Nitin Pai / Opinion : The case against mandatory corporate social responsibility

Perspective: 1

Philanthropy is a private matter and must be encouraged but the government has no business intervening in such decisions

"Companies have a social responsibility, but it is not to engage in philanthropy. Rather, their fundamental social responsibility is to generate wealth for their shareholders in a law-abiding, ethical and sustainable way"

To mandate that private firms donate a part of their revenues to charitable causes is to profoundly misunderstand both the social responsibility of corporations and the meaning of the word donation.

Yes, companies have a social responsibility, but it is not to engage in philanthropy. Rather, their fundamental social responsibility is to generate wealth for their shareholders in a law-abiding, ethical and sustainable way. When they do that, they generate surpluses for society, provide consumers with goods and services that they need, create employment, purpose and dignity among workers, and strengthen the nation. To the extent that they do this, they have completely discharged their corporate social responsibility. So let’s be clear: a profitable, well-run corporation does more for India and its people than any charity could possibly do.

What about social welfare, help for the needy and worthy causes that need financial support? If the issue involves providing public goods like education, public health, safety and environmental protection, what are taxes for? It is for this purpose that we pay taxes, not for the government to pour more money into loss-making airlines, run soap companies, employ a salt commissioner and subsidise the undeserving in numerous ways. Sure, even the most fiscally responsible governments cannot cover all the gaps, which is where philanthropy comes in. But philanthropy is a private matter—it is up to the individual to decide whether, how much and who to give to. The government can encourage this—through tax deductions, public acclamation and moral suasion—but has no business intervening in those decisions. In other words, shareholders and employees, as individuals, should be giving money to causes that they like. The right role and the right balance between corporate profits, government taxes and individual charity promote social welfare.

Which is why mandatory CSR is a terrible idea, born out of the Congress Party’s distrust and misunderstanding of markets and capitalism. To compound that, as the Modi government has now done, with forced expropriation of unspent funds and the introduction of jail terms for non-compliance is even worse. The correct thing to do would have been to do away with mandatory CSR, and instead lower corporate taxes, and if need be, introduce tax deductions for certain activities that the government wishes to promote.

"The mandatory CSR regulations never made sense to start off with. They have now become obligations that will add to the already stifling compliance burdens that companies face. They will only get worse. To what end?"

The only good reason I can think of to encourage CSR is to allocate funds into activities that a government of a low-income democracy cannot. Faced with immense developmental challenges, our governments cannot easily justify allocations for world-class art galleries, museums, theatres, sports facilities, research institutions and so on. Yet, without aesthetics, arts, sports, science and cultural life, India will remain poor in other sense of the word. Poverty is not merely about lack of income, it is also about a lack of dignity. We will remain poor if incomes improve, but dignities do not. That is where individual philanthropy and CSR can be useful — they can support causes that democratic politics won’t allow the government to.

However, if you look at corporate India’s CSR allocations, you’ll find the bulk of it going into education, health, rural areas, environment and so on. The point is not that this money doesn’t help — it does make a difference to the lives of the beneficiaries — but that it is like a flea riding on the back of the elephant. A few thousand crores of CSR money over and above hundreds of lakhs of crores of government expenditure for the same purposes. Does an extra one-tenth of a decimal point make a difference to the big picture?

Corporate executives are often unable to decide on the best social use of CSR funds because they are not equipped to do so. Nor should we expect them to, for their job is to run companies and create wealth. We can’t blame them for buying into the anti-poverty narrative and allocating CSR funds into ‘safe’ activities, the equivalent of “nobody gets fired for buying IBM” logic. The UPA government must be blamed for prescribing what activities constitute CSR and what do not. India first legislated that the flea must follow the elephant. With this year’s changes to the law, the government will grab errant, lazy or adventurous fleas and force them to sit on the elephant.

Do not get me wrong. By using the flea metaphor, I do not intend to demean CSR contributions or the causes they support. Rather, I am using it to give you a sense of proportion. The same flea can be quite a large creature if we look at it at a different scale: a few thousand crore rupees could create Olympic athletes, enduring cultural institutions and beautiful public spaces, things that enrich India.

The mandatory CSR regulations never made sense to start off with. They have now become obligations that will add to the already stifling compliance burdens that companies face. They will only get worse. To what end? Why choose such an expensive way to launder our conscience when simpler methods—like reducing taxes to promote growth—have proven to be a lot more successful in improving the lives of our people?

