Pros, Cons and scope for improvement of Corporate Social Responsibility CSR clause- As per the Companies Act, 2012
The recently passed Companies Bill, 2012 has a separate clause on CSR which makes it mandatory for certain specific companies to spend 2% of the average net profit made in preceding 3 financial years on Corporate Social Responsibility. The 2% CSR provision will have ripple effects in the economy of India.
Following are its pros:
• Mahatma Gandhi once said, ‘Industry should consider themselves as trustee and servants of the poor. CSR, as a concept, upholds Gandhiji’s views.(Pro-Gandhian)
• CSR is very popular in countries like Japan, South Korea and growing economies like Brazil where companies are actively involved in various activities to demonstrate themselves as socially responsible corporate citizens. (widely accepted)
• India became the first country to make CSR mandatory, which would help shaping communities and improving the national economy.(India- first country)
• Huge scope for the corporate sector to contribute to employment, health, education and poverty.(Scope for corporate)
• Enhances the possibility of cooperation between business, society and government.(cooperation)
• Enhances the competitiveness of the company, while simultaneously advancing economic and social well-being in the communities, thereby increasing the long term sustainability of the company.(competitiveness)
• If a company does not conduct its own CSR it can give the required amount to the government’s socio-economic welfare programs such as “Prime Minister’s National Relief Fund”. (diversion of funds)(imp. For MCQ)
• With the 2% CSR provision there will be an immediate doubling of social program money in India i.e. additional $5 billion poured into social welfare sector. (more money)
• Via 2% CSR there will be more human capital developed (education, healthcare, training, etc) in the economy which will have long term ripple effect on Indian economy to accelerate production of goods and services. (human capital)
• Moreover, through CSR spending in energy, environment and R&D other factors of production will be more efficiently utilized. This will in turn boost capital generation and thereby boost the economy in the long run. (capital generation)
• Occasionally the government re-distributes resources, mostly taxed money, very inefficiently. Plus the government agencies are often restrained by regulations and requirements in their attempt to implement social programs. Businesses do not have to face such restrains. They can spend money and minimize externalities that come with undertaking social good. (less restrains)
Following are its cons:
• No other country in the world has made CSR mandatory.
• Mandatory CSR increases the inefficiency which can be equivalent to government ‘taxing’ its investors which deprives them of mobilizing the economy.(inefficiency)
• Might create reluctance within the international business community about investing in India.(reluctance)
• One of the basic aspects of corporate commerce this clause tends to ignore is the interests of the shareholders of a company. The shareholders have invested their money in a company and expect a return. It would be irresponsible for the company to indulge in activities that diminish shareholder value over the long run. And if the company is successful it is obviously generating enough tax revenues to address the government’s social spending needs. And, assuming shareholders get a return from their investment, it is their call to spend their individual earnings the way they like it to be.(shareholders’ interests)
• There is already a series of cascading taxes charged on companies, in addition to the expenditure incurred on buying materials from suppliers, employee benefits and so on, hence an extra mandatory expenditure would become burdensome.(cascading taxes)
• Also the percentage of expenditure fixed i.e. 2% is high; ideally it should have been around 1% of profit after tax.(high percentage)
• Any company operating in a market is bound to have constant interactions with the society around it. It might be with the people it employs, lenders who lend it, exchequer which collects taxes. Therefore, if a company is fair in its dealings there is hardly any need for imposing CSR on it.(socio-economic interactions)
• The last couple of years have seen quite a few episodes of industrial unrest erupt at manufacturing facilities managed by leading companies. These have brought to light several murky practices employed by some manufacturing companies to keep their production lines chugging, even as they cannot manage the costs. Unfair practices such as keeping legitimate workers off the payroll, paying them salaries that blatantly violate minimum wage rules and using loopholes that deny them of basic legal rights. If a company acquits itself badly on the above counts, it doesn’t really help the social cause if it then goes on to build schools or sanitary facilities in the rural hinterland.(unethical practices)
• Another set of problems that plague SMEs is inordinate delays in payments of dues for supply of goods or services, wafer-thin margins and one-sided, contracts that barely allow survival. Such problems surface mainly when smaller industries have to deal with more powerful corporate buyers. This is the chief reason why listed companies were earlier mandated to make explicit disclosures, in their annual reports of large outstanding dues to SMEs. These disclosures have now been waived. This can be counted as a black mark against social responsibility.(problems of SMEs)
