The Social Net Worth

ON 8 AUGUST, India officially embarked on one of the world’s largest experiments in converting cash into development. Some cheered it on, some feared it, and many argued that it should never have happened, but for better or worse, the Companies Bill cleared the Rajya Sabha with a small clause in the middle that orders India’s largest companies to spend a small but significant part of their earnings on corporate social responsibility (CSR) initiatives.

Clause 135, better known as the “two-percent rule”, requires companies “having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year” to give back two percent of their after-tax profits to society. (According to accounting firm Ernst & Young, there are about 3,000 such companies.) Schedule VII of the bill defines giving back: “eradicating extreme hunger and poverty; promotion of education; promoting gender equality and empowering women; reducing child mortality and improving maternal health; combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases; ensuring environmental sustainability; employment enhancing vocational skills; social business projects; contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; and such other matters as may be prescribed”. There are process requirements—appoint a board committee, develop a plan, monitor it—but no explicit penalty for not spending. The bill simply requires delinquent companies to explain, in their annual reports, their failure to spend two percent.

The new rule was not exactly a surprise. Corporate social contribution in some form has always been an implicit component of the public discourse of nation building, and companies have always been expected to “do their part”—at first a bit part in the 1945 Bombay Plan (incidentally, written by industrialists), then an increasingly large part in delivering ingredients for development beyond the businesslike private finance of public infrastructure. (For example, the prime minister himself urged industry participants of India Telecom 2012 to apply their minds to “develop strategies to expand teledensity in rural areas”.) The CSR discussion—which entered the scene in 2008 with a joint project between the Indian Institute of Corporate Affairs and the German technical agency and bilateral donor GIZ to develop “an Indian concept” for CSR guidelines and reporting—is the latest articulation of the notion.

The “National Voluntary Guidelines on Social, Environmental, and Economic Responsibilities of Business” that came out of these discussions started to look more like rules in 2012, when the Securities and Exchange Board of India (SEBI) ordered the 100 largest companies listed on the Bombay and National stock exchanges to disclose their CSR activities along with the percentage of after-tax profits devoted to CSR. The Lok Sabha then passed the Companies Bill, including the two-percent clause, in December 2012.

In the run-up to the vote in the upper house, consultants, auditors and pundits estimated the amount at stake at something like Rs 100 billion per year. Forbes, online philanthropy portals, and business dailies ran columns on opportunities and challenges posed by the CSR provision; and other public agencies took inspiration. The Punjab state Empowered Committee on Mega Projects, for example, approved a measure to direct one percent of some project investments toward a “Cancer relief and de-addiction fund”, and the Ministry of Rural Development floated a proposal to require companies that secure public contracts of more than Rs 100 crore to spend one percent of the project value on CSR.

Despite the CSR provision’s long spell in the purgatory between upper and lower houses, the media blitzed when the bill passed. The dialogue shifted from the spring’s breathless estimates of how much money would flow into CSR activities (and CSR consulting) to more ruminative commentary on the meaning of capitalism and social responsibility. Reactions fell into three broad camps. There were those who didn’t think it was mandatory or prescriptive enough. Others didn’t like the scent of “mandatory” (a position that was mostly reported second-hand, in business papers, as “corporate India’s views”—though many business leaders came out in favour of the newly passed Bill in a 14 August Google Hangout session with Corporate Affairs Minister of State Sachin Pilot). And there were yet others who disliked the very principle of government-regulated corporate giving.

Many of the more sophisticated responses to the passage of the Companies Bill looked past the current formulation to anticipate and argue against additional government pressure to spend on state-approved causes. Some argued that money doled out as CSR would be better taxed and spent by the government, others that the government’s efforts to track spending would distract from unmet and more worthy regulatory tasks. Several highlighted the potential for political misuse of the newfound powers over CSR slush funds. Rohini Nilekani noted in an interview with Mint that corporate efforts to comply could divert attention from more creative forms of philanthropy that are already underway. “It could be a mixed blessing,” she said.

All this aside, the provision is more or less law, and the question now is how to adjust this mix. (At the time of writing, the president could still refuse to give his assent or return it to parliament for reconsideration, but this seems unlikely given the importance of the rest of the bill and the political awkwardness of deleting corporate India’s “responsibility” to society.) The danger is that the Ministry of Corporate Affairs will jump in to reinforce the existing mandate with penalties, and with more directive definitions of “social”. Although Joint Secretary Renuka Kumar stated that “The basic tenancy of the rule would be transparency and disclosure” in a 14 August interaction with the press, the general murmuring in Delhi anticipates further emphasis on the “mandatory” part of the provision.

