- Wealth PMS
In 1916 ,J.M.Clark, writing in the Journal of Political Economy, wrote “if men are responsible for the known results of their actions, business responsibilities must include the known results of business dealings, whether these have been recognized by law or not.
One of the earliest recorded acts of Social Corporate Responsibility comes from Cadbury, the Chocolate makers. George Cadbury, son of Cadbury founder John Cadbury had this to say about responsibility of his company when it came to his employees “If each man could have his own house, a large garden to cultivate and healthy surroundings – then, I thought, there will be for them a better opportunity of a happy family life.”
In India, we saw Tata building Jamshedpur wherein rather than it being just homes for employees, it features wide streets planted with shady trees, stadiums and parks, all cared for by Tata Steel which has its oldest plant out there.
In both cases, this was done going beyond the call of duty. But for long, this was informal and not forced upon any companies to implement. While in the West, Social Responsibility has been catching up, it’s been more about how companies trying to reduce their harmful impact on the environment.
India has become the first country to enforce CSR though the Companies Act of 2013. Rather than an act of selfless duty, this was made compulsory for companies which Companies with a net worth of Rs. 500 crores or greater or a turnover of Rs. 1000 crores or greater or those that have a net profit of Rs. 5 crores or greater.
The companies that fulfilled any of the above criteria were required to constitute a committee from the Board of Directors comprising of 3 or more directors who shall look into various aspects ranging from policies to be followed, activities that will be funded and finally monitor them. The amount on CSR is now required to be about 2% of pre-tax profit.
Forced social spending doesn’t really work in the way one anticipates. With companies more concerned with growth of the company, activities such as CSR constitute time expenditure many cannot really afford.
In the year 2015 – 16, a total amount of 9,822 Crores were spent on CSR activities by more than 5000 companies. Here is a Sector wise classification of the spending
A survey by accountancy firm KPMG found that 52 of the country’s largest 100 companies failed to spend the required 2% in 2015. Among companies that do spend, many donate to their own charities. In addition, there are accusations that few companies donate to Trusts / Institutions that payback much of the same after deducting a small fee.
When companies and individuals pay tax – direct or indirect, the monies go to a pool account from where all spending takes place. This means that regardless of the amount contributed, there isn’t any direct relationship between the payee and the spending.
Companies that invest directly in activities now have a way to see the fruits of their spending. Kizhakkambalam is a GramaPanchayath in the Ernakulam district of Kerala. Kitex Garments Ltd, a listed company and Kitex Childrenswear Limited (KCL), a family concern both have spent their CSR for the development of the village.
In 2016, when Panchayat elections were held, Twenty20 Kizhakkambalam (Twenty20), a charity outfit floated by the Anna-Kitex Group won the Panchayat elections. Think about it, for the first time in history, people’s mandate was won based on spending by a company.
While conflict of interest between politicians and their private enterprises have always been there, there hasn’t been any instance of corporate sponsored candidates winning elections. Since rules are formed by those in power, this can give unprecedented power to make rules that are suitable for the company.
Companies that spend on CSR might choose to create a NGO foundation to which they donate the money. A case in point: Kaveri Seeds.
Kaveri Seeds has donated about Rs. 7.75 cr to a foundation in the name of the promoter, called the Kaveri Bhaskar Rao Charitable Foundation.
While this may sound a little shady, we have to dive in some more.
The foundation was created in the year. The idea was to give it funds so that you don’t have “unspent” amount, but at the same time recognize that you can’t deploy all the funds at one time. The Bhaskar Rao foundation has not spent all the money either – it still has Rs. 6.52 cr. left unspent, but the remaining was spent to set up a school, a borewell, and so on.
Overall, this might not sound that bad, even if it is a conflict. Should the company forcibly donate to general charitable foundations, if it can use the money to benefit a village near its factory? The foundation acts as a buffer. However, if the money were to remain unspent in subsequent years, then we know that the whole CSR piece is useless. And indeed, if the promoters intend to not use the money at all, then we have an integrity issue.
But much of the fault would lie on the government for forcing companies to contribute over and above what they do by way of taxes. Worldwide Corporate Social Responsibility is more about how the company is trying to make the world a better place to live. The force of the act makes it a burden, and then companies end up doing conflicting things like creating non-profit foundations to buffer themselves from actually spending the money.