Anirudha Dutta is former head of research at CLSA India Limited, a leading foreign brokerage house. While every number tells a story, there are many stories beyond numbers and both are equally important. This blog will attempt to tell some of these stories.
The Companies Bill 2012 has been passed by the Rajya Sabha in the monsoon session of the parliament. This will bring in big changes in the regulatory stance towards corporate social responsibility (CSR), as well as responsibilities placed on the corporate sector. Enough has been written about the pros and cons of the CSR provisions, although my own view is that there is over-emphasis on Outlays, with limited thoughts, if any, on Outcomes.
Outlays or Outcomes? Outlays are easy to mandate and easier to track, if all the boxes of right intent are ticked. The government does not seem to be equally bothered about the outcomes. For them, the CSR requirement is like another tax' on the corporate sector and they have done their bit for the aam aadmi.
In many ways, it is the companies that will determine the Outcomes and therefore the success of the CSR. The Tata group has been involved in such activities for over a century, although it didn't have the same nomenclature then. After decades of CSR, a company like Tata Steel realised that there were limited benefits of spending money without:
So Tata Steel changed and tweaked the way the programs are directed. I do not have all the details; but from what I know-- If a water pumpset (made famous as "Lal Bahadur" in the movie Peepli Live) was installed in a village, they would make sure the villagers contributed something to it - either by way of labour, material or money.
Many promoters and managements look for "returns" from such spend. There is nothing wrong with this. When I spend on my immediate community, I benefit from a harmonious relationship with the community and hopefully a stable work force. NGOs do that too. Whenever I have quizzed Vinayak Lohani of Parivaar about why he spends money on non-core (another corporate jargon!) activities in the surrounding villages, his rationale is like a corporate - harmonious relations with the society he operates in.
The concerns arise when people start expecting favors, like concessions from the government or politicians in return. In an interview to the New York Times, the chairman of a large Indian group said that his group may have given scholarships to bureaucrats children. Now prima facie there is nothing wrong with it. It would be wrong if an independent audit had found that a majority of the scholarships given over a 10 and 20 year period have gone to bureaucrats children and therefore, may have been given to win potential favours.
A friend recently met the patriarch of a large reputed group in South India to raise funds for a venture which works in public policy. The group is well-known for donating money to education. The first question the patriarch asked was, "How will we benefit from this?" He went on to hint that their donations and philanthropic activities had pay-offs and they did not fund anything just for the larger good.
A shot in the arm for crony capitalism?
Given the way crony capitalism has gripped India and resulted in the present stasis (read Two to clap by T N Ninan and Pratap Bhanu Mehta's When business bats against itself), CSR could well go the same way depending on the intent of the corporate or the business house. Can we de-link this by asking for mandatory disclosures or audits.
Finally, it is clear that the direction will depend on good men for outcomes and there may not enough of them, whether in the government or in the corporate sector. A Nandan Nilekani or Ajay Piramal or Azim Premji don't need to be forced by a new law to give away part of their wealth; an Infosys Foundation was started much before CSR became a buzzword; Jamsetji Tata spoke about the good of the larger society over a hundred years back. But sadly even today many business groups talk about "hamara faida".
In a country that is the beneficiary of global outsourcing, the government is today busy outsourcing much of its governance to hide its failures in the garb of rights and entitlements. Given the nexus between business and politics, CSR funds could in fact, give rise to more crony capitalism. Publishing CSR reports will not achieve anything. The Vedanta group, for instance, produces some of the best CSR reports. Its Tuticorin smelter has been shut down after a prolonged battle. What value do such reports have, if large scale environmental violations are taking place for decades? My views in this case are based on media reports, But this seems to be just another tick in the box activity
Legislations like the RTI have exposed a lot over the last two years. Whether it breaks the nexus of crony capitalism or increases the cost has to be seen. Part of the increase in cost may come from CSR funds, especially for groups that think of only "hamara fayda". Others will continue with good work they are doing - mandatory or not.
The market has been largely indifferent
The second point that I would like to dwell on is about how the markets perceive CSR, While companies have, at least on paper, concerns for all stakeholders-- the promoters have their eyes on the stock price.
Do analysts care about CSR? The answer in one word would be a firm No. Analysts care mostly about financial numbers and what their clients want. A 2% "tax" on profits would result in one-time downgrade of earnings estimates and then building it into all future forecasts. Therefore, I do not think it will matter much in terms of valuations and stock price impact.
The more important question is do investors care? And we all know the answer. During my career as an analyst, I have come across very few asset management houses that are concerned about CSR or corporate governance, although a lot of lip service is paid to the latter. Most fund managers are worried about stock market performance (that is what counts) and unless there is a serious violation or a fallout over sustainability or governance issues, it really doesn't matter to them. This is the reality whether we like it or not.
The fund houses that are different are so for two reasons:
1. First, they have found a niche to differentiate themselves and to promote their business.
2. Second, certain asset allocators, notably from the Scandinavian countries, have become very conscious of sustainability and governance issues.
Winds of change?
However, as we become more conscious of these issues, Fund managers will surely demand greater scrutiny of sustainability, environmental violations, labour-law violations and CSR. We examples of this on labour issues in developing countries. Companies that outsource manufacturing like Nike, Gap and others have been under serious regulatory scrutiny on labour practices at their partners' manufacturing sites. This has often resulted in better employee conditions and less exploitation over a period of time. Consultants now vet the suppliers and investors find these studies and reports useful because it impacts their portfolio value. Hence, analysts pay attention to these issues.
The same will likely happen with CSR if there is an impact on the stock price, for the better or for the worse.