COMMENTARY
India’s 2% CSR Law
The First Country to Go Backwards
Arun Maira
Business persons have always
been concerned with their own
ends, but multiple pressures from
society and polity over time have
forced them to sit up and worry
about their means of profit as
well. The need today is genuine
business responsibility and
societal trust in business.
Mandatory corporate social
responsibility may prove
inadequate to inculcate either.
The new legislation to mandate
expenditure for social causes
is both meagre and one whose
time had long passed – almost
as if India has progressed,
but “backwards”.
T
he new Indian Company Law that
received the president’s assent in
August 2013 includes a novel provision which mandates that companies
spend 2% of their profits on “corporate
social responsibility” (CSR). Expectedly,
there is a buzz about matters of detail,
such as what will classify as genuine
CSR expenditure and how will it be
certified. “CSR consultants” are emerging as champions of this provision, seeing new opportunities for themselves.
Philanthropic trusts, as well as politicians sense opportunities to cajole corporations to direct CSR funds towards
their corpuses and pet causes.
This legislation is a novelty no doubt.
The critical question must be, is this a
good novelty or a bad one. The impact of
this first-in-the-world national legislation
can be examined from two perspectives:
looking at the woods or the trees. Or,
using another metaphor: how the deckchairs must be arranged now, rather
than what effect this legislation will
have on the direction of the ship. The
buzz about what the 2% can be used for
is a buzz about the arrangement of the
deckchairs. Whereas we must examine
the effect this mandatory expenditure
of 2% of profits will have on the direction we want the ship to take – the improvement of genuine business responsibility and societal trust in business.
Innovation of Institutions
Arun Maira (arun.maira@nic.in) is a member
of the Planning Commission of India.
Economic & Political Weekly
EPW
september 21, 2013
Douglass C North received the Nobel
Prize in economics in 1993 for his work
on the development of institutions and
their role in human progress. North
defined institutions as the “humanly
devised constraints that structure political, economic and social interactions”.
Constraints, he said, are devised as
formal rules (constitutions, laws, property
rights) and informal restraints (sanctions,
taboos, traditions, codes of conduct).
vol xlviii no 38
The story of the progress of humanity
is a story of evolution of new institutions.
New forms of political institutions have
evolved over time to provide societies
with more effective and more equitable
governance: from tribal chieftains and
their councils, to hereditary monarchies
that provided more stability along with
bureaucracies to manage state affairs, to
parliamentary democracies. New economic institutions have improved the
efficiency and scale of economies: from
barter, to money, credit and banking, to
the invention of limited liability corporations in the 17th century which have
become the principal institutions propelling the growth of capitalist economies.
Institutions are the vehicles with which
humanity achieves its aspirations. When
the conditions in which human societies
must sustain themselves change, or when
new aspirations arise, the evolution of
new institutions becomes necessary.
John F Kennedy’s call in 1961 to America to put a man on the moon stirred the
nation’s imagination. The objective,
which seemed way beyond reach when
he announced it, was reached within
a decade. It was made possible with
the development of vehicles that could
operate in the rarefied atmosphere
of space. Aeronautical technology had
come a long way since the design of the
plane the Wright brothers had flown for
just 300 yards to the amazement of the
world in 1903. When Kennedy made his
speech, jet planes were flying across
oceans. But the conditions in space are
very different to those in the earth’s atmosphere. Therefore, the mission to the
moon required the development of radically new vehicles that could operate in
those conditions.
Just as aircraft designed for atmospheric flight cannot operate safely – or at
all – in open space, similarly, since the
conditions in which human institutions
are operating have changed dramatically in the past two decades as I will now
explain, the design of institutions must
also be changed to suit these conditions.
A storm is buffeting political and economic institutions in the 21st century.
