Corporate Social Responsibility - Inclusion or abdication?
All through my growing up years, the school Civics textbooks extolled the Government’s great efforts in public service. We had to learn by rote – if we wanted to pass, that is – that the government used our tax money to build roads, provide safe drinking water, electricity (infrastructure), schools (education), public health, law and order, etc. The media was controlled by this selfsame government. So there were no television anchors screaming for answers to distract my learning! I actually believed those texts – somewhere in my heart, I still do today, albeit reluctantly!
Those were the heady days of socialism, the 3.5% GDP growth, queuing up for rationed sugar, restrictions on importing virtually everything and, consequently, Haji Mastan! Bollywood movies were all about the rich being vain and oppressive and the poor being virtuous and oppressed.
So when I read what is soon to become The Company’s Act of 2012, one section jumped out at me: Section 135. The one about Corporate Social Responsibility (CSR).
Companies of a certain size, have to allocate, towards CSR, 2% of their average of the past 3 years’ Profit after Tax (PAT), aka Nett Profit. The same Nett Profit margin that corporates are struggling to hold up given the state of economy, the hardening dollar and reducing revenues.
And it’s not just the money that the bill specifies. The corpus so formed, has to be monitored by a specified infrastructure of at least 3 directors, including one independent director. CSR funds can only be sharply focused in vaguely specified areas, with the window to add more in future…
The very concept of Corporates being forced to shell out money for social development contradicted what I had learnt right through school. So, I did some personal auditing:
- I’ve been paying two additional Education-related cess amounts over the significant percentage of my income that went in income tax
- My son studied at a private school. Even our maid ensured that her child did not attend a government school!
- My home had an expensive water purifier – the water in the tap being quite undrinkable
- My apartment building had its own captive electricity generator that virtually never stopped generating
- When a family member recently needed surgery, we automatically thought of a private medical clinic. The guarantee of catching something one never went in with, eliminated the unhygienic, over-crowded, government-run place nearby!
- The sandwich place I eat lunch at adds over 18% to their bill thanks to three different kinds of taxes!
- I was even paying toll for using the highway for my daily commute – alternative roads being either waterlogged or transmogrified into moonscapes, thanks to a recent downpour
- I am afraid to open the newspaper for fear of reading about a new murder, rape, robbery, or injustice committed – so much for the promised law and order!
Amused at my deconstruction of the overtly obvious, my wife added her 2-penny bit – her two and a half penny bit, actually: ‘hey, don’t forget the donations we give to…’ she rattled off names of the charities we support. This personal giving worked out to just under 2.5% of our family income – no worries. We believe these are good causes. Besides, giving feels good and hopefully will help tip the scales in our favour on Judgement day!
But…wait a minute! These charities were working towards providing education, healthcare, food etc. Why do they need to be doing this? Where’s the government?
In fact, shouldn’t the government be providing me – the citizen – with clean water, regular electricity, roads, education, healthcare – as my Civics book had preached? Why should I have to create jugaads just to live a happy and healthy life? Conversely, maybe I should ask the government to kindly give me a tax refund for all the extra money I am putting out because of these very obvious service delivery failures?
My wife muttered something to the effect that I needed psychiatric help.
So what’s with Corporate Social Responsibility (CSR)? Well, the nomenclature, to start with. Social development is the Responsibility of the Government – that’s why we vote it into power, that’s what we expect them to judiciously deploy our tax money towards. Corporates on the other hand need to operate responsibly in the environment they work in – that’s why there are audits and licenses.
Using the term ‘responsibility’ interchangeably with ‘responsibly’ extends the onus of Social Development from the government to the corporate sector!
A hitherto voluntary, kindness-of-the-heart initiative, based on genuine concern, has now been transformed into a punishable mandate!
Bain & Company’s India Philanthropy Report for 2013 mentions that there is near-universal enrolment of children in schools at the primary level. So far so good! However, less than a third of Class III children can read a Class I text!
After a recent disaster in the midday meal scheme, press reports highlighted the dismal conditions existing in the government school infrastructure. Into this cesspool goes my Education cess money?
On public health, India ranks 134th out of 187 nations in the United Nations’ Human Development Index! Step into any government hospital and the reasons leap out at you.
Electricity generation is way below demand. Alternate energy is yet to get the impetus required to become universally viable. Alongside crying itself hoarse about the pathetic infrastructure in the country, the corporate sector has had to make its own arrangements! Too bad about the carbon footprint, the increased cost.
The customer will just have to pay more…taxes extra.
Disturbed by the terrifying statistics – the sheer number of people falling prey to poverty, hunger, illiteracy and preventable diseases, and increasing year on year – concerned individuals opted to take matters in their own hands.
The Non-Government Organization (NGO) sector has never been a dull space, ever.
Constantly prodding public conscience to donate for a good cause. Using tools and techniques better known in the corporate sector: Marketing gimmicks, movie star evangelists, and the like. Periodic disasters (sic) helped. When human misery peaked, so did the giving!
For most of us, giving comes easy. We have soft hearts. We even forgive the government for consistently failing in its own social responsibility – a fundamental reason for its very existence.
Bain’s earlier mentioned report checks with high net worth individuals (HNWI) – folks who have more than INR 5 crore in investible assets – about their giving habits. It turns out that HNWI’s increased their giving, from 2.3% of their household income in 2010, to 3.1% in 2011. A whopping 35%! And this constituency promised to give even more in 2012 and 2013. And this is only private giving from a small segment of society!
Running out of creative taxation ideas – usually positioned as best practices, pulled in from this country and that – it was time to find another innovative way to extract money: Corporate Social Responsibility.
Very broad estimates place the ‘revenues’ in the NGO sector to be in the vicinity of about INR 50,000 Crores – about US$ 8Bn. And there are over 3.3 million registered NGOs in India and growing!
