Corporate Social Responsibility in India: A Journey from Corporate Philanthropy to Governance Mandate

Introduction

Social sensitivity of business is not a new phenomenon in India. The notion has well been imbibed, going beyond the semantics, in its various explicit manifestations of proactive engagements in socially useful activities, even in the pre-industrialised era. Doing responsible business was considered as a social necessity in India (Khan, 2008). India’s ancient business wisdom underscores the social engagement of business to create social value and ensure the well-being of all stakeholders. Many family businesses, such as Tata, Birla, Godrej and Bajaj which were spearheading industrialisation in the country, were strongly inclined towards not only wealth creation but also passionately concerned with social progress. The cultural and spiritual attributes of ancient India ardently supported social benevolence. Researchers (Chatterji, 2011; Sagar & Singla, 2004) have identified the evidences of deep-rooted connection between spirituality and corporate social responsibility (CSR) in India.

A company can reinstate its decisive role in clarifying its social roles and the methods of fulfilment (Khan, 2008). It is understood that a socially responsible organisation makes CSR initiatives embedded in its core business strategy and, thereby, creates a virtuous cycle of prosperity. Unfortunately, the societal sentiments are poorly addressed either due to greed or due to the attempt of survival struggle by majority of corporates in the current scenario (Chatterji, 2011; Rishi & Moghe, 2013). The very notion of CSR draws considerable attention in the perception of organic existence with the social ecosystem. Businesses have a responsibility to ensure the holistic development of their employees and make tangible positive contributions to the betterment of society and community they operate within (Gupta, 2007). The CSR initiatives demonstrate how far a corporate is embedded in society, and how to address the critical social requirement.

It is quite admirable to acknowledge that the Indian companies, traditionally, focused on the creation of shared value for the society, whereas the major thrust of their Western counterparts was the creation of value for their shareholders. But, of late, the social concerns of business in India, barring very few exceptions, have taken an unpleasant turn of social issues. This is evident from the government’s active involvement through multiple initiatives. The governmental initiatives, to put CSR in the core business agenda, acknowledge the policy engagement in promoting socially responsible business in that country (GoI, 2013). The present article is the outcome of a country-specific study examining the CSR mandates on a historical perspective in India, in general, and the CSR domain of Companies Act 2013, in particular.

Background of a CSR Policy

Business sector, as the foremost prime mover of economic growth, has tremendous impact upon human life, especially in a pro-market structure (Chatterji, 2013). Companies are increasingly required, unprecedently, to realise their implicit commitment and reciprocation to the very society which conditions the business. It is widely understood that the social divorces of companies will badly affect the reputation and goodwill, which will be evidenced in the brand value (Saraf, Singhai & Payasi, 2012). From a voluntary benign altruistic gesture of social engagement, CSR has now become a compulsory mandate, either required by regulatory framework or due to intense stakeholder pressure. The stakeholder theory is now an integral part of corporate governance system (Chatterji, 2011).

Gulati (2005) identifies a dichotomy in the mainstream CSR; on the one end, it is the mandatory regulatory compliance and on the other extreme, it is pure philanthropy. The modern perception of CSR, as it originated in the USA in the 1960s, is the legitimate minimum requirements to stay on the business. But the CSR tradition of India is invariably cemented in the philosophy of altruism. The country has a great philanthropic tradition (Gulati, 2005) that has driven the companies to be more socially as well as morally compliant. Khan (2008) argues the philanthropic underpinnings as the underlying principle of Indian CSR. However, many new generation corporates and high-profiled corporate marriages have contributed much to the social divorces. Lack of social concern of new corporates was evidenced from the corporate flare up in the aftermath of the Companies Act 2013.

Review of Relevant Literature

On examining the factors associated with the society-business partnership in India, Gulati (2005) identifies the benefits of civil society-business collaborations. It is noted that a number of businesses create value for shareholders, employees, customers and society at large. The article acknowledges that corporate citizenship is not likely to produce significant development results unless civil society organisations are empowered to be partners in their collaborative ventures. Khan (2008) explores the evolutionary phases of CSR in India in a context-specific manner, reviewing the social involvement of four pharmaceutical companies in the country. Focusing on the pharmaceutical industry, the article underlines that CSR in India is a modern variant of the traditional philosophy of Gandhian social trusteeship, not so much of the replication of the Western concept of triple bottom line. The author clearly demarcates the contrasts between the Western Judeo-Christian view of CSR and Indian Vedantic view in terms of the relationship between morality and acquisitiveness.