• Take evasion is another bottle-neck faced by the government in increasing its tax-GDP ratio. It has become quite commonplace in recent years to see large firms lead their lenders on a merry dance to recover their dues. Taking recourse to innovative ‘structures’ that help escape one’s legitimate share of taxes has become a daily affair now. Therefore, there doesn’t seem much substance in cheating the exchequer out of a 30% share of profits by evading taxes and then shelling out a paltry 2% as CSR.(tax-evasion)
• Finally the problems of the poor and needy in our country are real and need addressing. The government is supposed to address these problems. The CSR tax is a diversion. The government would be better served by improving its execution capabilities.(govt. shirking responsibility)
• A company’s failure to conduct CSR will lead to its penalization. (penalty)
Scope for improvement:
• The main point on which the law makers should focus before making an effort to implement the CSR clause is the willingness of the corporate world to integrate the same into its business strategy. CSR makes sense only when the business requires it and not the government. For example a business that depletes resources such as water, can and should put in place initiatives that replenish these resources to restore environmental balance.(willingness)
• There should be an arrangement made by which the shareholders are aware of the fact that the company is going to spend a specific part of its profits in CSR, as ultimately it is the shareholders who contribute significantly to the corpus. (shareholders’ interests)
• It is also suggested to actively consider a system of ‘CSR credits’ that evaluates a company’s social responsibility in its entirety. While awarding ‘credits’ to companies that do deploy 2% of their profits on CSR, it should also incorporate negative marks for being in an undesirable business or sharp practices in dealing with suppliers, employees and the exchequer. (CSR credits)
• Establishing a disclosure framework for all this may not be too difficult, as the top listed companies are already required to address many of these issues in the new Business Responsibility Report. A report card on these lines may prompt the leading corporate to take their social responsibilities more seriously. It may also help silence the cynics who ask if a profit-oriented enterprise can really do well, if it expends it profits on doing good.(Business Responsibility Report)
To a layman CSR looks like an innovative solution to remove certain inefficiencies set in government’s service delivery system, but a lot depends upon how the corporate sector perceives it and the amount of willingness it shows to perform the duties as mandated to it. 2% might look very petty to a huge multinational company like Reliance or Walmart, but the kind of impact that it can create on the society is immense.Many large corporates across the country are conducting laudable CSR programs that have far-reaching benefits. Very few of these corporates actually invest into impact assessment even though an assessment could help them plug gaps and move ahead. Impact assessment could actually be the “collateral benefit” from the 2% CSR provision that corporate India was reluctant about.
by Lloyd D’Souza
References:
http://independentskies.com/the-2-impact-of-indias-companies-bill-creative-capitalism-for-development/
The Hindu Business Line: Dated 12th August, 14th September and 16th September 2013
The recently passed Companies Bill, 2012 has a separate clause on CSR which makes it mandatory for certain specific companies to spend 2% of the average net profit made in preceding 3 financial years on Corporate Social Responsibility. The 2% CSR provision will have ripple effects in the economy of India.
Following are its pros:
• Mahatma Gandhi once said, ‘Industry should consider themselves as trustee and servants of the poor. CSR, as a concept, upholds Gandhiji’s views.(Pro-Gandhian)
• CSR is very popular in countries like Japan, South Korea and growing economies like Brazil where companies are actively involved in various activities to demonstrate themselves as socially responsible corporate citizens. (widely accepted)
• India became the first country to make CSR mandatory, which would help shaping communities and improving the national economy.(India- first country)
• Huge scope for the corporate sector to contribute to employment, health, education and poverty.(Scope for corporate)
• Enhances the possibility of cooperation between business, society and government.(cooperation)
• Enhances the competitiveness of the company, while simultaneously advancing economic and social well-being in the communities, thereby increasing the long term sustainability of the company.(competitiveness)
• If a company does not conduct its own CSR it can give the required amount to the government’s socio-economic welfare programs such as “Prime Minister’s National Relief Fund”. (diversion of funds)(imp. For MCQ)
• With the 2% CSR provision there will be an immediate doubling of social program money in India i.e. additional $5 billion poured into social welfare sector. (more money)
• Via 2% CSR there will be more human capital developed (education, healthcare, training, etc) in the economy which will have long term ripple effect on Indian economy to accelerate production of goods and services. (human capital)
• Moreover, through CSR spending in energy, environment and R&D other factors of production will be more efficiently utilized. This will in turn boost capital generation and thereby boost the economy in the long run. (capital generation)
• Occasionally the government re-distributes resources, mostly taxed money, very inefficiently. Plus the government agencies are often restrained by regulations and requirements in their attempt to implement social programs. Businesses do not have to face such restrains. They can spend money and minimize externalities that come with undertaking social good. (less restrains)
Following are its cons:
• No other country in the world has made CSR mandatory.
