Prelims cum Mains

Over the barrel: Why we need new thinking on CSR

Corporate Social Responsibility (CSR):
  • Corporate Social Responsibility (CSR) is a concept that suggests that it is the responsibility of the corporations operating within society to contribute towards economic, social and environmental development that creates positive impact on society at large.
  • Although there is no fixed definition, the concept revolves around that fact the corporations needs to focus beyond earning just profits.
  • The UN defines it as the management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders.
CSR in India:
  • The Companies Act, 2013, mandates that large Indian firms (above a specified threshold level), public and private, must allocate at least 2% of their net profits for corporate social responsibility.
  • Activities which may be included by companies in their CSR activities can be on eradicating extreme hunger and poverty, education, health, skill development, environmental sustainability etc.
  • The Act gives the companies freedom to identify the projects and determine the modalities of implementation.
Huge amounts spent on CSR activities:
  • The Act came into force in in 2014.
  • Since then, the companies have spent significant amounts of Rs 5,922 crore, Rs 7,549 crore and Rs 8,446 crore in 2014, 2015 and 2016, respectively, on eligible CSR activities.
 
The usage of funds does not seem optimal
  • The current usage of CSR funds is too individualistic, with every company doing its own thing.
  • There are three main reasons for ineffective usage of CSR funds.
1. Most of the funds allotted to just few sectors:
  • The Ministry of Corporate Affairs (MCA) data shows that the bulk of the CSR money (almost 75%) is allocated to just three sectors—education, health (including sanitation and water) and rural poverty.
  • It is not surprising considering they are the most pressing issues facing the country.
  • There might be better outcomes through cooperation to avoid duplication of efforts.
2. Few states getting most of the funds:
  • The MCA data also reveals a skew in the distribution of CSR funds.
  • Almost 40% of the money goes to just a few relatively well-developed states—Maharashtra, Gujarat, Karnataka, Tamil Nadu, Andhra Pradesh and Telangana.
  • This is again not surprising given that India’s most profitable companies (Reliance, Infosys, Wipro, ITC, IOC, HDFC) invest mostly in these states. The Section 135(5) of the Companies Act encourages companies to “give preference to the local area and areas around where it operates, for spending the amount earmarked for CSR activities.”
  • This model is not the most efficient at alleviating the existing regional and social disparities.
3. Lack of expertise:
  • Corporates have limited experience and expertise in addressing the complexities of social development.
  • They do hire in resources to bridge the lacuna, but there might still be gaps.
Should CSR even be mandated?
  • CSR has been a controversial subject.
  • Many have opposed it.
  • Nobel Price winning economist Milton Friedman held that business had a singular responsibility to their shareholders and that “the business of business was business.”
    • That is to say, the shareholders are the rightful owners and business should be make all profits for them, and business should not have to divert 2 % of profits to CSR activities. It should be up to shareholders on how to use the profits.
Many corporates see it not as social responsibility but as need of business:
  • Corporates have, for long, regarded CSR as little more than a business necessity.
  • They may not spend money on social projects because of an underlying social commitment or moral suasion.
  • CSR is just the price to be paid for running business smoothly in a region and is an integral part of their public relations exercise.
But attitude of corporates to society are changing:
  • This attitude has undergone a definitive shift in recent years.
  • An increasing number of Indian companies, especially large companies, have woven social responsibility into the fabric of their corporate values.
  • They acknowledge a responsibility towards stakeholders that fall outside the boundaries defined by the shareholder community.
A possible different model for CSR expenditure
  • Corporates can pool their CSR funds into a common “CSR trust” and allow an autonomous body to manage and disburse the funds.
  • This body should be a confederation of corporates, NGOs, domain experts and the government.
  • Its role should be to define the CSR agenda, identify the CSR projects, select the local partners, allocate the resources and oversee implementation.
Benefits of such a collaborative model:
  • It would enable the pooling of knowledge and experience and the sharing of best practices.
  • It would provide a forum for learning from the grassroots experience of NGOs and the local community.
  • It would facilitate synergies and reduce duplication of efforts on just a few sectors.
  • It would allow for a more equitable geographical distribution of funds.
  • It would also provide a platform for the delivery of holistic solutions by creating development of “joint ventures” between companies with complimentary assets and skills.
  • Example:
    • For example, a joint venture between Reliance JIO, TCS, Unilever and Larsen & Toubro could bring to a CSR project on education not just the hardware like school building, tables and chairs, but also internet connectivity by JIO, IT by Wipro, marketing skills by Unilever, vocational training by L&T and internship by all.
    • This can generate sustainable income-generating opportunities.
Conclusion:
  • The government is responsible for social development. Corporates cannot replace them in this role.
  • But governments need help.
  • Corporates can make a meaningful contribution, especially if there is a platform that allows them to offer the totality of their skills, technology and resources.
Importance:
GS Paper III: Economy
Related question:
The current usage of CSR funds is too individualistic with every company doing its own thing leading to most the funds going to few sectors and states. Critically analyze.

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