Sundar’s (2013) work shows how contemporary forms of CSR are transforming India’s traditional business notions of clarity and philanthropy on a historical perspective. The author argues the decisive role of business to address the nagging issues of social equity and environmental degradation. Indian corporates are called for to work in synergy with their peers, government, civil society organisations and general public to tackle the daunting development challenges, social inequality and environmental problems. The author reiterates that CSR is a broader platform for social change. A qualitative exploratory study (Ray, 2013) examines the pros and cons of mandatory CSR guidelines for public sector enterprises issued in 2010 and attempts to link CSR with sustainable development. The article endorses that those guidelines are the first of its kind in the public policy realm, across the world, to link CSR and sustainable development. The researcher has analysed the policy document and interviewed managers responsible for CSR implementation from a cross-section of Public Sector Undertakings (PSUs). The study identifies four areas of scope: stakeholder engagement, institutional mechanism, capacity building and knowledge management. Arevalo and Aravind (2011) explore the drivers and barriers confronted by Indian firms to implement CSR practices. Drawing on literature, the study contends that CSR is predominantly considered as a Western phenomenon due to strong institutions, standards and appeal system. The article affirms that lack of these fundamentals pose a serious challenge to implement CSR in developing countries such as India. The empirical results substantiate that ethics and values are major drivers for CSR initiatives in India.

On examining the CSR practices of major companies in India, Saraf et al. (2012) admit that economic performance and social responsibility can go hand in hand. The study endorses that CSR team of companies are doing brand-building exercise by linking their policies to catering to social requirements. The researchers argue that only internalised CSR agenda will produce maximum social benefits and good brand image rather than reacting to outside pressure. The study concludes that the CSR activity to build public goodwill is better than compulsory impersonal donation of money. Rishi and Moghe (2013) endorse that an organisation’s core social and cultural values must be integrated with the CSR policies with an engagement of employees.

Methods

This is a review article based on the approach of desk research. The main focus of the study was to review the Section 135 (CSR) of the Indian Companies Act 2013. Keeping the goal of the study in focus, relevant publications and other documents were gone through. There is no dearth in the literature on CSR in Indian dimension. However, there is no scholarly review of the recent Companies Act. This study has attempted to address this knowledge gap. The historical development of CSR in Indian perspective has been reviewed to catch hold of the drivers to the latest regulatory change in CSR.

Evolution of Mainstream CSR in India

The Indian CSR concept has a unique and organic evolution, as noted by Sundar (2013), in synchronisation with societal aspirations and needs. India can claim a long tradition of co-existence and organic social life, a heritage of giving back to society. But the mainstream CSR is of a recent phenomenon in the Indian corporate domain. During the heydays of princely regime, kings, landlords and wealthy merchants voluntarily patronised the social causes, and which were manifested in the creation of religious centres and public establishments. Saraf et al. (2012) state that organised CRM initiative has been evolving in the domain of profit distribution in India. Many conventional business establishments in India were known for their altruistic benevolence. The CSR acquired a different dimension with the introduction of the Gandhian concept of trusteeship, during the freedom movement, with a strong call for nation-building and the consequent socio-economic development. The trusteeship concept allows private ownership of property only to the extent that it serves society’s best interests (Khan, 2008).

Though the period after independence necessitated the building of a good industrial base, focusing on capital intensive heavy equipment, the social concern of business was not much impaired due to the pre-eminence of public sector, which was required to ensure social accountability and regular stakeholder engagement. However, the sweep of liberalisation and privatisation and the consequent exposure of Indian companies to global competition, in obsession with explicit financial matrices, caused the corporate’s social involvement to take a back seat. Drifting away from traditional cultural ethos became a circumstantial inevitability to survive in the tough era of market-driven competition (Rishi & Moghe, 2013). Sharma (2011) observes that the urgency of a mainstream CSR in India is due to the predominance of private sector and steadily shrinking role of public sector in the post-liberalised era.

