Mandatory CSR and Social Audit

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         When the BBC reported just one example of good CSR -a company that gave away1 percent of the profit (in the form of products) 1 percent of employee time and 1 percent of equity as charity it made news. India has no model of quantifiable CSR as yet, although CSR has become an integral feature of large company policy. But now things are about to change. If the Ministry of Corporate Affairs has its way, specific scales for financial contribution towards CSR will soon become the law. And as a natural by product, the financial and physical progress of CSR initiatives will need to be audited. This article argues that it is best to be forewarned and be prepared for social audits of the effectiveness of CSR achievements.

CSR and the Law

         In response to the findings of the Standing Committee of Parliament on Finance which examined the Companies Bill 2009 on CSR, the Ministry of Corporate Affairs was expecting to table a Bill in the monsoon session of Parliament. The opportunity has been missed by a whisker but the wheels of Government will continue to grind slowly but surely until the Bill becomes law. The Bill mandates that every company with specific net worth,turnover and profits ( which includes PSEs, Banks and the private sector) shall be required to contribute at least 2 percent of its average net profits during the three immediately preceding financial years to be spent on CSR activities as approved and specified by the company. The Directors shall be required to make suitable disclosures in this regard.

Drivers of CSR

         When the new law comes, it will be distinctive in the world of corporate law. Until now most countries that practice CSR have encouraged it either through broad exhortations to the boards of directors to mull over the interests of non-shareholder constituencies while making corporate decisions. By and large legal or justiciable obligations do not seem to have been imposed on companies to compulsorily undertake serious CSR activities. In developed countries CSR is something that makes business sense because of the expectations of the public and an environment that rewards support to the disadvantaged. Besides large estate duties often turn some of the richest men in the world into philanthropists-witness the rise of Foundations and charities that support an ever increasing array of causes. Indeed many of them are genuine but the rationale is founded on several considerations.

         In India save for a few philanthropic exceptions, which have supported valuable projects for decades –long before CSR was even heard of, we have a long way to go. The public sector sees itself as a part of the public and assumes that it is automatically imbued with social concern. Notwithstanding shining examples of PSEs that have genuinely assisted in providing healthcare services, education and environmental protection, most view CSR through the lens of a public relations exercise. Indeed a far cry from Mahatma Gandhi’s concept of trusteeship.

         Private companies run as family concerns still hold the Hindu families’ heredity rights as sacrosanct and non-divisible; such family conglomerates usually set up hospitals and schools (named after a parent)-often run on strictly commercial lines. The public benefits no doubt but which public and at what cost? Multi-nationals and a few large business houses have been “doing their bit” for decades putting tens of thousands of kids through school. Some others have set up philanthropic foundations that make excellent contributions; but does putting a few thousand kids in school translate into even a tiny proportion of their profits? Per-haps. Perhaps not. But until nowno one could ask.

Industry and the bona fides of CSR

         When the new law is enforced,CSR symbolism represented by corporately managed hospitals and technical institutions, pictures of smiling villagers, mobile health vans and class room & fuls of well-oiled little children will no longer be adequate proof of CSR activity. Civil society organisations will demand that the living conditions of the communities affected by an industry improve and in no case worsen. Affected citizens will question the extent of work done in the name of CSR. How were the beneficiaries selected? What did they have to say about the impact of the CSR efforts? They will demand a social audit of the processes and outcomes something which until now was only reported to shareholders – but never discussed. A system of social audits would necessarily have to be put in place to oversee the fulfilment of the proposed law.

         The public sector will have their CSR work open to examination by parliamentary committees, by the media, NGOs and RTI. Representing massive sectors like electricity, mining, agriculture, manufacturing and services the “Ratna companies” which account for a third of the 240 PSUs will be expected to contribute to sustainable economic development in a quantifiable fashion. Social audits will become the arbiters of what is sufficient and insufficient contribution. Guidelines which until now were “voluntary” will now become the benchmarks for undertaking social audit. How were the projects selected? What was the domain expertise of the company and its agents to handle the projects? Were resources laid too thinly to make a difference?

         Extractive industries like oil, coal mining and gas will be exposed to social audits which will commenton compensation for excavation and extraction, deforestation and submergence, along with sufficient and sustained evidence of caring for those affected. Social audits will question whether the company engaged proactively with all stakeholders. Did it inform them of the inherent risks of their plans and mitigate hazards? Did it respect workers’ rights? Establish an effective grievance redressal system? Explicitly show respect for human rights?

         Sooner than later this inquisition will permeate to cover private sector’s CSR work. In the area of corporate governance CSR policy would need to embrace ethics and transparency codes; anti-bribery pacts. Information disclosure would become inescapable as a part of corporate responsibility. Impact assessments supplemented with independent evaluation ofselected projects would become obligatory. Ovesight mechanisms will unquestionably come. Social audits might even substitute statutory audits when seeking evidence of CSR claims.

The beginnings of Social Audits

         When the law demands that a culture of profit making suddenly turns around to become proportionately compassionate, it will pose an unprecedented challenge for organisations. Selecting worthwhile projects that are sustainable will be another challenge. A mandatory CSR regime would require organisations and institutions to start independent oversight and audit functions in a structured way. Social audits are already integral to NREGA, the flagship employment guarantee scheme. A Task Force set up by CAG recommended that social audits cover the National Rural Health Mission, the Sarvashisksha Abhiyan and the Accelerated Rural Water Supply Programme too. A move to examine whether the Accountants General dealing with audit of utility PSUs in power, water, and mining sectors could be involved with RTI to provide logistic support for sensitisation of civil society groups is reported to be under discussion. There was a suggestion to depend upon NGOs (with the caveat that those with a political and sectarian agenda and institutions with a doctrinaire bias should be excluded.)

Building capacities to conduct Social Audits

         If CSR becomes mandatory there will be every need to ensure that money spent in the name of CSR is subjected to independent social audits. There will be a need to set up mechanisms which are transparent and can also prevent rent-seekers and trouble-makers from jumping on this new bandwagon. To start with, institutions with domain experience of the sector could be engaged to examine the impact created by CSR activities and to highlight and advise on best practices. It is time to build capacity to undertake such audits by encouraging independent agencies with domain knowledge to visit beneficiaries and stakeholders to understand the degree of difference that current CSR efforts have made. The CMDs of right-thinking companies should try to introduce the process straightaway so that the internal systems of the organization move from a self-congratulatory, self-referential approach to one that actively seeks advice, criticism – even exposure. The aim should be introspection and improvement not fault-finding.

         The writing is on the wall. Whether it is today or tomorrow, CSR is destined to change from its soft, cuddly status to become a concrete and binding requirement. A willingness to welcome social audits and to build capacity in that direction will ensure that money gets spent wisely and the pressure to cater to constituencies, provide photo opportunities for VIPs and placate local leaders is replaced by doing something that can really make a substantial difference to people’s lives. And in the process earn genuine goodwill.

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One thought on “Mandatory CSR and Social Audit

    Vidya Sagar said:
    January 3, 2012 at 10:16 PM

    Madem,

    This is an excellant piece of information that you shared. Thanks a lot.
    Please explain in details how an individual/NGO can come forward to involve Corporates in the CRS for betterment of socially negleced children who are deprived of oportunities..

    Warm Rgds.,
    Vidya Sagar

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