CSR: A Substitute for the State? A Global Perspective by Alexa Kardos

Since the law introduced new requirements for compliance but didn’t attach any penalty for noncompliance, what are companies doing in response? Has mandating CSR given India a leg up in terms corporate giving and social welfare globally? This piece argues that the absence of adequate sanctions undermines the effectiveness of the 2% requirement of the Companies Act. Seeing that companies who have undertaken CSR programs long before the Act was passed will continue to do so regardless of legislation, and that companies who don’t comply face no sanctions, mandating corporate philanthropy is perhaps no more effective than allowing it to be voluntary. Further, mandating CSR is not a replacement for government social spending—a key ingredient to the success of developing nations.

The lack of effective punishment for companies who fail to meet the 2% requirement was done to ease business into CSR and can be seen as a temporary measure, according to Utkarsh Majumdar, business professor at the Indian Institute of Management. All companies are mandated to have a CSR board, policy, and reporting procedure, and can face government sanctions such as fines for failing to comply, or even imprisonment for nondisclosure; but if companies do not spend the required 2% on CSR, they are merely obligated to explain why they were unable to do so to their shareholders and to the government. Since many companies are comfortable excusing themselves from CSR requirements with some rendition of ‘we are new to CSR and were unable to find our footing,’ there is no incentive to comply with the giving regulation. Noshir Dadrawala, founder of the Centre for Advancement of Philanthropy, calls this the government’s “show-or-shame policy,” in which companies must “show (they) did CSR, or shame (themselves they) could not.” Founder of ZAB & Partners, Bahram Vakil asserts that “down the road each year, (companies) are not going to be able to make the same excuse.” Eventually, the shame that stems from wearing the scarlet letter of not doing CSR, may be pressure enough to compel companies to comply with all aspects of the law. Whether or not this will be the case, Anita claims, “you’ll have to wait and see for another year or two.”

India is the only country in the world where it is mandatory for businesses to engage in CSR. In some countries, like the United States, tax deductions exist to encourage corporate giving, but companies are free to choose the amount and the organization through which to funnel their donations. Despite U.S companies not being legally obligated to donate, the majority of companies still do. According to the National Philanthropic Trust, total corporate giving in 2014 totaled 17.77 billion dollars—a 13.7% increase from 2013. [1]And this giving is not limited to the larger companies—a survey reported by the U.S Small Business Administration suggests 75% of small firms donate to charities each year, that number, averaging about 6% of their profits.[2] Dardawala explicates some of the reasons companies voluntarily participate in CSR, saying, “companies do it because they have found true area surveys that say it attracts good HR, and it sustains good HR. People want to work with companies that are CSR complaint. It gives them a sense of pride, it gives them a (way) to experience something else in the world…like work in communities.”

Some lawyers, such as Anshul Jain, managing partner at Luthra and Luthra Law Offices, see the Companies Act as an “alternative tax, which is being levied on corporations.” The 2015 budget shows that the Indian government is reducing it’s own spending on social welfare programs and perhaps hopes businesses and NGOs can fill this vacuum. A 2014 study conducted by the OCED[3] found that India’s public social expenditure falls short of that spent by other developing nations such as Brazil and China, both of which have seen great improvements in human capital as a result of state led spending. Brazil’s greatest success story in the sector of social welfare is a program entitled “Bolsa Familia,” launched by President Lula in 1993. According to the World Bank, since it’s inception, the program has halved Brazil’s poverty rate, from 9.7% to 4.3%, reaching nearly 50 million people—a whopping 1/4th of the population.[4] A program of this scale would be nearly impossible for a single company, or even a host of companies to implement, reminding everyone of the key role government has to play in social welfare. Without a doubt, companies have a responsibility to sustain and improve the quality of life in the areas in which they work, however, CSR is not a substitute for government investment in the social welfare of its people.

Public Social Expenditure in Brasil China India Indonesia South Africa