The first ever attempt to introduce mainstream CSR in India took off in 2009, when the Ministry of Corporate Affairs, Government of India (GoI, 2009) pronounced the Voluntary CSR guidelines. This framework instructed each business to formulate a CSR policy to guide its strategic planning and provide a road map for its CSR initiatives, which should be integral part of overall business policy and aligned with its business goal. Saraf et al. (2012) underpin that the interdependence of a company and society can be analysed as that of its competitive position. The guidelines mandate that corporate governance should be based in ethics, transparency and accountability and the companies should allocate specific amount in their budget for CSR initiatives. The companies are expected to encourage responsible business practices and CSR activities. In furtherance to the voluntary CSR compliances of 2009 (GoI, 2009), guidelines for CSR for central public sector enterprises were issued in 2010 by Ministry of Public Enterprises and Ministry of Heavy Industries. These guidelines insist upon the development of company-specific CSR action plan strategies, with a view to kindling the interests of state-run firms towards higher accountability towards addressing social issues.

The CSR Dimension of Indian Companies Act 2013

One of the greatest challenges of the governments in the developing countries like India is to create and nurture an enduring institutional framework that can translate policies into deliverables. With this historic move, the state has shown its moral responsibility towards ensuring the well-being of the society. Researchers (Gulati, 2005) have well reckoned that the government authority is ineffective in enforcing CSR compliance. In this backdrop, the Companies Act 2013 is a historic milestone in the corporate regulatory framework of the country, replacing almost six decades of nostalgic Companies Act (1956) and mandating CSR as a statutory compliance, inter-alia, many other provisions for the first time.

Introduced for legislative deliberations in 2011 as Companies Bill 2011, the document became a full-fledged statutory framework during 2013. The attempt is to institutionalise the CSR activities, through budgetary provision, integrating to the core business, which has hither to been a voluntary contribution out of generosity and goodwill measure. The current policy regime, which came into effect on 1 April 2014, mandates not only the allocation of stipulated fund for CSR activities enunciated, but also its public disclosure as well. Any non-compliance should also be reported publicly, with reasons thereof. Major highlight of the CSR guidelines is its primacy to a company’s immediate locale (Section 135 (5)). The Act facilitates collaborations and resource pooling to address wider social issues.

The Section 135(1) of the Act sets out that

every company, having net worth of ₹500 crore or more, or turnover of ₹1000 crore or more or a net profit of ₹ five crore or more during any financial year shall constitute a CSR committee of the Board, consisting of three or more directors, out of which at least one director shall be an independent director. (p. 80)

The Act assigns three terms of reference to the CSR Committee: formulate and recommend to the Board, a CSR policy, which shall indicate the activities to be undertaken by the company (as specified in the Schedule VII of the Act); recommend the amount of expenditure to be incurred on the proposed activities; and monitor the CSR policy of the company from time to time. The Act assigns the Board to ensure the disbursement of at least 2 per cent of the average net profit of the company made during the three immediately preceding financial years, in pursuance of its CSR policy, as per the broad areas given in the schedule VII of the Act. The local area of the company will get pre-eminence over the other in the CSR fund allocation.

The governance and accountability attributes of the Act are noteworthy from the angle of stakeholder welfare. The Section 134(3) clause (o) mandates the Board of Directors to lay before the General Meeting the details about the policy developed and implemented by the company on CSR initiatives taken during the year. As per the Section 135(5) of the Act, if the company fails to spend such amount, the Board of Directors has to state the reasons thereof. These provisions require the companies, coming under CSR net, to be accountable and transparent. Taking the stakeholder approach in a wider perspective, the Act pronounces the integration of business models addressing social and environmental issues to create shared values, nothing but the revisiting of social sensitivity of business through institutional mechanism. The Act has obtained legal sanctity and, therefore, what was once voluntary has become legally binding and mandatory.