Perspective: 2

CSR: Should it be Mandatory?

India has made Corporate Social Responsibility (CSR) spending mandatory by law. New amendments to the Company’s Act make it impossible for companies to escape CSR. Non-compliance can even attract a jail term. Is this move in the right direction? Is coercion of what is essentially a philanthropic activity in the right spirit? NDTV held a debate on its We The People programme on the subject, anchored by Sarah Jacob. Abridged version of the debate....

"I think we should exercise our generosity muscle much more. The government has decided to tax the super-rich with 42.7% tax, people will feel jittery. Tax on great wealth is fine, but what is the right amount? It should also spur social generosity, especially when governments cannot solve all the problems"

- Rohini Nilekani

Nitin Pai: Co-founder & Director, Takshashila Institute, Independent Centre for Research and Education in Public Policy.

Harsh Mander: Socialist, Columnist, author of Looking Away: Inequality, Prejudice and Indifference in New India

Rohini Nilekani: Former journalist, Writer, Philanthropist, Co-founder and Director of EkStep, the education non-profit; Founder and Chairperson of Arghyam, a foundation that strives to provide safe sustainable water for all.

Gurcharan Das: Author, commentator; Former CEO, P&G India

Naina Lal Kidwai: Former HSBC Chairperson; Former Chairperson, Indian Chamber of Commerce and Industry, head of India Sanitation Coalition

Pushpa Sundar: Development specialist, founder director of Sampradaan, Indian Centre for Philanthropy

Madhuresh Kumar: National Convener of the National Alliance of People’s Movement in India.

Ashwani Dubey: Lawyer, political activist from the BJP.

Sarah Jacob: India is the first country to make CSR spending mandatory by law. New amendments to the Company’s Act make it impossible for companies to escape CSR. Under the Act, companies earning a profit of over five crores, a turnover of 100 crores or net worth of over 500 crores are required to spend at least 2% of their three-year annual average net profit towards CSR activities.

Any unspent amount of the mandatory 2% for CSR activities will not be allowed to be carried forward. It has to be deposited into an escrow account and spent within three years from its transfer, failing which, it will be put into a fund - maybe even the Prime Minister’s Relief Fund.

The government also plans to put a penal provision in the Companies Act in case of non-compliance, which could include a three-year jail term for officials and companies that fail to spend CSR funds in any given year. The government says this law will force companies to make a real contribution to India’s challenges; it will release much-needed funds for social development, while critics warn of a tick-box mentality. Will this make corporate India wake up to its wider social responsibility? Or is it another utopian idea hijacked by political interference?

Sarah: Rohini, you have contributed enormous sums to community development from your personal wealth, that is post-tax wealth but where do you stand on the mandated spending as envisaged in this new Company’s Bill?

Rohini Nilekani: The government stands to lose some public trust. To make something like this mandatory with even jail terms is stretching the idea of giving back too far. It will just create fear; it will create more bureaucratic processes in a country burdened by so many compliance issues. The minister has said that they will be re-looking at it, so I do hope that they do it quickly.

Sarah: What is the difference between personal philanthropy and CSR? Apart from a few examples like Azim Premji, Kiran Majumdar Shaw, you; the contribution of India’s richest to philanthropic activities has grown at a much slower pace than the increase in their wealth.

Nilekani: True, I think we should exercise our generosity muscle much more. The government has decided to tax the super-rich with 42.7% tax, which people will feel jittery. Tax on great wealth is fine, but what is the right amount? It should also spur social generosity, especially when governments cannot solve all the problems. We do need philanthropy risk capital.

Sarah: Mr Das, what will you say here to those who believe that companies have a responsibility?

Gurcharan Das: Philanthropy is a wonderful thing and my initial reaction was that it is a wonderful idea. Then I thought that there is a confusion of roles. Companies manufacture products, creates employees, creates jobs, they creates profits, pays taxes which are spent on education, health, roads, flood relief and so on but the fact is that the shareholders of a company, the ones who invest in your company want a return and; if the shareholder finds out that the company is spending your money in running hospitals and schools, you would worry.

Only three countries in the world have a CSR law in the world, and one of them was the UK. They even had a minister for CSR and then they gave it up because it was not working. One thing I didn’t agree with what Sarah and Rohini were saying.

