On April 1, 2014, the new Companies Act, 2013, came into force making India the first country to legally require companies to “give back” to society.
The law made it mandatory for companies that have an annual turnover greater than Rs 1,000 crore or net worth greater than Rs 500 crore or net profit greater than Rs 5 crore, to spend 2 percent of their three-year average annual net profit on corporate social responsibility (CSR) activities starting last year.
But does India Inc really care about CSR?
Most Indian companies have long practiced some form of CSR with the broad goal, simply, of contributing to the well-being of the communities and society they affect and on which they depend.
But, now with the law in place mandating CSR, there is an increasing trend to dress up CSR as a business discipline. That is distracting firms from what must be their underpinning goal, doing good.
Traditionally, CSR space has been cluttered with heavy jargon like risk mitigation, reputation enhancement, goodwill creation, and so on, contributing to a sort of adulteration of the firms' sentiments to create a larger social impact based on triple bottom line. In fact, many firms perceived CSR under the burden of these jargon which turned out to be a spillover.
Now, is the high time for India Inc to refocus its CSR activities on the fundamental goal of community good and develop a systematic process to bring coherence and discipline to CSR strategies.
The new versions of CSR practices fuelled by the law
Despite the widely accepted ideal of pursuing “shared value”—creating economic value in ways that also create value for society—this is not the underlying norm. Rather, most companies practice a multifaceted version of CSR that runs the gamut from pure philanthropy to environmental sustainability to the active pursuit of shared value. Moreover, well-managed companies seem less interested in totally integrating CSR with their business strategies and goals than in devising a cogent CSR program aligned with the company’s purpose and values.
But although many companies embrace this broad vision of CSR, they are hampered by poor coordination and a lack of logic connecting their various programs. Although numerous surveys have touted the increased involvement of CEOs in CSR, we have found that CSR programs are often initiated and run in an uncoordinated way by a variety of internal managers, frequently without the active engagement of the CEO.
Developing Coherent CSR Strategies
To maximise their positive impact on the social and environmental systems in which they operate, companies must develop coherent CSR strategies. This should be an essential part of the job of every CEO and board. Aligning CSR programs must begin with an inventory and audit of existing initiatives.
Since, traditional CSR programs were not designed to produce profits or directly improve business performance, there is a perennial sentiment of lesser focus by the leadership. However, now there is a category of companies that function within existing business models to deliver social or environmental benefits in ways that support a company’s operations across the value chain, often improving efficiency and effectiveness. Thus they may, but don’t always increase revenue, decrease costs, or both. Examples include sustainability initiatives that reduce resource use, waste, or emissions, which may in turn reduce costs; and investments in employee working conditions, health care, or education, which may enhance productivity, retention, and company reputation.
Also, there are businesses that create new forms of business specifically to address social or environmental challenges. Improved business performance—a requirement of initiatives in this theater—is predicated on achieving social or environmental results.
Developing a Unified Practice Platform
Though, the boundaries of the CSR law in light of this castigation of CSR based firms approach is quite porous. Companies building their CSR policies should focus on developing an interdisciplinary strategy.
• Businesses must reduce or eliminate initiatives that do not address an important social or environmental problem in keeping with the company’s purpose, identity, and values.
• Developing Metrics to Gauge Performance and Social Impact
It’s neither practical nor logical for all companies to engage in the conventional CSR practices, since CSR programs are driven by diverse factors including the industry and the societal environments in which businesses operate and the motivations of the people who staff, run, and govern each company. For example, although a manufacturing company may have rich opportunities to reduce its environmental impact, a financial services company may be hard-pressed to do so—but it may be vastly more successful in the social sphere, with significant initiatives supporting financial inclusion and literacy. In a country lacking sufficient government funding for public health, a company’s philanthropic funding for clean water and sanitation may be far more valuable to the community than carbon mitigation initiatives to reduce climate impact, while a society that enjoys robust government provision for social welfare services may place greater importance on environmental conservation programs.
Best-practices companies operate coordinated programs across the CSR portfolio. Some of their initiatives indeed create shared value; some, though intended to do so, create more value for society than for the firm; and some are intended to create value primarily for society.
Yet all have one thing in common: They are aligned with the companies’ business purpose, the values of the companies’ important stakeholders, and the needs of the communities in which the companies operate. These companies, of course, stand in stark contrast to those that are focused solely on creating value for their shareholders.
Companies must demonstrate superior social or environmental value for their external stakeholders while maintaining or improving internal bottom-line targets—a goal sometimes attainable only in the long run. That’s why these initiatives, unlike those in theater two, may involve risky business decisions. However, if successful, they can transform companies into net positive contributors to societal well-being.
There are two important questions companies need to ask:
> Does our fundamental business enhance society?
> Do any of our products and activities diminish that goal, and if so, how can we mitigate or reverse them?
The day companies in India start doing this, we won't need CSR.
The thoughts and opinions shared here are of the author.
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