Corporate spending on CSR: India’s debate on mandatory versus voluntary regulation

The rise of China, the Euro crisis, sluggish domestic economic recovery. These events are catalyzed by momentous global shifts in population demographics, labor provision, industrial structure, and financial integration. Together with a mounting imperative for sustainable business operations, the restructuring of economies and industries worldwide will have far-reaching implications for business and the corporate social engagement (CSE) space. As a window into this year’s Corporate Investment Fellowship, Changing Our World’s summer Fellow Nicolas Picard will share his perspective on timely topics that intersect with these large macroeconomic trends.  Look out for the full report to be released later this year.

Of the 470 clauses outlined in the new Indian Companies Bill, the section mandating corporate social responsibility (CSR) spending by large companies came as a surprise to many CEOs and philanthropists. The corporate act contained the world’s first compulsory CSR clause, and makes India one of four other developing countries which have incorporated some type of environmental, social, and governance (ESG) stipulations in company regulation.

Though government-mandated corporate reporting of ESG issues is not new (between 1995 and 2008, 24 countries have instituted one or more compulsory regulations)[1], Clause 135 would be the first time a government makes holistic CSR a mandatory legal requirement, determined by a financial threshold. Debate around corporate philanthropy and CSR has a long and complex history in India. Indeed, the two terms are often used interchangeably, with some corporate families letting philanthropic passions dictate their CSR activities[2].

The bill has thus far generated a lot of debate. The former director of Tata Sons, one of India’s most revered company (and a well-known actor in the philanthropic space), has stated his outright opposition to mandatory reporting[3]. In an effort to appease criticism, the Ministry of Corporate Affairs recently changed the language in the act (to be presented to parliament in the coming months) so that companies must explain themselves to shareholders if they fail to spend at least 2% of average net profits on CSR.  A parliamentary panel has opposed this softer language, saying it will provide a “security valve” for irresponsible companies[4].

In an effort to clear the air, the government submitted national voluntary guidelines for responsible businesses in July of last year, outlining nine core principles, implementation guidelines, and a reporting framework in keeping with a broad array of industries[5]. However, before the government can begin to work effectively with the corporate community on an acceptable definition of CSR, there needs to be further debate and consultation regarding the merits of mandatory versus voluntary regulation.

Although research has shown that adoption of mandatory sustainability reporting has led to increased social responsibility of business leaders[6], the same causal link may not hold for mandatory CSR spending. Indeed, CSR casts a wider strategic net than sustainability, and ‘mandatory spending’ sounds an awful lot like a corporate tax in a country not known for its tax compliance[7]. And what of the new breed of firms which are pursuing triple bottom line profits? Should the Tata Group, innovator of a low-cost water purification device for “bottom billion” consumers, be subjected to further commitments to society[8]? Going forward, it will be important for stakeholders in India and elsewhere to weigh in on the merits and pitfalls of government mandating corporations’ societal contract.

Nicolas Picard is the 2012 Corporate Social Investment Fellow at Changing Our World’s New York office. Currently a Master’s candidate at Carnegie Mellon University’s School of Public Policy and Management, Nicolas is also co-directing an international consulting non-profit (SCIO) doing development work in Africa. Before graduate school, Nicolas was working in development at the United Nations University and in curriculum-design at a Singaporean micro-business school. Nicolas is French and holds a B.A. in International Development from McGill University in Canada.

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