This storm has been caused by the
recent collision of four forces that had
been gaining strength for some time. They
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COMMENTARY
are: capitalism and free markets as the
way to organise economies; democracy
and the principles of human rights as the
way to organise societies; the growing
awareness of the limits of the earth to
support the human economic enterprise
as presently conducted; and an explosion
in the availability of information to
people everywhere through technologies
of communication and ­digitisation.
The ideas of capitalism and free
markets have been around for many
centuries, more so since the time of Adam
Smith in the 18th century. Principles of
universal human rights have gained
strength in the last century, and some
were expressed as Millennium Development Goals at the advent of the new
millennium. In the last two decades
awareness of the potentially catastrophic
consequences of climate change caused by
human activity has become widespread.
And access to information, with the
internet, mobile communication devices,
social media, etc, has exploded in the
last five years.
The Business of Business
The East India Company, established in
1600 AD, was one of the first “limited
liability corporations” in the world. Its
“owners” contributed capital for the voyages of the company’s ships to the East
and, later, for its trade ventures in India.
The owners shared the profits of the
ventures amongst themselves. The reports of meetings of the Company’s
Board in London show that the directors
were only concerned about calculating
the profits and their distribution amongst
the shareholders. They seemed hardly
aware of the violence and corruption in
the conduct of their employees in India.
What the company’s employees did to
make the profits for the owners was of
little concern to them. The tenet driving
the conduct of the East India Company
was “the business of business must be
only business”. The rest was none of
their business. The resentment of India’s
people to the conduct of the East India
Company led to the War of Independence in 1857. Combined with the reactions to the conduct of the East India
Company of high-minded societal leaders
in Britain, it resulted in the British
government taking over the Company’s
affairs in India.
However, the principle that “the business of business must be only business”
has continued to guide corporate conduct into the 20th Century, especially in
the Anglo-Saxon world, reinforced by
the philosophy of Nobel Laureate Milton
Friedman and the Chicago School of
Economics. The responsibility of the
board of a company, according to this
philosophy, is to ensure that shareholder
value is increased and that disbursement of profits to the shareholders is
­equitable. Many US-based business corporations amassed huge profits for their
principal owners in the 19th and 20th
centuries, some of whom created trusts
in their names that have gone on to do
excellent philanthropic work. However,
the damage that some of these companies
had done to the environment and communities in the course of making their
profits, as well as societal and political
reactions to their monopolist and corrupt
practices, led to the creation of many laws
to constrain corporate conduct.
By the end of the 20th century, the
world had changed dramatically compared to the conditions in which the East
India Company had operated and even
the conditions in which 20th century
corporations have operated. The forces
mentioned before – of an increasing
awareness of fundamental human rights,
realisation that economic activity was
damaging the environment too much,
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vol xlviii no 38
EPW
Economic & Political Weekly
COMMENTARY
and the ubiquity of information available to citizens – have begun to put great
pressure on corporations to change their
ways, even preventing many corporate
projects from proceeding. Society has
begun to demand a new code of business
responsibility in return for granting
corporations their licences to operate.
Powered by global communication networks, this demand has grown simultaneously in both the developed and the
developing world.
The context in which corporations
must now operate has changed dramatically. Therefore, the concept of what their
responsibility is to society and what
their governance practices should be
must change too. The business of business can no longer be just business. New
institutions are required. A new form of
the business corporation must evolve.
International Initiatives
Many innovations in business-governance
practices are evolving. The damage, or
benefit, for society and the environment
is caused by a company’s operations and
products. What it does afterwards with
a portion of those profits to repair the
damage caused can only be a small token.
Therefore, societal attention is shifting
from how business profits are used after
they are made to how the profits are
made in the first place.
An exaggerated example will help to
explain the new concept of business
responsibility that leaders are now
promoting. There is a large demand for
hard drugs in many societies. A businessman can seize this opportunity and produce and sell such drugs to make large
profits while damaging many lives in the
process. He may then use a portion of
the profits, even exceeding 2%, to set up
the world’s best clinics to rehabilitate drug
addicts. By spending this money on a
very worthy cause, has he fulfilled his CSR?
