6 min read.Updated: 06 Feb 2014, 10:01 PM ISTAveek Datta
Khanna says the new Companies Act will make CSR an important part of the CEO's agenda at Indian companies
Mumbai: Indian state-run companies are much better placed to implement meaningful programmes of corporate social responsibility (CSR) than their private sector counterparts, owing to the large scale on which they operate and their accessibility to the government, says Tarun Khanna, Jorge Paulo Lemann professor at Harvard Business School and director of Harvard University’s South Asia Institute.
Khanna is in Mumbai to deliver a workshop organized jointly by the South Asia Institute and the World Bank to engage with Indian public sector enterprises on ways to make their philanthropic efforts more relevant.
The new Companies Act mandating companies to set aside a certain percentage of their net profits for CSR activities, says Khanna, will make CSR an increasingly important part of the chief executive’s agenda at Indian companies, even though some firms will still try to “dodge" it. Edited excerpts:
At many Indian companies, CSR is still not seen as a core function and often leaders do not devote much attention to it. Will this change with the new Companies Act laying emphasis on such activities?
We need to recognize that India is still very much a developing country, even though we have made some progress in the last two decades. Even though we rightly pride ourselves on our democratic processes, we don’t have a state that has all the capacity that it needs to have for the elementary delivery of public goods. So there are problems in most basic things like sewage system and healthcare. For those who are sceptical of CSR—and I think the scepticism is grounded in often good partial reasoning—because they feel that the function of businesses is to generate jobs, provide goods and services and that is what they should stay focused on, it is important to note that our ultimate ability to generate jobs and do all those things that we want to do is contingent on public goods being available. Don’t think we, as corporate leaders, have quite had the luxury to disengage from the process of public goods provisioning. So the only debate in my mind is what should the corporations do?
The spectrum of thought on this runs all the way from disengagement, disenchantment, cynicism and criticism to complete engagement in the provision of public goods. Corporations have to engage in the private provisioning of public infrastructure. That is a complicated phrase, because public infrastructure by definition is that which the private sector is always inadequately incentivized to provide. Nonetheless, a partial provisioning of public infrastructure has been happening. Whether you look at canonical examples of Tatas building up Jamshedpur, Godrej doing something in some underdeveloped areas to allow its factories to come up, or the different state-owned enterprises talking about how they have had to build little townships to support their factories, these are all examples of the partial provisioning of public infrastructure. And the question in my mind is that, is there a way to do this more systematically, more cost effectively than we have currently?
How do you think companies will perceive the provision in the new Companies Act mandating firms to devote a certain percentage of their profits towards philanthropic activities?
As a private sector entity, the right way to see the new provision in the Companies Act regarding CSR is that there is a mandate and the money has to be spent. If one wants to call it a tax, you can call it a tax. But it’s a tax that should be spent productively. I would hope that corporations engage seriously with the state and different well-meaning entities that want for the provision of public goods to happen in earnest.
I know that many, if not most corporates, will find ways to re-classify as CSR many activities that they are already doing. And there will be some degree of dodging to get around the tax. But my hope is that at least a good number of corporations—maybe 20 or even 100—will realize that in the long run we will all be better off if they take on a stewardship mentality in the creation of infrastructure that is needed to allow the country to move to the next level.
I don’t think that it’s really going to be at the cost of shareholder value. There was a paper that I wrote 15 years ago with a student of mine, Raymond Fisman, who is now a professor at Columbia University, which was about how companies that went to backward areas and spent a lot on public goods creation fared and were they penalized as an outcome—be it in profits, or shareholder value. And the answer was, no. They actually did better than what they would have if they didn’t engage in this. So even after accounting for the costs of such activities, there were sufficient benefits to be had for these corporations.
Tell us about the programme and the need to sensitize public sector undertakings (PSUs) for meaningful CSR.
The South Asia Institute, which I run at Harvard, in partnership with the World Bank thought that PSUs in India had sufficient scale and connectivity with the government and if one could work with them to understand their perspective and try to put a framework in place, they could be engaged in CSR more productively.
But, as PSUs are mostly government-owned, isn’t it the same thing if the government was to create public infrastructure directly?
The story of modern economic development is a story of intermediation. You need formal structures to make things happen. It is one thing for a politician or an economist to come up with a brainwave and another thing to actually impact people’s lives on the ground. There is a whole chain of things that need to happen in between. It is not a question of whether the government should do it or the PSUs, but what’s the best set of intermediaries through which it should be done? What’s the counter-factual against which you evaluate the effectiveness of the PSUs? They are one set of entities, but if not them then who? We can mobilize the private sector, and of course the intent of this part of the new Companies Act is to do just that. So it is not an “either-or" situation. The needs, opportunities and concerns of PSUs are sufficiently distinct. There are many such far-reaching organizations to merit a separate effort to engage with them.
On a separate note, Satya Nadella has recently been appointed as chief executive of Microsoft Corp and many other Indians have assumed senior leadership roles in global corporations. Why do you think this is happening?
It’s a result of several things. It is the result of a generation coming of age. There was a lot of migration at a certain point of time particularly to the West from this country and some of those people have risen through the professional ranks.
Second is that there is a selection effect. Certain kinds of people went overseas 15-20 years ago, and I suspect they were better educated and a bit more risk-taking—which is the story of immigrants from every country throughout history. So it is not surprising that you see more of them ending up in positions where they have to be comfortable with those values.
And last, there is the simple story of speaking English. We grew up in this country speaking English as a result of our legacy of British Raj and that has proven to be a particular asset in America, compared with other East Asians for instance, who are comparatively less comfortable with the language. So you see relatively lesser East Asian CEOs in the corner office, though you see them achieving dramatic success in all other walks of life. If you ask me if there is anything intrinsically amazing about Indians compared with the Chinese or the Latin American, I would say, no.