Back of the envelop estimates Corporate CSR, from just the top 1000 eligible companies, to infuse something close to US$ 1.5 Bn for utilization in the social sector.
And it’s totally brilliant!
Optically, the government looks great! It has not imposed any additional ‘tax’ on the Corporate sector. Yet has been able to extract an additional 2% from its net profit margin. Thereby forcing not only the Corporate, but, willy nilly, every single shareholder to contribute to social development! And no tax benefits for this piece of giving either.
Further, the government machinery and its army of bureaucrats does not have to lift a finger to do anything. Okay, except maybe to monitor the outlay and occasionally admonish errant companies!
Companies have to also build their own CSR infrastructure. From the mandated 3 Directors, all the way down to a CSR implementation team. Just to ensure that the money has been allocated, passed on to the appropriate NGO partners, utilized, its impact measured, those fancy Powerpoint presentations made and colourful reports filed. And everyone feels warm and virtuous!
By positioning CSR as ‘inclusion’ of the Corporate Sector in Social Development, the government has further abdicated its own fundamental responsibility to the public – and no one can complain.
After all, business leaders are public figures too. They have an image to maintain. Not one of them would like a churlish public image? C’mon, it’s only 2%. See how many people will benefit. See how benevolent we are. We’ll just increase prices next year to keep the shareholders happy…
Interestingly, the beneficiary areas defined in the Act are those where successive governments have consistently failed – since 1950. Remember Garibi Hatao? Hundreds of thousands of crores are being pumped into schemes with dubious success, year on year.
Shifting the onus of uplifting these fund sucking ‘black-holes’, mandated CSR would shift some of the blame for failure, to the Corporate Sector as well. Five years down the line, some bright spark in the bureaucracy will figure that the ‘impact’ is not visible enough. So maybe we should raise the CSR mandate from 2% to…4%?
It doesn’t take rocket science to figure out the mathematics. How much of the CSR outlay will the NGO sector use to maintain itself and how much will actually end up on their projects – and who actually benefits – is anyone’s guess.
A recent report in The Indian Express (April 08, 2013 – by Shyamlal Yadav) revealed another twist: Political leaders, and/or their near and dear ones, own 52 of the 215 Jan Shikshan Sansthans (JSS) approved by the HRD Ministry since 2000. An initiative set up for skill development, vocational training, etc among new-literates. This single initiative gave out between INR 35 and INR 50 lakhs per year, besides a one time building grant of INR 20 Lakhs – per institution! The report further states that details of the selection process are unclear but the guidelines ensured that only a selected coterie of NGOs became eligible recipients! Many of these are facing allegations of mismanagement of public funds and probes are on…and on…and on.
And this leakage is from just one initiative from one ministry! With the generous contribution from CSR, the potential for leakage is ginormous!
Now, why would political figures and bureaucrats want a part of this action? A moot question…
The NGO sector suffers from the inability to effectively measure and communicate impact. Bain’s report states this as a roadblock to further giving. More than half the respondents cited communication as a reason for not giving more. In parallel, 40% of the NGOs surveyed found measuring impact difficult and expensive. Effectively implying: give us your money and forget it. Trust us to do the ‘neeedful’ – and we decide what the ‘needful’ is.
A nice nebulous environment, loaded with cash and only marginally hampered by those pesky accountants and auditors.
So again, why would politicians want a part of this action?
One of the positive results of mandated CSR is that NGOs will be forced to learn up some of the measuring and reporting metrics the Corporate sector is used to! Corporates will demand it, now that they have the onus of reporting the details of funds deployed and utilized. If nothing else for the benefit of their hard nosed auditors and even harder nosed shareholders. Impact will have to become a key word in the NGO vocabulary. They will just have to find the money and create the metrics!
But how can measuring impact quickly become part of the DNA of a sector that has, so far, enjoyed the blind trust of its donors?
Easy: Hire people from the corporate sector! People who understand how to translate the NGO lingo into Corporate-speak – and vice versa. Who can fancify the boring spreadsheets into cracker presentations that clearly state the what, how, when, where and the what’s-in-in-for-you. By doing this, the corporate ‘bench’ manages the aggressive donor and handles the administration, while the pros do their job of providing succor at the grass-roots level.
This trend is catching up! The internet has plenty of stories about senior executives who have left plum corporate jobs to become NGO leaders. Many don’t even need to take a pay cut – no one talks about the benefits, though...
Mandated CSR will open up for Corporate resources a new, and largely under-explored, job market! One of the few sectors that is hiring. A sector with few datapoints for compensation benchmarking, and where attractive benefits are received both in this world and the next!
Corporate salaries in the not-for-profit sector! As one smart-aleck mentioned to me: the not-for-profit entity cannot make a profit, but the same rule does not apply to its ‘employees’!
A good question to ask at this point would be:
With all this added work, and cost, of hiring corporate honchos to run the show, measuring impact, delivering sharp reports and communications to the donors, how much of the NGO ‘revenues’ will actually reach the cause?
Corporates will demand greater transparency from their NGO partners and force them to squeeze significantly more value from every dollar spent. Hopefully this will bring in greater operating efficiencies resulting in more actual money reaching the end recipient. Hopefully, the government will incorporate some of these best practices when deploying public funds for social development.
Open questions and loads of hope!
Meanwhile, someone has to bear the additional cost of CSR! Not just the 2%, but also the additional ‘non-core’ people and resources that will be required to administer the outlay. How else can companies maintain the balance between the basic aim of profitability and the mandated CSR spends? Shareholders and promoters will continue their demand for ever-increasing returns on their investments. That attitude won’t change irrespective of the economic climate!
Will end-product prices have to be increased?
Maybe and fair enough. An investment demands a return – for everything else, there’s always…charity!