The Theory of Social Contract, discussed by Thomas Hobbe in his magnum opus Leviathan (1651) argues in favour of the subjugation of the individual to the will of the State by popular consent. The State, in return, acts as the sole promoter of social protection, individual rights and order. Modern societies, however, are often faced with the choice between different organisations and institutions, tasked with serving similar objectives. Options are exercised on the evaluation of costs and benefits of alternatives, and such decisions depend on countries, their culture, socioeconomic conditions and moral values.
An example of such choices is Corporate Social Responsibility (CSR), a business philosophy that dictates that companies around the globe should deviate from the narrow path of chasing only financial gains and wealth buildup and embark on a journey of sustainable development. It includes community welfare, ethical corporate conduct, climate action, defending the socio-economic rights of marginalised sections of society, among other aspects. Noble as the idea of Corporate Social Responsibility may be, it is also one of the most intensely debated concepts. At one end of the spectrum, we find the Agency Theory, developed by the Nobel laureate Milton Friedman (1976), preaching that the sole responsibility of the corporation is to its shareholders and its core mission is to maximise profit. At the other end of the continuum, we find the Stakeholder Theory that underscores a broader set of social responsibilities for businesses.
As the debate rages on, it’s heartening to note that the world is gradually coming to terms with the fact that public and private interests can coexist. This is testified by the 2019 Giving In Numbers Survey conducted by Chief Executives for Corporate Purpose (CECP). With a sample size of 250 multi-billion-dollar companies earning an aggregate revenue of US $ 7.9 trillion, it reported an annual spending of US $ 26 billion in CSR projects. It is an increase from US $ 23.8 billion spent in 2018 and US $ 20.3 billion in 2017. However, the elephant in the room remains the question: What role does the State, as the first and the most crucial pillar of society, have to play in corporate spending towards the sustainability agenda? What implications does it have for a developing nation like India?
India harbours one of the earliest and richest traditions of CSR in the world in the form of philanthropy. The names and the forms kept changing. It is not surprising that at its very germination, the concept of CSR was intrinsically linked to politics. We can find Kautilya, the “Indian Machiavelli” and the cardinal force behind Mauryan Imperialism, commenting and emphasising on the importance of observing ethical practices and principles while conducting commercial activities. The idea is reflected in charity practised by trade guilds to mendicants and the disadvantaged in ancient India. Our scriptures have also repeatedly echoed the importance of sharing business earnings with the deprived segments of the society.
India harbours one of the earliest and richest traditions of CSR in the world in the form of philanthropy. The names and the forms kept changing. It is not surprising that at its very germination, the concept of CSR was intrinsically linked to politics
In modern India, CSR was attributed with a whole new dimension with the “Trusteeship Theory” of Mahatma Gandhi, which considered the businessmen of India as trustees of trusts that looked after public welfare. The sage of the Indian Independence movement considered Indian companies and industries as the “Temples of Modern India”. Influenced by philanthropic ideologies, industrialist families established charitable foundations, educational and healthcare institutions and organisations for the development of society. They also undertook social reforms like rural development, women empowerment and the fight against illiteracy.
The tides of globalisation—the political decision to liberalise the Indian economy in the first year of the 1990s and sending the “License Raj” to its rightful demise—gave a boost to CSR activities in India. The increased momentum in industrial growth allowed Indian companies to embed CSR into a sustainable corporate strategy for better addressing the demands of the “Triple Bottom Line” – Profits, People and the Planet. Observing the need to bring the social accountability of Indian businesses within a legal framework, the Government of India included Section 135 in the amended Companies Act, 2013, replacing the former act of 1956.
This section mandates that companies with a turnover of INR 100 crores or with Profit After Tax (PAT) of INR 5 crores or net worth of INR 500 crores will have to spend two percent of their average net profits of the last three financial years towards CSR projects. Although the powers that be had their justification behind the move, it was considered an ill-advised one. The critics include the likes of Rajiv Kumar (2011), the then Secretary-General of FICCI and Aneel Karnani (2013), a professor of strategy at the University of Michigan, Ross School of Business. Reasons for the same ranged from an ultra-narrow scope, unnecessary pressure on the profit margin, ambiguity of the CSR definition to the fear of camouflaging unproductive activities as CSR projects.
Of course, today, enforced through a legal mandate, the risk of sacrificing the actual ground level impact of projects in favour of the propensity to merely meet regulatory standards is higher than ever in the history of CSR in India.
Complicating the already murky waters, the The Foreign Contribution Regulation Act (FCRA) Amendment 2020 brings about new impositions that further limit the prospects of the re-granting that is instrumental in curtailing misappropriation of funds. The restrictions of sub-granting and curtailing use of foreign funds for administrative purposes will have long lasting-effects on the nature of Corporate-Social sector partnership, the tremors of which will definitely be felt down the line.