"Only three countries in the world have a CSR law in the world and one of them was the UK. They even had a minister for CSR and then they gave it up because it was not working. Actually, individual philanthropy has been growing faster than the government spending"

- Harsh Mander

Sarah: Harsh Mander, you disagree with Mr Das…

Harsh Mander: For me, CSR is not about 2% of your profit. It is about four things. First, that they pay labour fairly, according to the laws of the land. Secondly, they don’t poison the air, water, etc. Thirdly, they pay their taxes fairly and willingly, and fourthly, they must take a position on issues in the country. India is passing through a very difficult period.

Sarah: A KPMG survey found that 72 of India’s 100 largest companies failed to spend 2% before it was mandatory. There were many reports of cheating the system. So can the government really be blamed here?

Nitin Pai: Of course, the government has to be blamed, both the UPA government which started this boondoggle and the Modi government because they don’t understand what CSR is. I live in Bengaluru; around me, there are hundreds of companies creating jobs, improving livelihoods and in fact closing that inequality which you are talking about. For me, CSR means to operate in a law-abiding manner, create profits and put money in the pockets of shareholders and then the shareholders give money to the causes they want. And the way to get more people to give to charitable causes is to reduce taxes, to make compliance easy. The government takes Rs.30 out of every Rs.100 as a tax deduction at source. We have a situation where the government has a claim on everybody’s money; how do you expect people to give money to charitable causes when the government has dried the whole pond? Both UPA and NDA governments are at fault, the mindset is definitely socialist, it does not understand the beneficial uses of capitalism, it does not understand the roles that the market play in national development, it does not understand the roles that capitalism and markets play in reducing inequality.

"The government takes Rs.30 out of every Rs.100 as a tax deduction at source. We have a situation where the government has a claim on everybody’s money; how do you expect people to give money to charitable causes when the government has dried the whole pond?"

- Nitin Pai

Sarah: The original idea of CSR was that the company would have the freedom to decide where it is going to spend its money. And you would come up with out-of-the-box ideas that the government is not able to do on its own, so companies can shake things up and find new solutions to new age problems that India is facing...

Pai: Do you really need to mandate CSR in order for them to give money? Even before the CSR law came, many companies were actually giving large sums of money to social development causes. We have no claim on private money. The nation does not have a claim. On the other hand, do you know how much the government spends on rural development, health, education, etc.? It runs into lakhs of crores. The entire CSR budget of companies is a few thousands of crores. By mandating CSR in the way it has, by dictating the kind of causes that qualify for CSR, the government has done badly for other causes. Why don’t we have world-class art galleries, world-class public places, world-class musical establishments… these are the kinds of causes for which corporates could have given money to. Now because of the ring-faced basket of what qualifies as CSR and what does not, money is not going into the other causes.

Sarah: Madhuresh, you disagreed to the point where Nitin Pai said that ‘this money does not belong to the people and the government cannot decide how a company should spend their money’.

Madhuresh Kumar: There is outrage about CSR money. But is there outrage against corporations that are doing bad jobs and do we hold them accountable? There is zero conviction against violations of the Air Act, the Water Act and the Environmental Pollution Act. There are criminal provisions but there is zero conviction of any factory manager because they have polluted the land, water and forest. If you claim only profit, then you also have to be responsible for respecting the laws.

Sarah: Naina Lal Kidwai, does the government have a misplaced priority?

Naina Lal Kidwai: What really has happened so far is compliance. We may be too narrow in the way we are looking at this. The focus around the world right now is on the ESG (Environment, Social and Governance).

When I chair the water mission at FICCI, we look at water stewardship and this does not get covered under CSR. What is water stewardship? I, as a company, must use water efficiently, must make sure that it is in full compliance but I am also responsible for the resources outside the fence. A company doesn’t necessarily do this because there is a CSR Act. Companies do this because they know they have to have communities around their factories on their side. If they don’t, factories are known to shut down because of problems and disturbances. The issue is around the responsibility, social responsibility, environmental responsibility, and we have to widen the responsibility of companies beyond doing CSR.

Sarah: Mr Dubey, has the government just gone too far this time?

