Corporate Social Responsibility (CSR): Implementation, Impact and Recent Developments

To prepare for GOVERNANCE for any competitive exam, aspirants have to know about Corporate Social Responsibility. It gives an idea of all the important topics for the IAS Exam and the Governance syllabus (GS-II.). Corporate Social Responsibility terms are important from Governance perspectives in the UPSC exam. IAS aspirants should thoroughly understand their meaning and application, as questions can be asked from this static portion of the IAS Syllabus in both the UPSC Prelims and the UPSC Mains exams. Even these topics related to CSR are also highly linked with current affairs. Almost every question asked from them is related to current events. So, apart from standard textbooks, you should rely on newspapers and news analyses as well for these sections.

Corporate Social Responsibility Mandate in India:  Companies Act, 2013 for Sustainable Business:

• 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 a positive impact on society at large.
• The Companies Act, 2013 is a landmark legislation that made India the first country to mandate and quantify CSR expenditure. The inclusion of Corporate Social Responsibility is an attempt by the government to engage the businesses with the national development agenda.
• Section 135(1) of the Act prescribes thresholds to identify companies which are required to constitute a CSR Committee – those, in the immediately preceding financial year of which:

1. 1. Net worth is Rs 500 Crore or more; or.
   2. Turnover is Rs 1000 Crore or more; or.
   3. Net profit amounts to Rs 5 Crore or more.

• As per the Companies (Amendment) Act, 2019,CSR is applicable to companies before completion of 3 financial years.
• Companies are required to spend, in every financial year, at least 2% of their average net profits generated during the 3 immediately preceding financial years.
• For companies that have not completed 3 financial years, average net profits generated in the preceding financial years shall be factored in.
• The CSR activities in India should not be undertaken in the normal course of business and must be with respect to any of the 17 activities of CSR mentioned in Schedule VII of the act.
• Primary objective of CSR: To promote responsible and sustainable business philosophy at a broad level and encourage companies to come up with innovative ideas and robust management systems.

Gandhi’s Trusteeship Philosophy: Bridging Wealth for Social Welfare

Trusteeship is a socio-economic philosophy that was propounded by Mahatma Gandhi. It provides a means by which the wealthy people would be the trustees of trusts that looked after the welfare of the people in general. … Gandhi believed that the wealthy people could be persuaded to part with their wealth to help the poor.

Corporate Social Responsibility Role in Business Success and Societal Health:

• A healthy business can only succeed in a healthy society. Thus, it is in the best interest of a company to produce only goods and services which strengthen the health of society
• If the company wants to succeed in the long term it needs to have the acceptance – or license to operate – from social actors affected by the company’s operations.

Corporate Social Responsibility Implementation in India: Reporting, Disclosures, and Challenges:

• Companies which fall under the law are required to share a report on their activities and spending.
• Those reports must include information about the company’s CSR policy, the composition of its CSR committee, the amount of Corporate Social Responsibility expenditures and details on the projects where it was spent.
• If the company does not spend the required amount, it must publicly disclose it and the reasons for it. Failure to report is punishable under the Act.
• The implementation was marked by inconsistencies based on nature, size, domain of the companies as well as region wise and sector wise spending.

Challenges in Corporate Social Responsibility Implementation: Reasons for Poor Execution

• The most common reason that companies cited for not meeting the target is that they had undertaken long-term projects. This means that the amount was earmarked for a long-term initiative and the company is carrying forward the spend.
• Many companies also said that they lacked prior expertise and delay in project identification as reasons for not spending. It is only since 2012-13 that firms have started allocating funds for CSR activities specifically. This was in response to the SEBI circular dated August 2012, which mandated all top 100 listed companies to include a business responsibility report as a part of their annual report.
• Also, reluctance to give money to construct stadiums and other infrastructure because companies did not have much time to vet projects whose impact is difficult to measure at the end of a year.
• Trust deficit in the not-for-profit sector – Section 135 of the Companies Act allows companies to partner with nonprofits to implement Corporate Social Responsibility initiatives. The idea is that nonprofits can bring expertise in various fields of development. However, there are not many such tie-ups seen.
• Traditionally work regarding social issues by companies started with providing the bare minimum facilities in and around their plants – like educational institutes, vocational training and healthcare for their own employees. New areas introduced had little or no takers among majority companies.
• Some companies have also taken advantage of unclear definitions. Reliance Industries Ltd included the setting up of Sir H.N. Reliance Foundation Hospital in Mumbai for Rs.553 crore as part of its CSR activity for ‘eradication of hunger’. It is a multi-speciality tertiary care hospital and 20% of its beds are subsidised. Technically the money has been categorised under CSR spend in the annual report, but it is an investment. In any case, all private hospitals must offer subsidised beds as a requirement under the law.

