CORPORATE SOCIAL RESPONSIBILITY IN INDIA
Author: Nikita Motwani
The Latin phrase ‘Quid pro quo’ which means ‘something for something’ is the founding principle for all symbiotic relationships. It is evident enough that there exists a symbiotic relationship between corporate businesses and the society in which these businesses operate and it is this founding principle of symbiotic relationship that gives birth to the concept of Corporate Social Responsibility (CSR). Though profit-making and social responsibility may seem oxymoron this traditional outlook of associating business organizations solely with profit maximization is no longer prevalent. The world is changing and so is changing the perception of corporate houses. Corporate organizations are now cognizant of the fact that their long term growth and survival depend on the well-being of the society in which they operate.
Taking into consideration what is stated above, this research paper aims at understanding the concept of corporate social responsibility, the evolution of CSR in India, and the regulatory framework prescribed for it. The paper also seeks to understand the growing importance of corporate social responsibility and the challenges that hinder the application of CSR activities and also recommend suggestions for fostering the application of CSR to ensure effective and efficient results. Further, the paper briefly discusses the relative importance of CSR in developing countries.
Gone are the days when profit maximization was the only aim of Business organizations. The simple buying and selling of products and services without paying any regard to social responsibility are no longer enough for the corporate world. Business organizations operate in a society under a given environment, use its resources in form of raw materials, labor, and capital and therefore it becomes all the more important for the business organizations to contribute towards the society in which they operate and be responsible for the environment that in turns help them. This interdependence generates the concept of Corporate Social Responsibility (hereafter referred to as CSR). The concept of CSR rests on the principle of ‘Quid pro quo’ which means ‘something for something’. To ensure the long term survival of the organization, it is equally important to ensure that the operations are carried out in an economically, socially, and environmentally responsible manner.
CONCEPT OF CSR
CSR as defined by World Business Council for Sustainable Development (WBCSD) is “the continuing commitment by business to contribute to economic development while improving the quality of life of the workforce and their families as well as of the community and society at large”.
The concept of CSR insists the corporations undertake the responsibility of investing in socially and environmentally relevant activities to interact and operate with factors like environment, consumers, stakeholders, employees, communities, and other factors of the public sphere. It obligates the organizations to undertake such corporate behavior, policy decisions, and actions that focus on the inclusion of public interests, objectives, and values of our society and tend to have a positive impact on the society and environment in which the business operates.
When resources are scarce and needs & wants are unlimited, the notion of sustainable development becomes important and necessary. To ensure sustainable development, it is imperative to complete the cycle which states that something that comes from people should go back to the people. About this sustainable development, John Elkington, a British entrepreneur, consultant, and author, coined the term Triple Bottom Line, a theory that emphasizes that companies should pay equal focus on social and environmental concerns just as it does on profit-making. So he suggests that instead of having traditional one bottom line that extends to only profit, a corporation should have three which expands to People, Planet, and Profit. In other words, a corporation should undertake fair and beneficial practices towards labor and the community and the region in which the business is conducted; it must adopt sustainable environmental practices and undertake activities which benefit the natural order or at least do not harm the environment, and profit that is enjoyed by both the organization and the host society. The concept of CSR is based on this Triple-Bottom-Line approach.
EVOLUTION OF CSR PRACTICE IN INDIA
Social responsibility of business organizations is not an alien concept but was practiced in different forms such as philanthropy, charity, and sponsorships. Taking into the account the historical development, political and economic environment, the development of CSR practice in India can be divided into five phases:
Phase I (Until 1914): Charity and Philanthropy were the key aspects of CSR during this phase. Family values, culture, religion, and the industrialization process shaped the CSR activities in this phase. The welfare of the society, the building of temples, helping poor in times of drought and famines were some of the activities conducted in this period. Charitable foundations, educational and healthcare institutions were set up by pioneers of industrialization like Tata, Birla, and Bajaj to promote the concept of CSR.
Phase II (1914-1960): Social development was the main focus of this phase. In the time of struggle for independence, Mahatma Gandhi’s theory of trusteeship and his appeal to wealthy industrialists to contribute their wealth for the benefit of society is what aided the socio-economic development during this period. Abolition of untouchability, rural development, education, and women empowerment were some of the activities that were sought.