Ashwani Dubey: It is an excellent move because the people who have given their land, who have contributed in the development of the country, ultimately don’t get anything. Their lands are acquired under the Land Acquisition Act, at that time they are paid whatever the amount is fixed by the government. After that industries make money out of that but they leave out those people despite signed agreements that they will ensure that good health is given, education is given, hospitals are given. Earlier, discretion was given to the companies to spend the CSR amount. That discretion was not utilized in a fair and reasonable manner. This 2% is expected to be utilized for the development of down-trodden people; to the people who have given their land.

Sarah: You are saying that the money will be spent on the development of the nation. I have some statistics which say that in 2016 only `46 crores were spent on the conservation of National Heritage Category of CSR. Suddenly, in 2017, it jumped to 155 crores. That happened because five PSUs gave money to the Statue of Unity which is the government’s pet project. How is this leading to what you have just said about the improvement of the lives of the underprivileged?

Dubey: The latest amendment in the Companies Act says that the District Magistrate of the area shall ensure that most of the amount is spent around the area where the industries are situated. Every industry will have a CSR department. If the industries fail to utilise that amount for that particular period, then the company and the officers will be penalised, and the penalty starts from Rs.50,000 to 25 lakhs and three years of rigorous imprisonment.

Sarah: Companies using gaushalas have peaked in 2017-2018. Schedule 7 of the Companies Act says animal welfare activity is one of the categories on which you can spend CSR money. Child mortality got no funding. Eradicating hunger and poverty got six per cent of the total CSR expenditure. We have forgotten the idea behind this and we just want to gain brownie points with this amendment.

Dubey: It is very early to comment on a law which has been recently given a nod by the Parliament. It is a 2019 amendment. It is a great endeavour by the government, is in the larger interest of the public and is a noble initiative. It is to be spent on the improvement of the people who have given their lands in the development of the nation.

"The new amendment says that the unspent amount will be put into various funds like the Prime Minister’s Relief Fund and some of the other funds they have mentioned. There is no guarantee that it will be spent more creatively with more accountability, etc."

- Pushpa Sundar

Sarah: Pushpa Sundar, is this a great idea or has it been hijacked by political interference?

Pushpa Sundar: I am in favour of CSR. I don’t agree that a company’s only responsibility is to its shareholders. Because the company makes a profit only because of the help of the society in which it is located. Economic and otherwise, it draws its labour from there, it draws its consumers from there. I think they owe something to the society in which they are located and need to give back. But it is a 360-degree concept and I disagree with the way it has been interpreted under the Companies Act. The government has focused on a very limited aspect of CSR. They have interpreted it only as financial allocation. The responsibility aspect or good behavior of a company has been totally lost sight of. The flaw really lies in the Company’s Act treating CSR as an ‘activity’ and not some kind of good governance or good behavior. Increasingly, CSR funds are being used by the government for its political purposes like the Statue of Unity. Even the CAG had pointed it out, that this cannot be considered as proper spending under the Heritage provision. Now they have spent on gaushalas, animal welfare is a proper activity under Schedule 7.

The new amendment says that the unspent amount will be put into various funds like the Prime Minister’s Relief Fund and some of the other funds they have mentioned. There is no guarantee that it will be spent more creatively with more accountability, etc. There has never been any public disclosure of what these funds are being used for.

This amendment is not correct. Also, how many people will they send to jail? Typically a CSR is implemented by a number of people at different levels. How are you going to fix accountability? The lowest person in the hierarchy will go to jail.

"The focus of the government should be on investing; the biggest investors in the market are organizations like LIC, GIC, government owned bodies. There is in fact merit in even looking at the way mutual funds invest. The principles of ESG are, to be the drivers of where financial institutions put their money"

- Naina Lal Kidwai

Sarah: Rohini, initially, the law was that companies have to show that they have spent this money fruitfully within a year, now it is three years. Do we need streamlining structures, proper execution and social sector capacity, which first need to be built up?

Nilekani: It is not like companies necessarily trust our civil sector entities. So there is a lot of work to be done to build trust between these two and then to build a capacity of social sector organizations to receive that kind of capital and spend it well. But anyway, CSR law is tax by other means. I would not be surprised if companies say, why I don’t give the funds to Prime Minister’s Relief Fund and not come across societal problems? One interesting thought has occurred to me is that if you are going to do this 2% cess, why don’t you say that over five years you can use this 2% to clean up the act inside the fence, to improve the way you treat labour, to improve your management of natural resources inside and outside, to improve the way you deal with water, otherwise government will tax it? Look at it in a creative way and do not criminalize it. You will definitely be catching the wrong people. It is very hard to fix accountability.

