li, undertook a study investigating whether corporate social responsibility (CSR) mitigates or contributes to stock price crash risk. They summarize the results of their study below.
“Using a large sample of U.S. public firms from 1995 to 2009, we find a significantly negative association between firms’ corporate social responsibility performance and one-year-ahead stock price crash risk, suggesting that socially responsible firms have a lower future stock price crash risk. The results are robust after controlling for other predictors of future stock price crash risk identified in prior studies, including divergence of investor opinion, past returns, firm size, and accounting opaqueness.”

Greater social responsibility means less “hoarding” of bad news

The authors argue that the key dynamic in why firms with strong corporate social responsibility have less crash risk is that socially responsible firms commit to a high standard of transparency and rarely delay announcing bad news. They point to a number of studies that show when senior management withholds bad news from investors due to career and compensation concerns, that means bad news accumulates and eventually reaches a tipping point and comes out all at once, often leading to a stock price crash.

Corporate social responsibility especially important for firms with less effective corporate governance

Another finding of interest in the study was that firms with strong corporate social responsibility but relatively weak corporate governance did not have a high risk of crashes. This means these firms are in effect “protected” from crashes by their high CSR. High CSR scores did not mean less risk of crashes for companies with strong corporate governance, but this makes sense as strong corporate governance itself prevents the behaviors that lead to crashes.
“We find that when firms have less effective corporate governance (indicated by lower governance ratings by MSCI ESG, CEO being the chairman of the board, and lower shareholder rights based on the Gompers et al. (2003) governance index) or a lower level of long-term institutional ownership, the negative relation between corporate social responsibility and future crash risk is significant. On the other hand, when firms have more effective corporate governance or a higher long-term institutional ownership, CSR does not appear to have a significant impact on crash risk. The results are consistent with the notion that the role of CSR in reducing stock price crash risk is particularly important when internal monitoring by the boards or external monitoring by institutional investors is weak.”