Let us look at some such spending from the corporate coffers that achieved little in terms of the sustainable development of the world’s largest democracy:
India witnessed the channelising of CSR funds from several Public Sector Undertakings (PSUs) towards the construction of a monument dedicated to national unity. Five prominent oil exploration and petroleum products marketing companies from the Indian Government’s stable contributed more than INR 140 crores. Along with these, several state government-owned PSUs were also directed to provide over INR 100 crores to support the project.
India witnessed the channelising of CSR funds from several Public Sector Undertakings (PSUs) towards the construction of a monument dedicated to national unity. Five prominent oil exploration and petroleum products marketing companies from the Indian Government’s stable contributed more than INR 140 crores
While national monuments have their undeniable aesthetic and emotional value, it can be argued that the CSR funds thus spent could have been better utilised for the establishment of a world-class educational campus, drawing students from all over the subcontinent, facilitating cultural assimilation or for the rehabilitation of the tribals whom the construction activities evicted. These activities would have contributed far more meaningfully towards the cause of national integration.
The misconceived idea of misusing CSR funds to secure political gains is not without religious connotations. Further, Schedule VII of the Companies Act 2013 directs corporates to invest in animal welfare. It is also a Directive Principle of State Policy, according to Article 48 of the India Constitution. But can such ideologies be distorted to justify funding apparent welfare activities for a particular species with a religious appeal?
On the species conservation front, CSR funds can be better utilised in areas like checking the degradation and fragmentation of habitats, mitigation of human-wildlife conflicts and poaching of endangered species. It is interesting to note that a global list of 10 endangered species of animals/birds being prepared by Convention on Conservation of Migratory Species’ (CMS) will include three from India, namely the Great Indian Bustard, Asian Elephant and Bengal Florican.
So when the Companies Act was amended in 2013 to make CSR mandatory and included specific verticals within its scope, is it possible it was done with a myopic perspective where the fundamental relationship between the State and the tenets of Corporate Citizenship were misconstrued?
The government and businesses are unique in their resources and capabilities. The corporate assets may be left stranded within CSR plans formulated by the State. Governments are often concerned with the issues limited within its borders. However, problems like climate change, global warming, species extinction and others need a global response. In these aspects, multi-national corporations are members of the worldwide community and are better positioned to devise effective strategies for addressing the problems.
Despite being a target of much criticism, the political community of India is not completely blind to the importance of giving a free hand to corporates as far as decisions regarding CSR spending are concerned. In May 2018, multiple complaints of irregularities in the use of CSR funds caught the attention of a parliamentary panel.
The Parliamentary Committee of Finance, consisting of numerous members of parliament and opposition stalwarts, took objection to the use of CSR funds for implementing government schemes. The committee further issued circulars to the corporates, advising them not to spend their CSR funds on government schemes and programmes as it may lead to redundancy of efforts, wastage of resources, uneven development and problems in ascertaining accountability.
So, are the State and businesses incompatible partners in the administration of CSR funds and driving positive change? Far from it, we believe that the government and corporates are co-pilots who can help India achieve the heights of sustainable transformation. The government can complement the efforts of the corporate by:
While moving away from being more directional to becoming mandatory, the recent CSR amendments to the Companies Act will help enhance transparency, focus on impact creation and allow greater flexibility to the corporate sector to innovate for social good. Sanctioning corporates to carry forward funds through an escrow account encourages alternative funding models such as impact investing which was long overdue. This can go a long way in promoting collective action as well as replicable and scalable programmes that create sustainable development. By mandating Board verification, the amendments have brought in compulsory and active leadership involvement, thereby, including CSR as a key aspect of a corporate’s strategy and action plan. The penalty regime ensures that profitable organisations set aside the required amount for CSR and avoid reallocating it towards other investments. And lastly, impact assessments by independent agencies will allow for the creation of a rich repository of knowledge sharing tools that help smaller organisations learn how to design and implement impactful and sustainable programmes that promote social, digital and financial inclusion.
While moving away from being more directional to becoming mandatory, the recent CSR amendments to the Companies Act will help enhance transparency, focus on impact creation and allow greater flexibility to the corporate sector to innovate for social good. Sanctioning corporates to carry forward funds through an escrow account encourages alternative funding models such as impact investing which was long overdue
Sustainable Development is too big a task, and its scope should be expanded beyond Section VII of the Companies Act 2013. With India aching under numerous socio-economic problems and only a decade left to the agreed deadline to meet the Sustainable Development Goals under the UN’s Agenda 2030, it is perhaps the last opportunity for the Indian government and corporates to effectively address the issue of sustainable development.
More than ever before, with a government holding a landslide electoral mandate and with India Inc. holding the inherent potential to create wealth and employment, today, India Inc. is perfectly positioned to make a difference. Together, India Inc. and the government can solve some of the most complex challenges of the world’s 5th largest economy, through resolute multilateral collaborations.
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Akanksha Sharma is an International Development and Public Policy Specialist. She has been recognised as the 'Most Impactful CSR Leaders Globally' 'Asias Top Sustainability Leaders' ...
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