Societies are increasingly demanding
explanations of how the 100% of revenues were produced, and not the glowing accounts of the small percentages of
profits that were spent on CSR. Profit is a
small fraction of the revenues and costs
of a business, perhaps no more than 10%
in most cases. Therefore 2% of profits on
CSR will be only 0.2% of a company’s
Economic & Political Weekly
EPW
september 21, 2013
revenues. Spending 0.2% of revenues on
CSR is the arrangement of the deckchairs
on the Titanic. The 100% of the revenues
is the impact of the course of the Titanic
on the environment and the communities
through which it traverses. Socially responsible corporations in the 21st century
must account to society for the impact
of their operations and products on the
health of citizens and on the condition of
societies and communities. Spending
0.2% of revenues (or 2% of profits) on
CSR is no longer an acceptable way to
win societal trust.
In response to the need to account to
society, and not just to shareholders,
several concepts have emerged in the
last 20 years, such as the Triple Bottom
Line and Shared Value. The concept
drawing the most global support is the
UN’s Global Compact which is completing its 10th year in 2013. Started by Kofi
Annan, then the UN secretary general, it
is the only UN organisation that does not
have any governmental representation.
It is a voluntary organisation run by
business leaders from around the world
along with representatives of civil society
– labour unions, environmental groups,
Transparency International, etc – to institute a universal corporate code of conduct.
These corporate leaders first focused
on environmental impact of businesses, to
which soon was added the determination
of social and community impact of businesses, and then was added the impact
of business conduct, through corruption
and lack of transparency, on the fabric of
polities and societies. The principal thrust
of the Global Compact is to encourage
and enable businesses to strengthen their
compact with society by transparently
reporting the impact of their operations
and products, followed up with discussions with stakeholders on these reports.
International communities of Global
Compact members transfer good practices in these matters around the world.
Side by side with the development of
norms of reporting to and engaging with
stakeholders, several formats for reporting the impact of businesses have been
developed, such as the “triple bottom line”
mentioned earlier and also an ISO (International Organisation for Standardisation) standard. The Global Reporting
vol xlviii no 38
Initiative (GRI) is emerging as the most
accepted framework, and it has tied up
with the UN Global Compact.
Voluntary Guidelines
Over the last few years, the Indian Institute of Corporate Affairs, GIZ (the German
Society for International Corporation), and
Indian business associations have carried
out a systematic process of consultation
with Indian businesses to develop a code
of voluntary conduct in line with the
principles of the UN Global Compact and
GRI. Thus the National Voluntary Guidelines have been created. In fact, these are
mentioned in the new Indian Company
Law, but only as an idea, not as a mandate.
Denmark was the first country to have
given 21st century corporate-reporting
requirements some force of law. India
could have been the second.
Voluntary, if not mandatory reporting
of social and environmental compact is
the right idea for 21st century corporate
governance. It also ensures that boards
are managing 21st century risks to their
shareholders by assessing the corporation’s impact on the environment and
society and possibilities of blowbacks on
the corporate reputation. Several of the
world’s largest financial institutions have
adopted the “Equatorial Principles”, a
framework for companies to assess and
improve their performance regarding
the impacts of their operations on the
environment and communities. Similarly,
Securities and Exchange Board of India
had proposed that large companies on the
stock exchange must adopt the National
Voluntary Guidelines.
Unfortunately, these National Voluntary
Guidelines, which would have put
India’s institutions of corporate governance in the forefront with world leaders, have been given short shrift in the
new Company Law. They have been
drowned by the buzz around the retrograde 2% CSR provision in the law. Yes,
India is the first and only country to
have mandated expenditure on CSR,
though so many protested. This proves
that Victor Hugo may have been wrong.
Sometimes, it seems that in India no
force on earth can stop an idea whose
time had long passed, instead of an idea
whose time has come!
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