Strategic Choices in Corporate Social Responsibility implementation:

• Eleven areas were identified under the Companies Act, 2013, for corporate social responsibility expenditure.
• The six areas that failed to attract significant interest are slum development; technology incubators at academic institutions; promotion of rural as well as Paralympic and Olympic sports; the Prime Minister’s Relief Fund; preservation of national heritage, art and culture; and welfare of armed forces veterans and war widows
• The pattern of CSR spending is driven by factors like accessibility to professionals, tangible results, governmental push, brand visibility and traditional pool of social development initiatives.
• New entrants to CSR might be reluctant to spend on arts and culture or sports as they do not produce immediate visible results.
• Schemes like building toilets and the Swachh Bharat Abhiyaan are “low-hanging fruit” for companies, they can fulfill targets as well as publicise immediate results.
• Also, getting clearances, licenses and other regulatory requirements for a project from local authorities becomes easy as the government itself is pushing the scheme.

Challenges in Corporate Social Responsibility Impact Assessment:

Corporate Social Responsibility (CSR) Rules, 2014 have no clear indication or requirement of impact assessment. In the first year of the rules taking effect, most companies were focused on compliance rather than on tracking how their initiatives fared. Following issues were observed in the domain of impact assessment:

• Evaluating impact may be premature at this stage, as impact is usually achieved over a long term. Many feel that impact can truly be assessed only after a particular activity has been in place for 3-5 years.
• For most top listed companies, CSR initiatives have been part of sustainability reports for over five years now but for companies undertaking CSR for the first time there is little or no impact to assess.
• Third party assessments are being done by professional companies in some instances. However, adoption is low and the reports are not made public.
• Most firms used their own foundations to carry out CSR. Companies preferred this route as it enables better control over the funds and hence, better monitoring of the initiatives.

Should the Government define an Assessment Framework for Corporate Social Responsibility Initiatives?

• In the absence of a framework, the assessments have been far and varied. Some feel a structure is needed, which would help streamline the measurement of these social initiatives.
• However, others believe that Corporate Social Responsibility is subjective in nature and cannot have assessments or audits like financial accounts. The government should only encourage assessment, not define parameters for it.

Impact of company size on Corporate Social Responsibility adoption and effectiveness

• Smaller firms with lesser resources at their disposal are less likely to adopt strategic CSR.
• CSR activities closely linked to the company’s business goals and falling in the purview of strategic CSR (for example–women hygiene classes by fast moving consumer goods majors) have higher payoffs and are mostly done only by larger companies.
• Hence, positive correlation between profit and Corporate Social Responsibility expenditure is enhanced as the size of the firm increases. It is advantageous for a large company to spend on CSR, as it strategically differentiates its product, which ultimately pays off in the long run. Strategic differentiation may also spur innovation, which might improve delivery of services.

Corporate Social Responsibility Expenditure Patterns: Public vs. Private Sector Companies in India

• Public sector companies spent only 66.7% while private companies spent 82% of the prescribed spend in the first year of mandatory CSR spending, according to the data compiled through research.
• Earlier, public companies needed to set aside anywhere between 0.5% to 5% of net profits based on the profits of the company, according to the 2010 CSR guidelines issued by the department of public enterprises. Hence, effectively state-run companies had a five-year head start with respect to setting aside funds for corporate social responsibility (CSR) initiatives.
• Under Companies Act of 2013, both public and private companies had to set aside 2% of their net profits.
• Public companies are mostly in industries where customer perception of the company does not matter (ONGC, NDMC, NTPC, etc.) as much as it does for a private company and this has led to a degree of complacency in meeting the CSR spending target.
• Public companies outspent private companies in one area in a big way – environment. This may be because many PSUs are natural resource companies and since they have a direct impact on the environment, they have taken it up as a cause.

