Let’s Do Good Better

CSR Mandate (Companies Act 2014): Time for a Review? (Part 1)

India’s Companies Act 2014 was the first time that any large country laid down explicit requirement for Corporate Social Responsibility (CSR) spending. Incidentally, it is probably also the last time, because no other country has done so since then!

The law, requiring companies above a certain threshold of size (in terms of profit/turnover/investment) to spend two percent of the average profits of the last three years, came into force on April 1, 2014. And so is it time to review this? After all, it is a unique law, without precedent, and it does not seem possible that it could have got everything right the first time around!!

Well, even if the government doesn’t, I thought I would think about this, and hopefully start a conversation around it. I am sure many are not going to agree with many of the points I will be making. But that is the point!

When something becomes the law or norm, we take it for granted, and forget to ask whether it should be so. The most fundamental question which we have all forgotten is ‘Should CSR be mandatory?’ But I shall skirt this topic and other larger issues for the moment, and leave them to the end of the conversation, which I hope will run to many parts.

Let’s start with smaller irritant. Here is one that leads to a lot of confusion.

The Geography of CSR:

The original Act says ‘the?company?shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities’. Many managements and Boards go by this dictate because it is the safest thing to do (and being on the wrong foot on CSR and receiving a notice from MCA is the last thing companies want).?

Subsequent FAQs from the Ministry of Corporate Affairs clarify that: ‘The spirit of the Act is to ensure that CSR initiatives are aligned with the national priorities and enhance engagement of the corporate sector towards achieving Sustainable Development Goals (SDGs).

Thus, the preference to local area in the Act is only directory and not mandatory in nature, and companies need to balance local area preference with national priorities’. But this does not seem to have registered strongly enough, widely enough.

Resulting in a situation that leads everyone to lament that a lot of money is going into already well-funded urban areas, metropolises and industrialized areas, leaving very little for rural, tribal or remote areas. Can we be surprised? After all industrial activity is concentrated only in few states. And even more so, headquarters of large companies are located in the large metropolises. No wonder then, with the ‘letter of the law’ interpretation of the law, Maharashtra, Tamil Nadu and Karnataka see the maximum spends.

The original dictate may have come from the thinking that polluting industries or those which negatively impact local communities must try to set right these wrongs beyond legal compliance, and spend in their neighbourhoods. This is logical, but what about companies which don’t have significant local impacts? Or impacting industries which have huge CSR spends which are way beyond local needs? Or those that have pan-national footprints through their value chains?

But there is also some safety that coporates see in this clause. For instance, when a politically powerful person brings pressure on a company to do something in their constituency which may have nothing to do with the company’s operations, the corporate does use this clause as an excuse!

At any rate, wouldn’t it be best to leave it to the wisdom of the company, rather than over-specifying on matters like this? Bringing in the concept of materiality (which we can interpret for this purpose as ‘the most significant environmental or social issues that may impact a company's financial value’), would be useful here.

Suggestion: Let’s remove the clause from the Law!

#MandatoryCSR #CSR #CompaniesAct

?

?