How to read the Companies Bill?

This post originally appeared on FSG's Social Impact blog.

The whole world is watching: Will Indian companies be required by law to contribute a certain percentage of net profits to CSR activities? While much speculation exists abroad, debate and controversy around this proposed requirement can be found in almost every conversation about CSR in India today.

The proposed Companies’ Bill would require that all private companies with a net worth of $100 million or more, or turnover of $200 million or more within a given fiscal year, report on whether and how they are spending 2 percent of their net profits after tax (PAT) on CSR activities. While India’s Public Sector Enterprises already face many regulations around sustainable development, the Companies’ Bill would set a new precedent for the relationship between the private sector and the Government of India (GoI).

The Bill spells out in much detail about which companies will be required to comply with the guidelines, how to calculate the 2 percent based on a rolling three-year average, and how corporate governance will oversee the spend.

However, many important questions remain unanswered, including: Who within the organisation is responsible for implementing these programmes? Who will be considered an approved third party evaluator to measure the programmes’ validity? And, most important of all, what will “count” as CSR activities under this new law?

As a consultant at FSG working out of our Mumbai office, these questions continually arise in the many conversations I have with corporations when the topic of the Companies’ Bill comes up.

A couple weeks ago, FSG co-founder Mark Kramer visited India and the volume of these questions got turned up during two shared value workshops we co-hosted with The World Bank, the Indian Institute of Corporate Affairs, and the Ministry of Public Enterprises.

The workshops were split into two days: One day each for the private sector and the other for the public sector.

With the public sector already facing requirements to spend a mandated percentage of their profits on CSR, and the Companies’ Bill pending for the private sector, participants were eager to hear how shared value fits into India’s evolving CSR landscape.

The morning session included keynote addresses from Mark as well as many other CSR thoughtleaders in India – the World Bank’s Country Director Onno Ruhl, Member of Planning Commission Arun Maira, the Minister of Heavy Industries Praful Patel, the Joint Secretary of the Department of Public Enterprises AK Pavadia, the Secretary of the Department of Public Enterprises OP Rawat, and Dr Bhaskar Chatterjee of the Indian Institute of Corporate Affairs.

While presenting slightly different perspectives, all the speakers agreed on three areas: (1) that India needs a new approach to solving social problems and fostering inclusive growth (2) that companies have an essential role in doing so, and (3) that the government wants to build companies’ capacity to do so successfully.

Mark, in his presentation, challenged companies to leverage the mandate in order to achieve the three-fold objectives mentioned above. He also highlighted that companies could view the government mandate as a tax or as an investment.

If the money is spent on philanthropic projects unrelated to the business, he said, then it is really just a social tax on profits. But if companies can use the 2 percent for philanthropic and shared value projects that create new business opportunities, reduce costs, or strengthen their industry cluster, the same expenditures would become an investment that bring benefits back to the company.

Mark gave many examples of Indian enterprises that have developed profitable shared value strategies that address critical social needs in India, such as rural healthcare, financial services, and livelihoods for small farmers. (These and other examples can be found in FSG’s report Creating Shared Value in India).

However, the closing session yielded the most rewarding results. Mark and select representatives from the opening session opened the floor for closing comments and questions. Participants were asked to revise the current CSR mandate to allow companies to take on more shared value initiatives within their spending requirements.

A participant said, “What I’ve learnt here today is, what we ‘spend’ on CSR doesn’t actually matter – but it is the impact we have on society and the sustainability of these efforts to our business which we need to focus on. When will the government change its mandate to hold us accountable for our impact, rather than our inputs in terms of rupees spent on CSR?”

Incorporating shared value initiatives into the CSR mandate raises a considerable challenge: If companies can include profit-making initiatives that address targeted social issues in fulfilling their obligation, it becomes harder to distinguish shared value investments from other investments the company makes.

As the participants observed, it shifts the reporting requirement from social spending to social impact. At the same time, it unleashes new and more powerful opportunities to meet the many social needs India faces, a future vision the participants were eager to embrace.

Overall, it was an enriching and rewarding experience to see how our ideas are not only influencing the practice of CSR, but also the dialogue between companies and the Government of India as to how to increase impact and accountability of these efforts.

We see great promise for the concept of shared value to become further embedded in both corporate strategy and government policy as a sustainable way to solve India’s vast social problems.

By Mark Kramer, FSG co-founder and Managing Director and Melissa Scott, FSG Consultant (Mark Kramer co-founded FSG with Michael Porter in 2000. He is the author of influential publications on shared value, catalytic philanthropy, collective impact, strategic evaluation, and impact investing. Melissa is a Consultant in FSG's Mumbai office.)

The thoughts and opinions shared here are of the author.