On April 1, 2014, the new Companies Act, 2013 came into force—and India became the first country to legally require companies to “give back” to society.
On April 1, 2015, the government will start finding out if any of that actually happened, and if not, why not, as the legal reporting framework requires.
The law made it mandatory for companies that have an annual turnover greater than Rs1,000 crore, or net worth greater than Rs500 crore, or net profit greater than Rs5 crore, to spend 2% of their three-year average annual net profit on corporate social responsibility (CSR) activities starting last year.
But Indian companies largely spent 2014 awaiting regulatory clarity on several unclear provisions in the law, while also preparing to comply.
CSR is actually much more exciting than all this regulatory talk.
Critics argue mandatory CSR is oxymoronic, and a bad idea at a time when economic growth driven by the private sector has been ostensibly pulling millions out of poverty.
Moreover, they add, India’s inherent government corruption and “tick box” tokenistic compliance behaviour could make it nearly impossible for CSR to have substantial positive social impact.
Now there is speculation that the Narendra Modi government’s move towards improving ease-of-business might do away with the 2% requirement, but the Companies Amendment Bill 2014 passed by the Lok Sabha late last year doesn’t officially seem to deal with this (pdf).
Nonetheless, minister of state for finance, Jayant Sinha, last month recommended that corporates engage in CSR. And, although the CSR clause might eventually be watered down for ease-of-business reasons, it is very unlikely to be removed entirely.
But CSR is actually much more exciting than all this regulatory talk.
As economic growth gets back on track—and if as expected the next decade produces unprecedented corporate successes in India—the size and scale of CSR will expand since it is effectively a proportion of corporate profits.
Which brings us to a key question: Whether compliance-driven or responsibility-driven, can CSR be transformational in India?
Organising force
In 2009, India had 3.3 million non-governmental organisations (NGOs), about one for every 400 Indians.
Most are tiny organizations that deal with specific local issues. And while the social sector in India is recognized for its big heart and solid commitment to social justice, it is equally well known for lacking professionalism, efficiency, transparency and accountability.
CSR can bring fresh life into this situation and unlock the sector’s value by organizing it.
NGO leaders will typically treat these traits as good-to-haves, but lack the resources—and often, the will—to implement them. That’s understandable. Consulting firms offer pro-bono consulting services for NGOs, but that too has limited impact.
Larger companies start their own foundations or NGOs in the hope of both doing good and being seen as such, but often end up creating somewhat professional but tiny silos, having little impact in organising the sector as a whole.
But if the social sector remains unorganised, much of its value will remain untapped. And that significantly reduces possible mission-level benefits for both NGOs and government institutions, and the communities they wish to serve.
CSR can bring fresh life into this situation and unlock the sector’s value by organizing it.
CSR funds can be used to create and run high-impact, transparent NGO projects. These high efficiency, technology-driven projects—co-created by corporate donors, NGOs, research organisations and local government agencies—can be transformational in their legitimacy, reach, funding, impact and sustainability.
To ensure maximum impact for every rupee spent, these projects can aim to improve the implementation of often flawed and leaky government programmes, and help create sustainable livelihoods.
Under the law, CSR funds are directly proportional to corporate profits, which are driven by market forces. Therefore well-managed collective CSR efforts will effectively create an elaborate, market-led NGO performance measurement standard, without any added government regulation or cost.
Through this, NGOs get to have social impact; companies enjoy impact and branding; the government receives help in development works; research organisations get access to subjects and data; and, most importantly, the served communities benefit tremendously.
In India, it would be a near miracle if all these happen as described, but the larger point is that CSR does have the potential to create and administer effective development projects.
Philanthropy and government
The past half-a-century of proliferating NGO activity has certainly done some degree of good for India’s poor and marginalized, but it has also added to government jadedness at the local level, by opening up what is often called a parallel development sector.
NGOs feel they are filling in for governments that aren’t doing their part. Unfortunately very often they have been right. But NGOs are often just as ineffective themselves. Companies doing CSR can change that by incentivising both sides to work together.
The central government’s many flagship schemes for the urban and rural poor need a lot of professional deployment assistance from the outside. Assistance coming from CSR-funded, professional NGO projects can improve the effectiveness of such programmes significantly.
Teams of consultants, development practitioners, researchers, academics and technologists, hired by think tanks that are funded by CSR money, could provide a major boost on the ground.
These experts can help local NGOs and government bodies implement programmes with precision and speed towards pre-negotiated common goals. If it is done right, such a controlled operation will likely demonstrate on-going positive development impact.
But that’s only a good idea. If not executed professionally, this can fall by the wayside just as easily.
Incentivise companies
A third way CSR funds can be transformative is if companies understand the real marketing, communications and brand value in properly executed CSR projects. This is not a novel idea, but it hasn’t been done right—yet.
Just about every new study on perceptions of business responsibility reveals that today’s consumers—including in India—are disproportionately more willing to buy from companies perceived as “caring” for people, communities and social issues.
CSR funds spent in the right places can easily qualify as marketing funds.
Unfortunately, what we currently have is a large numbers of companies engaging in “feel good,” mostly pseudo-philanthropic marketing campaigns.
Some of it may be going viral now but these trends will be gone in five years. Instead, what will last is real concern, real care and real impact on the ground—all communicated well.
CSR funds spent in the right places can easily qualify as marketing funds, and if sufficient numbers of Indian companies begin to see this, it can result in significant cost savings and social impact for companies.
And that’ll help the bottom-line.
You can follow Ravi at @ravinarain. We welcome your comments at ideas.india@qz.com.
This article is a part of Quartz India. For more, follow this link.
Dear Indian corporate: here is why you need to take social responsibility seriously
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