Phase III (1960-1980): This phase saw CSR under the paradigm of the mixed economy which saw the emergence of Public Sector Undertakings (PSUs) for better wealth distribution in the society. Policies of licensing, taxes, and restrictions on the private sector resulted in corporate malpractices which in turn triggered the legislation on labor and environmental standards. Since the success rate of PSUs was limited, the phase also witnessed the growing contribution of the Private Sector in socio-economic development.
Phase IV (1980-2013): The transformation of CSR, from a philanthropic approach to business strategy or approach, was the key aspect of this phase. The New Economic Policy of 1991 which aimed at Liberalisation, Privatisation, and Globalization led to a boom in economic growth and increased momentum in industrial growth. Indian companies could now contribute more toward social responsibility. What was earlier thought to be just a philanthropic activity has now turned into a coherent, sustainable, and accepting business responsibility and strategy.
Phase V (2013 onwards): The increasing importance being attached to CSR led to this phase when the Government made CSR spending mandatory for sizeable firms under Section 135 of Companies Act, 2013.
REGULATORY FRAMEWORK IN INDIA
In 2009, the Government of India attempted to recognize CSR when the Ministry of Corporate Affairs issued voluntary guidelines on Corporate Social Responsibility. These guidelines focused on care for all stakeholders, worker’s rights and welfare, human rights and environment, activities for social development, and overall ethical functioning of the business. This was followed by the Guidelines in 2011 known as National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business (NVGs) which set out nine principles. These guidelines urged the corporations to adopt the triple-bottom-line approach to harmonize the interests of the company and the society in which it operates. These guidelines were expected to be followed by all businesses irrespective of their size, sector, or location. These voluntary guidelines then came to be regulated when the Securities Exchange Board of India (SEBI) made it mandatory to disclose the CSR activities in Business Responsibility Reports (BRR) accompanying the Annual Reports for the top listed 100 companies.
India became the first country to make CSR expenditure mandatory for pre-specified corporates with the enactment of Section 135 of Companies Act, 2013. As per Section 135(1) companies accruing net worth of rupees five hundred crores or more, or turnover of rupees one thousand crores or more or a net profit of rupees five crores or more in any fiscal year, are obligated to perform CSR activities. A CSR committee is required to be formulated by the listed companies. The committee shall have a minimum of 3 directors, at least 1 being the independent director. Section 135(2) provides for the disclosure of the composition of the CSR committee by the Board’s Report. Sub-section 3 further provides that such committee shall formulate and recommend to the Board a CSR policy for the company and the activities to be undertaken under Schedule VII for the same; it shall also recommend the amount of expenditure to be incurred on these activities; further, it shall monitor the CSR policy of the company from time to time. In addition to this, sub-section 4 provides that the board of such company as stated in sub-section 1 shall consider the recommendations of the CSR committee approve the CSR policy and shall disclose the related contents on the company’s website. It shall also ensure that the activities included in the policy are undertaken by the company. Finally, Section 135(5) mandates the Board of such company to ensure that the company spends every financial year in respect of CSR policy, at least 2% of the average net profit of the company made during the three immediately preceding financial years. In doing so, preference shall be given to the local area and the areas around it in which the company operates. The company is further required to furnish reasons for the same if it fails to spend such amount.
CSR ACTIVITIES LISTED IN SCHEDULE VII
Schedule VII provides a list of activities that may be included in CSR policies by companies. This includes:
1. Eradication of hunger, poverty, and malnutrition; promotion of health care including preventive health care; aiding sanitation and safe drinking water
2. Promoting education, including special education and employment, enhancing vocational skills, particularly among children, women, the elderly, and differently-abled people and projects aimed at improving livelihoods.
3. Promoting gender equality, empowering women, building homes and hostels for women and children, creating old age homes, daycare centers, and other services for senior citizens, and measures for reducing inequalities faced by socially and economically disadvantaged classes.
4. Ensuring sustainable environment, ecological balance, flora and fauna protection, animal welfare, agroforestry, natural resource management, and maintaining the quality of soil, air, and water.