Companies are unlikely to respond quickly to the threat of having to disclose their planned and actual expenditure, and widespread underspending will look like failure. On the other hand, if spent, the money involved (which is equivalent to about 12 percent of this year’s Ministry of Rural Development’s budget) would flood the existing collection of NGOs, social businesses, and others working outside of the state on social causes with new cash, attracting inexperienced and diversely motivated new entrants. Existing NGOs often struggle to build the human capital and operational capacity to handle the current private social budget from philanthropy, and few have systems in place to track, much less report social impact. An exclusive list of approved social activities would become a focal point for lobbying and newer, more creative approaches could easily be left out.

At the same time, however, the companies that fall under the CSR provision display some of the key ingredients for social innovation and an ability to convert cash into development: decentralised decision-making, institutionalised attention to at least some forms of need, demonstrated capacity for adaptability, and the clear ability to move from idea to implementation. With the right oversight, this potential could flourish into some much-needed caulking around the cracks of an imperfect state. Seizing this opportunity will require an uncharacteristic degree of government restraint, as well as more strategic policy investment in strengthening systems for disclosure.

The current perfunctory disclosure clause handicaps even this nascent potential for public oversight to motivate social effort. Spending obligations are highly concentrated among companies that face limited risk that customers will shun them for absent or inept CSR. More than half of the profits after tax available from companies on the 2012 Economic Times 500 list of India’s largest listed companies are in industries that face limited competition to meet critical needs (such as shipping or refining), don’t depend on everyday goodwill for their brand (such as steel or cement), or simply have a reputation that dwarfs attention to CSR (such as mining).

What’s more, three-quarters of India’s companies are family-owned or promoted, according to Chandrajit Banerjee, Director-General of the Confederation of Indian Industry, and it’s hard to see how disclosing failure to meet CSR spend at the Annual General Meeting of this audience would be a threat. This context will evolve—the Companies Bill has new protections for minority shareholders which may encourage more diverse investors to jump in, and India Inc. increasingly attracts institutional investors known to cry foul—but today it’s a small, friendly club.

Media and public watchdogs may reach into this world once in a while to check on CSR progress, but the current disclosure mandate does not make their lives easy. Extracting annual reports from unenthusiastic corporate officers is investigative journalism at its most tedious. Downloading, decoding, and aggregating insights from online annual reports in PDF formats to make some sense of the trends will also be a labour of love. Prominent, publicly listed companies may see more pressure, but they also have larger public-relations cells.

But the CSR provision could still be just the nudge that India Inc. needs to think clearly about how it might contribute to social development. Total disregard of the mandate is a more active opt-out than just casual procrastination: it requires more intentional consideration and rejection of the possibility of organisational philanthropy. Some business leaders may treat the mandate as just so much paperwork for consultants, but many may actually take the time to think about how they can apply their skills, and the organisations they lead, to achieve more than simply profit. It is easy to stereotype the “captains of industry” as a bunch of hard-hearted capitalists, but equally easy to draw up a long list of counter-examples.

The result could be lots of minds at work, many of which have an understanding of process, project management, and scale that complements the passion often seen as the highest virtue in the social sector, leveraging flexible organisational structures, processes, and hiring possibilities towards new ends—in short, the kind of capacities we wish the public sector had, but which it is still, well, acquiring. The logic of a market in which development becomes like another product is certainly not a replacement for higher forms of social contract, but it does offer some prospects for loose coordination among particular projects as companies seek to create a better version of social impact than what’s already being produced by someone else. Large scale CSR could, for example, complement public efforts by offering innovative proofs of concept for local and other governments to replicate and scale. It could address interlinked problems that cut across the fragmented public sector response. It’s worth giving the approach a chance.

The trick is to offer that chance without relaxing expectations. The governance of CSR needs to balance accountability (for the incentives) with freedom (for the creativity). Dispersed social oversight does just that. Just as many minds are more likely to innovate than one, many judges are more likely than one to see the good and accept diverse versions of it. Public sentiment matters more and more in the age of social media; and stronger disclosure can leverage this trend. India could also adopt a clear taxonomy for social outputs, for example, so that a “job” or “energy savings” mean the same thing whenever they are claimed. International standards such as the Impact Reporting and Investment Standards (IRIS) allow global comparisons and benchmarking and are regularly updated as well as open to public comments and addition. The ministry could mandate the format for disclosure to ensure that it is available in electronic, machine-readable, manageable and analysable formats, making it easy for watchdogs to find and report patterns for the general public.

Tightening the definition of “social” and then blindly enforcing the mandate could undermine all this. The journalist R Jagannathan pointed out in MoneyControl that, as is, “the law has no problems whether a company uses profits to help commercial sex workers in Mumbai or build places of worship as part of CSR”; it was meant as a critique, but it should actually be the aspiration—as long as those who care about each cause can track and reward effective work.