Sarah: Naina Lal Kidwai, Azim Premji, probably India’s biggest philanthropist, also said 2% on CSR is a lot, especially for companies who are trying to scale up in these difficult times.

Kidwai: There are companies who spent more than 2% and have been spending 2% well before these rules came into place. In fact, that 2% is well-achieved if we can indeed encourage the ESG principles of it being environmentally right, socially right and governance- right.

The focus of the government should be on investing; the biggest investors in the market are organizations like LIC, GIC, government-owned bodies. There is in fact merit in even looking at the way mutual funds invest. The principles of ESG are, to be the drivers of where financial institutions put their money. This is happening abroad, companies that don’t abide by the right principles of ESG do not get money, which doesn’t help their share price up. We are talking about listed companies where these norms have been applied. Rather than a whip which is very narrow by definition and tough for compliance, let us look to drive funding in a way that the government itself can look at the way investing happens. That will bring change faster and quicker because companies will be vying to demonstrate that they are socially responsible, they are ticking the boxes in terms of the community they serve around them.

Sarah: Nitin Pai, will you respond to our panellist who pointed out a basic flaw in the idea that companies aren’t responsible to the people because they are using resources that are affecting each and every one of us…

Pai: Nobody has an argument which says that the company should not follow the law. Compliance with laws and regulations is mandatory, it is not optional. As far as using resources is concerned, do you know that corporations pay huge amounts of money, much more than the consumers pay for the resources that they use? Whether it is electricity, water or real estate?

We grow as a nation when there is a balance between the government, markets, and society. The government’s job is to provide basic services, across the board, in a uniform non-discriminatory manner. This includes health care, primary education and so on. The role of the corporation is to generate profits and wealth for the economy in a law-abiding, sustainable, ethical manner. The role of an individual is to close the gaps which the government and the markets cannot, this includes private charity, philanthropy and so on. We should strive to have a balance. What this mandatory CSR has done is that it has distorted that balance, it is making the corporations do what the government ought to do.

I think Mr Dubey said there should be penalties for companies that don’t do their job. Are there penalties for government employees who don’t do their jobs properly? We are spending Rs.5000 crores on Air India; we have hundreds of PSUs wasting money. Taxpayer’s money is being funnelled into these loss-making enterprises and then we say, ‘hey why don’t you pay more money into CSR so that we can do the necessary thing’? In fact, the first charge of the government budget should be on these essential items, and whatever is left, then you can do CSR to support Air India.

"Firstly, I do believe that the company has more than one stakeholder, which is the shareholder. It has employees, it has a responsibility towards its employees. Secondly, I believe very firmly that the purpose of a corporation is to create its own products and do its own job and in the process of doing so, it creates employment and taxes which make the government’s spending possible"

- Gurucharan Das

Das: Firstly, I do believe that the company has more than one stakeholder, which is the shareholder. It has employees, it has a responsibility towards its employees. Secondly, I believe very firmly that the purpose of a corporation is to create its own products and do its own job and in the process of doing so, it creates employment and taxes which make the government’s spending possible.

Why I have got converted to CSR? It goes against my conviction. I have met a lot of people, I have been on a lot of boards and have seen people spend money. And also, the causes that I am interested in, the money is coming from CSR. What I am now convinced is that actually, companies are doing a far better job spending their money, they are not treating it like taxes. The projects done by companies versus those done by governments are far more efficiently done, there is a greater passion. The mistake we are making in the panel is that the people who hate business and capitalism, are the ones who think everyone is a crook and people who are capitalists or who believe in market outcomes think that the government is bad. The reality is that a lot of companies are doing excellent work in CSR.

Sarah: Harsh Mander, how can businesses do good through CSR?

Mander: I have to say to Mr Pai, India has one of the lowest tax to GDP ratios in the world. Much of our taxes are indirect taxes on the poor and not on the super-rich, the 1.5% on the wealth of the dollar billionaire is enough to send every child to school. The second factor, the increase in the wealth of the top 1% in India in 2017 was larger than the Union Budget, it is a huge amount of wealth that we have to tax to ensure health care and education are done properly. But I don’t want philanthropy to be supervised by the state.