5. Protection of national heritage, art and culture including preservation of historical buildings and sites and artworks; establishment of public libraries; promotion and creation of traditional arts and crafts
6. Measures benefiting veterans of the armed forces, war widows and their dependents
7. Training and promotion of rural sports, national sports, Paralympic sports, and Olympic sports.
8. Contribution to the national relief fund of the Prime Minister or any other fund created by the Central Government for the socio-economic development and assistance and welfare of scheduled caste, tribes, other backward classes, minorities, and women.
9. Contributions or funds made available to technology incubators located within academic institutions which are approved by the Central Government.
10. Rural Development Projects
IMPORTANCE OF CSR
The importance of CSR lies in the fact that it aims at harmonizing the interests of both- the business organization and the society/community in which it operates. The Corporate Social Responsibility creates a kind of symbiotic relationship between the company and the society and environment in which it exists, while the former depends on the latter for resources and its long term survival, the latter in turn depends on the former for its socio-economic development and sustenance of life. CSR focuses on having such policies and procedures which tend to integrate the social, environmental, ethical, and human factors into the business operations and its core strategy. Application of CSR policies by the companies not only help in upgrading the standard of living of the society, the introduction of more amenities, creating a better and healthier environment, socio-economic development of the community but also helps the company to build goodwill, brand value, loyal employee base, greater acceptance in society, more sales and better financial position. Responsible social behavior also provides legitimacy to the existence of the firm and such firms confront fewer legal hurdles. Better CSR policies also help the company in gaining a competitive advantage over other firms. Apart from this, CSR practice also helps the company in risk management, cost savings, innovation, and better customer relationships. All this in turn helps in developing a sustainable economy and cohesive society. The extension of benefits of CSR policy is multidirectional and this is what enhances the importance of CSR.
CHALLENGES IN APPLICATION OF CSR
The traditional business outlook is focused on satisfying customers through better services and pricing policies. Owing to this, business organizations tend to possess a narrow outlook towards corporate social responsibility and consider it as a side objective and not something of prime importance. However, this outlook fails to take into consideration that a business organization owes responsibility not only towards individual customers but also towards society as a whole. As a result, the economic, social, and environmental development, which are important for the sustainability of corporate business and the society in which the business operates, often get overlooked.
The already less prioritized corporate social responsibility is accompanied by a lack of knowledge and communication on the part of both corporate and community. Business organizations invest less interest and effort in knowing the existing social problems; as a consequence, the little effort that they put in implementing CSR activities goes in vain. On the other side, the community is hardly aware of CSR policies and activities that are undertaken by the companies which in turn make it less receptive and participative in such initiatives. Also, the dearth of non-governmental organizations and other competent organizations that could contribute to the undertaken CSR activities and awareness programs adds to the limited application and scope of CSR in India.
Transparency and trust are of key importance in a symbiotic relationship. However, when one party chooses to be translucent or opaque, this trust between the parties starts to quiver. Such is the challenge posed to CSR when corporate houses choose to hide information regarding their CSR activities, expenditure, and impact assessment. This problem is aggravated when companies start undertaking selective CSR activities and the aim of undertaking such activities change to improving brand value from serving society. Such a challenge dilutes the spirit of social belongingness and leads to an unhealthy relationship between corporate and community.
SUGGESTIONS AND RECOMMENDATIONS
To bring CSR in the mainstream domain and to ensure its proper implementation and effective and efficient impact, the following suggestions are recommended:
• There is a need for change in outlook and how business organizations view corporate social responsibility. Corporate businesses should not view the mandatory CSR as some kind of burden upon them rather they should consider it as a part of their responsibilities which in turn will add on to their well-being. To ensure their and their company’s well-being, these corporate businesses should invest in research programs to know the real existing social problems before investing in CSR activities.
• It is also required that efforts are made by stakeholders, media, non-governmental organizations, and other competent organizations in making the general public and the community aware of CSR policies and activities. The more aware the community is, the greater will be its participation in such programs and initiatives. This will help in changing the community’s perspective towards business organizations which it generally thinks are profit-oriented. Such a change in approach and attitude will encourage other companies to undertake similar activities and contribute to the development process.
• It is also suggested that Government, non-governmental organizations, private and public corporate houses, and people who are supposed to be aided by such activities should pool their resources to enlarge the scope and benefits of CSR policies. Further, incentives and rewards should be offered by the Government to those corporate houses that serve society with their projects and initiatives and encourage them to invest more in such activities. Media should further help these corporate businesses to reach out to people and not just help the community to grab the benefits but also help the businesses to generate goodwill which in turn will motivate them to increase the scope of their initiatives.