• Mandatory CSR increases the inefficiency which can be equivalent to government ‘taxing’ its investors which deprives them of mobilizing the economy.(inefficiency)
• Might create reluctance within the international business community about investing in India.(reluctance)
• One of the basic aspects of corporate commerce this clause tends to ignore is the interests of the shareholders of a company. The shareholders have invested their money in a company and expect a return. It would be irresponsible for the company to indulge in activities that diminish shareholder value over the long run. And if the company is successful it is obviously generating enough tax revenues to address the government’s social spending needs. And, assuming shareholders get a return from their investment, it is their call to spend their individual earnings the way they like it to be.(shareholders’ interests)
• There is already a series of cascading taxes charged on companies, in addition to the expenditure incurred on buying materials from suppliers, employee benefits and so on, hence an extra mandatory expenditure would become burdensome.(cascading taxes)
• Also the percentage of expenditure fixed i.e. 2% is high; ideally it should have been around 1% of profit after tax.(high percentage)
• Any company operating in a market is bound to have constant interactions with the society around it. It might be with the people it employs, lenders who lend it, exchequer which collects taxes. Therefore, if a company is fair in its dealings there is hardly any need for imposing CSR on it.(socio-economic interactions)
• The last couple of years have seen quite a few episodes of industrial unrest erupt at manufacturing facilities managed by leading companies. These have brought to light several murky practices employed by some manufacturing companies to keep their production lines chugging, even as they cannot manage the costs. Unfair practices such as keeping legitimate workers off the payroll, paying them salaries that blatantly violate minimum wage rules and using loopholes that deny them of basic legal rights. If a company acquits itself badly on the above counts, it doesn’t really help the social cause if it then goes on to build schools or sanitary facilities in the rural hinterland.(unethical practices)
• Another set of problems that plague SMEs is inordinate delays in payments of dues for supply of goods or services, wafer-thin margins and one-sided, contracts that barely allow survival. Such problems surface mainly when smaller industries have to deal with more powerful corporate buyers. This is the chief reason why listed companies were earlier mandated to make explicit disclosures, in their annual reports of large outstanding dues to SMEs. These disclosures have now been waived. This can be counted as a black mark against social responsibility.(problems of SMEs)
• Take evasion is another bottle-neck faced by the government in increasing its tax-GDP ratio. It has become quite commonplace in recent years to see large firms lead their lenders on a merry dance to recover their dues. Taking recourse to innovative ‘structures’ that help escape one’s legitimate share of taxes has become a daily affair now. Therefore, there doesn’t seem much substance in cheating the exchequer out of a 30% share of profits by evading taxes and then shelling out a paltry 2% as CSR.(tax-evasion)
• Finally the problems of the poor and needy in our country are real and need addressing. The government is supposed to address these problems. The CSR tax is a diversion. The government would be better served by improving its execution capabilities.(govt. shirking responsibility)
• A company’s failure to conduct CSR will lead to its penalization. (penalty)
Scope for improvement:
• The main point on which the law makers should focus before making an effort to implement the CSR clause is the willingness of the corporate world to integrate the same into its business strategy. CSR makes sense only when the business requires it and not the government. For example a business that depletes resources such as water, can and should put in place initiatives that replenish these resources to restore environmental balance.(willingness)
• There should be an arrangement made by which the shareholders are aware of the fact that the company is going to spend a specific part of its profits in CSR, as ultimately it is the shareholders who contribute significantly to the corpus. (shareholders’ interests)
• It is also suggested to actively consider a system of ‘CSR credits’ that evaluates a company’s social responsibility in its entirety. While awarding ‘credits’ to companies that do deploy 2% of their profits on CSR, it should also incorporate negative marks for being in an undesirable business or sharp practices in dealing with suppliers, employees and the exchequer. (CSR credits)
• Establishing a disclosure framework for all this may not be too difficult, as the top listed companies are already required to address many of these issues in the new Business Responsibility Report. A report card on these lines may prompt the leading corporate to take their social responsibilities more seriously. It may also help silence the cynics who ask if a profit-oriented enterprise can really do well, if it expends it profits on doing good.(Business Responsibility Report)
To a layman CSR looks like an innovative solution to remove certain inefficiencies set in government’s service delivery system, but a lot depends upon how the corporate sector perceives it and the amount of willingness it shows to perform the duties as mandated to it. 2% might look very petty to a huge multinational company like Reliance or Walmart, but the kind of impact that it can create on the society is immense.Many large corporates across the country are conducting laudable CSR programs that have far-reaching benefits. Very few of these corporates actually invest into impact assessment even though an assessment could help them plug gaps and move ahead. Impact assessment could actually be the “collateral benefit” from the 2% CSR provision that corporate India was reluctant about.
by Lloyd D’Souza
References:
http://independentskies.com/the-2-impact-of-indias-companies-bill-creative-capitalism-for-development/
The Hindu Business Line: Dated 12th August, 14th September and 16th September 2013
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