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Companies should start by listing out all points of interaction with society across its value chain to derive a complete list of possible initiatives it could execute. A manufacturing firm could map CSR projects around emissions, among other things. Photo: Mint
Companies should start by listing out all points of interaction with society across its value chain to derive a complete list of possible initiatives it could execute. A manufacturing firm could map CSR projects around emissions, among other things. Photo: Mint

CSR should be a strategy, not an accounting head

As in other parts of the world, organizational focus on implementing CSR activities in India has traditionally been fragmented and even superficial

India has been described as a country that is a functionally capitalist economy thriving within a socialist constitution. The surprise this has generated has been the mandate to spend at least 2% of a qualifying company’s three-year average net profit to fulfil its corporate social responsibilities (CSR).

CSR practice and research in the rest of the world has focused primarily on voluntary business-driven initiatives and international agreements, rather than enacting and enforcing it through law, making this a high currency debate. It has been argued that anything that is mandated by the state is like a tax or regulation.

As a natural reaction to any compulsion, the immediate focus of many companies has shifted from the accounting and auditing aspects of CSR expenditure to making sure that the company is indeed doing what is mandated and gets a so-called tick in the box on CSR compliance.

With any form of compliance, there is always a temptation to innovatively interpret the data and conditions to demonstrate this compliance, while not actually complying. This risk is specifically recognized in a joint declaration issued following Global Reporting Initiative’s Sustainability Reporting for Sustainable Development conference in Mumbai in June 2014. According to this, “only time will tell if this legislation will have a real impact on poor people’s lives and prevent actual environmental degradation".

As in other parts of the world, organizational focus on implementing CSR activities in India has traditionally been fragmented and even superficial. It is often based on who in the organization is driving a specific CSR initiative, rather than being holistically driven by the top management; and often a value-creation-based perspective that is aligned to the business is absent.

It is only now that progressive firms in India are beginning to realize that a strategic rethinking and operational alignment of CSR activities can enhance their effectiveness and also enable them to be in a position to build their reputation. Michael Porter and Mark Kramer in a seminal paper in the Harvard Business Review, as early as December 2006, set out their recommendations on how to better establish the link between competitive advantage and CSR. This broad guidance can now be applied to the Indian scenario to implement CSR as a strategic initiative.

Strategy is all about making choices and the fundamental principle for achieving this transformation is to think win-win for business as well as for society in making these choices around CSR initiatives. This, in turn, requires a focus on the interdependence between business and society to prioritize those initiatives that have the highest extent of social impact and the highest impact on the firm’s long-term competitiveness. In this way, an objective rationale for CSR activities based on shared value is established that is tied to strategy, operations and geographical considerations.

To implement this approach, the company should start by listing out all the points of interaction with society across its entire value chain to derive a complete list of possible initiatives that it could execute. For example, a manufacturing company can map CSR initiatives around emissions and waste management, labour welfare and worker safety, energy and waste management, etc., to its manufacturing operations; and they could look for initiatives around utilization of natural resources or unfair child labour practices.

The next step is to rank each of the items on this long list on the basis of the extent of social impact and impact on the firm’s long-term competitiveness.

Using this approach, companies would be able to select those initiatives that are most aligned to their strategy and operations and have the maximum possible impact. For instance, an Indian automotive manufacturing company may focus on carbon emissions, which is a significant social issue as well as a source of long-term competitiveness. Or a bottled water or beverage company can invest in providing safe drinking water.

While these examples are covered within Schedule VII of the Companies Act, not all types of projects are. Most notably, social enterprise and social business projects, for example, do not feature on this list. Such exclusions are likely to restrict Indian firms in applying this strategic approach. In spite of this, there is a strong global argument in still going ahead with projects that make sense from this strategic perspective, irrespective of whether they count towards the 2% rule, as the strategic benefits are likely to be far higher. 

Sanjoy Sen is a doctoral researcher in strategic governance at Aston Business School, Birmingham, UK.

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