• Further it is also suggested that Section 135 should be amended to include not only large scale companies rather all the companies including small and medium-sized companies that are required to undertake CSR activities. However, different provisions may be made for the CSR expenditure depending on the size of the company. Some business houses may even be allowed to undertake CSR activities as per their strengths and the soundness of the business. The inclusion of small and medium businesses will enlarge the reach of CSR benefits. This may even help in extending the scope and benefits of CSR to rural areas.
• The discipline of corporate social responsibility should be included in the curriculum of business schools so that young minds are prepared in advance for future challenges. Not only preparing them but also inculcating in them the importance of striking the balance between business and society. They should also be encouraged to come up with innovative and creative ideas to magnify the scope of CSR.
CSR AND DEVELOPING COUNTRIES
The developed Western countries are often referred to as the architect of the modern form of CSR. This may be true to a certain extent, however, CSR, in its primitive form, has been always present in all countries including developing countries. This is evident from the fact that the interdependence between a society/community and its people is a common characteristic in all forms of countries. The world has undergone various revolutions before it acquired its current status beginning from cognitive revolution to agricultural revolution to the scientific revolution which in turn triggered the industrial revolution and information revolution. While these revolutions occurred at their own pace, all of them bought at least one common realization i.e. one needs to contribute to the society/community in which one lives to ensure development and growth for oneself.
While these revolutions took place, they also bought with themselves the economic, social, environmental, health-related, and industrial catastrophes such as economic disparity, social injustice, racism, casteism, child labor, exploitation of weak, pollution, deforestation, etc. These catastrophes hit developing countries harder than they did to developed countries. However, the ethical and moral values imbibed in the cultural traditions of these developing countries and the socio-political reforms in such countries have helped in combating these calamitous events.
All the developing countries aspire to match the codes and standards of developed countries. With such aspirations, CSR does more good for developing countries than it does to developed countries. Developing countries often struggle with problems such as high poverty rate, unemployment, income disparity, poor education facilities, etc. Therefore, CSR initiatives undertaken by companies in respect of these issues are highly praised by the government and community. Also, companies are well aware of the fact that their growth and survival depend on the development and success of the society in which they operate. Therefore companies in developing countries focus more on CSR activities to match the standards of companies in developed countries and to acquire a room for them in the globalized world. Also, the developing countries representing the most expanding economies reflect the dramatic economic, social, and environmental impact and thus provide a better rationale for focusing on CSR activities in such countries.
The importance of CSR in developing countries is growing rapidly. Not just CSR is narrowing the gap between expectations of the community from corporate houses and the actual industry performance but also it is improving their customer and employment base and also helping them to gain domestic as well as global recognition. Lastly, it should be taken into consideration that developed countries were not developed ever since their inception. It is the realization of performing social responsibility and the common vision for development that have helped in acquiring this status. Such realization and vision can be adopted by developing countries as well to accomplish their aspirations of being developed.
Symbiotic associations are a common phenomenon of nature. The give and take relationship helps in the long term survival of both the parties involved. This lays down the basis for the concept of Corporate Social Responsibility. The concept of CSR is based on the premise that a business organization operates in a particular society and under a particular environment. This corporation depends on this society and environment for its resources, wealth generation, and long term survival. Therefore to ensure that its objectives are fulfilled, it needs to perform certain social responsibilities towards the society and environment in which it operates. The concept of CSR is based on the triple-bottom-line approach which extends to the development of three factors- People, Planet, and Profit to ensure sustainable development.
India is the first country to mandate the CSR policy for pre-specified companies with the enactment of Section 135 of Companies Act, 2013 which comes after the earlier issuance of guidelines in 2009 and 2011. This was done to foster the growth and development of the country which in turn will facilitate the companies to prosper. The benefits of CSR which extend to the economy, society, and the enterprises reflect the growing importance of CSR in contemporary society. However, despite all good intentions, the impact of CSR remains ineffective due to various policy and procedural inadequacies. To ensure the effective application and positive results, proper measures and amendments must be adopted.
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