Women led Companies and Corporate Social Responsibility Spending Trends in India:

• Six women-led companies—State Bank of India, Axis Bank Ltd, ICICI Bank Ltd, Hindustan Petroleum Corporation Ltd, LIC Housing Finance, Apollo Hospitals Ltd – of the 85 of the top 100 companies by market capitalization on the National Stock Exchange saw their CSR spending amounting to 90.5% of what they had to spend.

Regional Trends in India’s Corporate Social Responsibility Initiatives

• While the increase in CSR budgets has resulted in some companies expanding the geographies they are present in, most choose to spend in areas where they have a business presence.
• CSR capital is concentrated in developed states with a strong manufacturing presence such as Maharashtra, Tamil Nadu, Gujarat, Andhra Pradesh, Rajasthan and Karnataka. These states are also among those with the highest gross state domestic product.
• Another reason for these states being favoured by companies is because of the vast network of NGOs that work in them. Maharashtra and Gujarat have the largest number of NGOs working at the grass-roots level.
• Some states have been very active in wooing firms. Maharashtra and Karnataka asked corporates to contribute to areas such as drought relief and tourism. The Gujarat government even set up a dedicated department called Gujarat CSR Authority
• The strong presence of manufacturing facilities across the state, in addition to much of corporate India having Mumbai as their headquarters, has resulted in more than 50% of the top 100 companies by market capitalization on NSE deploying their Corporate Social Responsibility spends in Maharashtra in one way or the other.
• Besides developed states, resource-rich locations such as Odisha and Chhattisgarh are also able to attract a fair number of companies due to the overwhelming presence of metals and mining units. All of these companies resettle and rehabilitate those displaced as part of their business.

Corporate Social Responsibility Disparities in India: Regional and State-level Inequalities:

• Indian Institute of Corporate Affairs (IICA) released data about CSR activities which shows the grim side of the picture.
• Poor states generally received least funds as compared to rich states.
• Jharkhand, Chhattisgarh, Uttar Pradesh, Bihar, Madhya Pradesh received only 9% funds during 2014-15 and 2017-18. Surprisingly these states have 55% districts of 115 Aspirational Districts.
• Maharashtra, Gujarat, Karnataka, Andhra Pradesh, Tamil Nadu, Delhi have only 11% Aspirational Districts but received 40% of the funds during the same period.
• 70% of companies do not have strategies put in place to implement Corporate Social Responsibility activities.
• About 55% funds are spent on human development and social welfare. For this Indian Institute of Corporate Affairs studied 104 companies. Of the total 104 companies, 74 companies are public while the remaining 30 are private companies.
• 66% funds are spent on health, differently abled, education, hunger, sanitation, drinking water, malnutrition and livelihood generation. Whereas 9% funds are spent on environment, conservation of resources and animal welfare.

Corporate Social Responsibility Case Studies: Dabur, Tata Steel, Toyota Kirloskar Initiatives 

Recent developments:

Recently, the report of a High-Level Committee (HLC) on Corporate Social Responsibility, set up under Injeti Srinivas in 2018 to review the existing framework submitted its report.

Key Recommendations for Effective Implementation and Impact:

• CSR Activities in Local Areas: The emphasis on local areas in the Act should not be treated as mandatory in nature. Companies should engage in CSR activities by balancing local area preference with national priorities.
• Schedule VII of the Act: It should be mapped and aligned largely with SDGs and some important items such as senior citizens’ welfare, disaster management, and heritage be additionally included to develop an SDG framework.
• Contribution to Central Government funds: This provision should be discontinued as CSR spend. However, a specific designated fund may be created for transfer of unspent CSR funds lying with the company beyond the proposed 3-5 year time limit.
• Issues related to Reporting for CSR: Enhanced disclosures should be made for better information dissemination with respect to selection of projects, locations and implementing agencies to facilitate better monitoring.
• CSR Audit: CSR may be brought within the purview of statutory financial audit, by making details of Corporate Social Responsibility spending as part of the financial statement of a company.
• Creation of ‘Social Impact Companies’: To express the object of pursuing social outcomes, while being permitted to achieve conditional profit which can be distributed.
• Tax Benefits for CSR Activities: All activities listed under Schedule VII to enjoy uniform tax benefits.
• Third party assessment of CSR Projects: 5% of CSR mandated companies are identified on a random basis for third-party assessments on a pilot basis.

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