COMMENTARY

Indias 2% CSR Law

The First Country to Go Backwards
Arun Maira

Business persons have always been concerned with their own ends, but multiple pressures from society and polity over time have forced them to sit up and worry about their means of prot as well. The need today is genuine business responsibility and societal trust in business. Mandatory corporate social responsibility may prove inadequate to inculcate either. The new legislation to mandate expenditure for social causes is both meagre and one whose time had long passed almost as if India has progressed, but backwards.

he new Indian Company Law that received the presidents assent in August 2013 includes a novel provision which mandates that companies spend 2% of their prots on corporate social responsibility (CSR). Expectedly, there is a buzz about matters of detail, such as what will classify as genuine CSR expenditure and how will it be certied. CSR consultants are emerging as champions of this provision, seeing new opportunities for themselves. Philanthropic trusts, as well as politicians sense opportunities to cajole corporations to direct CSR funds towards their corpuses and pet causes. This legislation is a novelty no doubt. The critical question must be, is this a good novelty or a bad one. The impact of this rst-in-the-world national legislation can be examined from two perspectives: looking at the woods or the trees. Or, using another metaphor: how the deckchairs must be arranged now, rather than what effect this legislation will have on the direction of the ship. The buzz about what the 2% can be used for is a buzz about the arrangement of the deckchairs. Whereas we must examine the effect this mandatory expenditure of 2% of prots will have on the direction we want the ship to take the improvement of genuine business responsibility and societal trust in business. Innovation of Institutions Douglass C North received the Nobel Prize in economics in 1993 for his work on the development of institutions and their role in human progress. North dened institutions as the humanly devised constraints that structure political, economic and social interactions. Constraints, he said, are devised as formal rules (constitutions, laws, property rights) and informal restraints (sanctions, taboos, traditions, codes of conduct).
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Arun Maira (arun.maira@nic.in) is a member of the Planning Commission of India.

Economic & Political Weekly EPW

The story of the progress of humanity is a story of evolution of new institutions. New forms of political institutions have evolved over time to provide societies with more effective and more equitable governance: from tribal chieftains and their councils, to hereditary monarchies that provided more stability along with bureaucracies to manage state affairs, to parliamentary democracies. New economic institutions have improved the efciency and scale of economies: from barter, to money, credit and banking, to the invention of limited liability corporations in the 17th century which have become the principal institutions propelling the growth of capitalist economies. Institutions are the vehicles with which humanity achieves its aspirations. When the conditions in which human societies must sustain themselves change, or when new aspirations arise, the evolution of new institutions becomes necessary. John F Kennedys call in 1961 to America to put a man on the moon stirred the nations imagination. The objective, which seemed way beyond reach when he announced it, was reached within a decade. It was made possible with the development of vehicles that could operate in the rareed atmosphere of space. Aeronautical technology had come a long way since the design of the plane the Wright brothers had own for just 300 yards to the amazement of the world in 1903. When Kennedy made his speech, jet planes were ying across oceans. But the conditions in space are very different to those in the earths atmosphere. Therefore, the mission to the moon required the development of radically new vehicles that could operate in those conditions. Just as aircraft designed for atmospheric ight cannot operate safely or at all in open space, similarly, since the conditions in which human institutions are operating have changed dramatically in the past two decades as I will now explain, the design of institutions must also be changed to suit these conditions. A storm is buffeting political and economic institutions in the 21st century. This storm has been caused by the recent collision of four forces that had been gaining strength for some time. They
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COMMENTARY

are: capitalism and free markets as the way to organise economies; democracy and the principles of human rights as the way to organise societies; the growing awareness of the limits of the earth to support the human economic enterprise as presently conducted; and an explosion in the availability of information to people everywhere through technologies of communication and digitisation. The ideas of capitalism and free markets have been around for many centuries, more so since the time of Adam Smith in the 18th century. Principles of universal human rights have gained strength in the last century, and some were expressed as Millennium Development Goals at the advent of the new millennium. In the last two decades awareness of the potentially catastrophic consequences of climate change caused by human activity has become widespread. And access to information, with the internet, mobile communication devices, social media, etc, has exploded in the last five years. The Business of Business The East India Company, established in 1600 AD, was one of the first limited liability corporations in the world. Its

owners contributed capital for the voyages of the companys ships to the East and, later, for its trade ventures in India. The owners shared the profits of the ventures amongst themselves. The reports of meetings of the Companys Board in London show that the directors were only concerned about calculating the profits and their distribution amongst the shareholders. They seemed hardly aware of the violence and corruption in the conduct of their employees in India. What the companys employees did to make the profits for the owners was of little concern to them. The tenet driving the conduct of the East India Company was the business of business must be only business. The rest was none of their business. The resentment of Indias people to the conduct of the East India Company led to the War of Independence in 1857. Combined with the reactions to the conduct of the East India Company of high-minded societal leaders in Britain, it resulted in the British government taking over the Companys affairs in India. However, the principle that the business of business must be only business has continued to guide corporate conduct into the 20th Century, especially in

the Anglo-Saxon world, reinforced by the philosophy of Nobel Laureate Milton Friedman and the Chicago School of Economics. The responsibility of the board of a company, according to this philosophy, is to ensure that shareholder value is increased and that disbursement of profits to the shareholders is equitable. Many US-based business cor porations amassed huge profits for their principal owners in the 19th and 20th centuries, some of whom created trusts in their names that have gone on to do excellent philanthropic work. However, the damage that some of these companies had done to the environment and communities in the course of making their profits, as well as societal and political reactions to their monopolist and corrupt practices, led to the creation of many laws to constrain corporate conduct. By the end of the 20th century, the world had changed dramatically compared to the conditions in which the East India Company had operated and even the conditions in which 20th century corporations have operated. The forces mentioned before of an increasing awareness of fundamental human rights, realisation that economic activity was damaging the environment too much,

