The Companies Bill 2011 is likely to be placed in the Parliament in the winter session. We may expect that it will be passed, as the Bill incorporates most of the recommendations of the Parliamentary Committee. The Bill approved by the Cabinet is not yet in the public domain. Therefore, we do not know exactly what modifications have been incorporated in the Bill that was presented before the Parliament earlier.
However, we can fairly guess that the provisions related to corporate social responsibility (CSR) has not been modified significantly except that the spending of two percent of the average net profit of the three immediately preceding financial years by specified companies might have been made mandatory.
In the Bill that was presented before the Parliament earlier, the provision is that a company that could not spend two percent of net profit should explain the reasons for the same.
The provisions relating to CSR is applicable to every company having net worth of Rs 500 crore or more, or turnover of Rs 1,000 crore or more or a net profit of Rs 5 crore or more during any financial year. Specified companies will create a CSR Committee of the Board of Directors, which will formulate the CSR policy and will oversee its implementation. The Bill lists out the activities that may be included in CSR activities. The list excludes CSR activities targeted to internal stakeholders (e.g. employees). For example, initiatives to ensure safety and work-life balance of employees are not CSR initiatives, although those are expected from a responsible company.
Some argue that mandating companies to spend two percent of the average net profit of the preceding three years is in the nature of tax on companies.
May be so. But it does not impose a heavy burden on companies, particularly when there is near unanimity that companies should contribute to community development and sustainability, and to improve the living of those who belong to the socially and economically weaker sections of the society.
Therefore, many companies view CSR spending as investment and earn a return on the same in terms of intangible benefits.
The benefits of making CSR spending mandatory is visible in public sector enterprises (PSEs). Under the Department of Public Enterprises' (DPE) guidelines on CSR, profit-making PSEs are required to spend a specified part of their net profit in CSR activities. This requirement has helped PSEs to take a disciplinary approach to CSR activities and their CSR activities have contributed to improve the living of the members of communities around which they operate.
Another significant positive fallout of the DPE guidelines is that the top management of PSEs has become passionate about the projects that the PSE has undertaken.
Thus, the DPE guideline has helped to sensitise the top management of PSEs to their responsibilities towards the members of the communities around which they operate.
Sensitisation to the social needs and sustainable development is essential to make companies responsive to their responsibilities towards the society and natural environment. Companies enjoy control over variety of resources (e.g. human, technical and physical), in addition to financial resources. Therefore, CSR does not end by allocating funds to CSR activities. Companies should use other resources also to identify and deliver CSR projects. For example, they should involve employees in identifying and monitoring implementation of CSR projects. This will also strengthen engagement with stakeholders because employees will interact with target beneficiaries in deciding how to spend the allocated funds.
The greatest challenge before the CSR Committee will be to develop the CSR culture within the organisation. When I talk to senior executives who manage CSR activities in companies that are respected for their CSR initiatives, I see a huge disappointment on their faces because they could not channelise passion (for CSR activities) at the top level to middle and lower levels of management and other employees.
In absence of sensitisation of employees to the responsibilities of every citizen to contribute his/her might to make the living of marginalised population of the community better, the full benefit of CSR will not be achieved.
Luckily now, CSR has transgressed from a 'fashion statement' to a 'serious initiative'. We may hope that the CSR committee of the board will take special initiatives to sensitise employees.
CSR committees should also revisit the widely accepted argument that CSR strategy should be linked to the business strategy to make CSR a business case. It might not be the case in the changed environment. I believe that the enactment of the Companies Bill 2011 will add significant momentum to the CSR movement in India.
E-mail: email@example.com Affiliation: Professor and Head of the School of Corporate Governance and Public Policy, Indian Institute of Corporate Affairs, Manesar