Discussion

Khan (2008) has conceptualised, in the context of Indian healthcare industry, that CSR is the ‘engagement of company’s resources for the benefits of the employees, their families and the larger community, contributing to their most urgent social development needs in a methodical and systematic manner, without necessarily expecting financial gains’. In this respect, the Act has a clear demarcation from the conceptualisation of CSR, in the Indian context, denouncing the expenditure undertaken for the benefit of the employees of the company and their family.

In a wider perspective, the new CSR policy tries to embrace responsibility for corporate policy and actions in a self-directed way. It requires the organisations to be actively involved in the process of social and community development, supplementing governmental action. The Act has provided some broad outlines giving ample freedom to undertake any socially useful and environmentally sustainable activities under CSR initiatives, instead of laying down an exhaustive list with less scope and coverage. Thus, the policy change is an attempt to address the larger issues confronted by the society, with abiding ramifications on account of corporate wealth creation and sustainable development. The provision on collaboration and resource pool will reinforce corporate partnerships as well as reconcile the conflicting interests of various parties. The compliance obligations include foreign companies functioning in India, and holding and subsidiary companies to scale up the scope of the policy guidelines.

Another significant point in the act is that its concern towards the immediate surroundings of a company. Involvement of a company in the close vicinity and social sphere will enable the company to gain more social acceptance and enhance wider stakeholder partnership. The disclosure of reason for non-spending in the Director’s report will help in institutionalising CSR initiatives and, thereby, imbibing CSR as an aspect of corporate culture in the company.

The act is seemed to discourage any window-dressing possibility in the name of CSR, which is manifested by three policy guidelines. First, the CSR policy does not include the activities undertaken in pursuance of normal course of business of a company. Second, the projects and programmes intended for the benefit of only the employees of the company and their families will not be considered as CSR activities. And, third, contribution to political parties shall not be considered as CSR expenses. The third guideline will deter the possibility of crony-capitalist practices, which have acquired their dubious manifestations in the country in recent times.

However, many corporate houses have openly criticised the mandatory provisions as well as the role of government in internalising and institutionalising the company policy. But the state has an important role to play in altering social and political life. Unless the companies make an affirmative agenda for CSR through the process of internalisation, no lasting progress in CSR regime can be accomplished.

Conclusion

Business is a social entity, perpetuated by social dynamics. At the same time, it can alter the very social fabric. Hence, the integration of business governance system into its social ecosystems can foster social inclusiveness and equity. In this regard, any discourse on mainstream CSR is deemed to be an understanding of corporate negligence and the blatant repudiation of mutuality, which otherwise would invariably have reinforced business-society linkage. The CSR should be embraced as a great market opportunity in the era of insistent and information-driven customers. Business entities should integrate their corporate conscience into the core business strategy, rather than adhering merely as a statutory compliance requirement, for the CSR initiative to fructify. Any initiative can be enduring only when it is imbibed in its culture, and CSR is no exception. The new regulatory framework is seemed to be an attempt to build a culture of corporate citizenship, which is a higher order of corporate philanthropy. Even though domestic governance is ineffective, the corporate citizenship promotes good business practices.

The Act reiterates that the business should not be conceptualised solely as an entity to making profits for its shareholders, but to be socially embedded as an element of social eco-system adding values in a sustained way beyond commercial transactions. Chatterji (2011) concedes that CSR needs to be part of the DNA of an organisation to understand and to be institutionalised. The statutory provisions in the Act bestow a vision to the durable corporate strategic outlook through the process of institutionalisation and internalisation of CSR activities. By holding responsible the top-level management to design, disclose and describe CSR activities, as per the new guidelines, a socially responsible corporate culture can be developed. Hence, the CSR dimension will get more accountability and governance framework, replacing the voluntary or casual reactionary actions. The new guidelines not only offer a regulatory clarity to the companies operating in India, but set certain goals to unfailingly ensure their social and environmental compliance, granting them full freedom to identify how they want to spend the stipulated sum for addressing the pressing needs of society.

Acknowledgements

The author would like to acknowledge the participants at the 13th South Asian Management Forum at Sri Lanka, March 2015, for their deliberation and valuable inputs.