The Adivasi Question

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september 21, 2013 vol xlviii no 38 EPW Economic & Political Weekly

COMMENTARY

and the ubiquity of information available to citizens have begun to put great pressure on corporations to change their ways, even preventing many corporate projects from proceeding. Society has begun to demand a new code of business responsibility in return for granting corporations their licences to operate. Powered by global communication networks, this demand has grown simultaneously in both the developed and the developing world. The context in which corporations must now operate has changed dramatically. Therefore, the concept of what their responsibility is to society and what their governance practices should be must change too. The business of business can no longer be just business. New institutions are required. A new form of the business corporation must evolve. International Initiatives Many innovations in business-governance practices are evolving. The damage, or benet, for society and the environment is caused by a companys operations and products. What it does afterwards with a portion of those prots to repair the damage caused can only be a small token. Therefore, societal attention is shifting from how business prots are used after they are made to how the prots are made in the rst place. An exaggerated example will help to explain the new concept of business responsibility that leaders are now promoting. There is a large demand for hard drugs in many societies. A businessman can seize this opportunity and produce and sell such drugs to make large prots while damaging many lives in the process. He may then use a portion of the prots, even exceeding 2%, to set up the worlds best clinics to rehabilitate drug addicts. By spending this money on a very worthy cause, has he fullled his CSR? Societies are increasingly demanding explanations of how the 100% of revenues were produced, and not the glowing accounts of the small percentages of prots that were spent on CSR. Prot is a small fraction of the revenues and costs of a business, perhaps no more than 10% in most cases. Therefore 2% of prots on CSR will be only 0.2% of a companys
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revenues. Spending 0.2% of revenues on CSR is the arrangement of the deckchairs on the Titanic. The 100% of the revenues is the impact of the course of the Titanic on the environment and the communities through which it traverses. Socially responsible corporations in the 21st century must account to society for the impact of their operations and products on the health of citizens and on the condition of societies and communities. Spending 0.2% of revenues (or 2% of prots) on CSR is no longer an acceptable way to win societal trust. In response to the need to account to society, and not just to shareholders, several concepts have emerged in the last 20 years, such as the Triple Bottom Line and Shared Value. The concept drawing the most global support is the UNs Global Compact which is completing its 10th year in 2013. Started by Ko Annan, then the UN secretary general, it is the only UN organisation that does not have any governmental representation. It is a voluntary organisation run by business leaders from around the world along with representatives of civil society labour unions, environmental groups, Transparency International, etc to institute a universal corporate code of conduct. These corporate leaders rst focused on environmental impact of businesses, to which soon was added the determination of social and community impact of businesses, and then was added the impact of business conduct, through corruption and lack of transparency, on the fabric of polities and societies. The principal thrust of the Global Compact is to encourage and enable businesses to strengthen their compact with society by transparently reporting the impact of their operations and products, followed up with discussions with stakeholders on these reports. International communities of Global Compact members transfer good practices in these matters around the world. Side by side with the development of norms of reporting to and engaging with stakeholders, several formats for reporting the impact of businesses have been developed, such as the triple bottom line mentioned earlier and also an ISO (International Organisation for Standardisation) standard. The Global Reporting
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Initiative (GRI) is emerging as the most accepted framework, and it has tied up with the UN Global Compact. Voluntary Guidelines Over the last few years, the Indian Institute of Corporate Affairs, GIZ (the German Society for International Corporation), and Indian business associations have carried out a systematic process of consultation with Indian businesses to develop a code of voluntary conduct in line with the principles of the UN Global Compact and GRI. Thus the National Voluntary Guidelines have been created. In fact, these are mentioned in the new Indian Company Law, but only as an idea, not as a mandate. Denmark was the rst country to have given 21st century corporate-reporting requirements some force of law. India could have been the second. Voluntary, if not mandatory reporting of social and environmental compact is the right idea for 21st century corporate governance. It also ensures that boards are managing 21st century risks to their shareholders by assessing the corporations impact on the environment and society and possibilities of blowbacks on the corporate reputation. Several of the worlds largest nancial institutions have adopted the Equatorial Principles, a framework for companies to assess and improve their performance regarding the impacts of their operations on the environment and communities. Similarly, Securities and Exchange Board of India had proposed that large companies on the stock exchange must adopt the National Voluntary Guidelines. Unfortunately, these National Voluntary Guidelines, which would have put Indias institutions of corporate governance in the forefront with world leaders, have been given short shrift in the new Company Law. They have been drowned by the buzz around the retrograde 2% CSR provision in the law. Yes, India is the rst and only country to have mandated expenditure on CSR, though so many protested. This proves that Victor Hugo may have been wrong. Sometimes, it seems that in India no force on earth can stop an idea whose time had long passed, instead of an idea whose time has come!
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