Stakeholders vs shareholders5 min read . Updated: 26 Oct 2015, 12:53 AM IST
As the world grows smaller and resources grow scarcer, businesses are being pushed to look at the larger picture
The implementation of the corporate social responsibility (CSR) rules, 2014, stressed the need for businesses to work for local communities. However, much before the CSR rules, firms had realized the need to look beyond employees, investors and consumers, knowing well that an unhappy community is a risk to longevity of their own businesses.
“Businesses do not make products or render services from thin air. They use community resources such as land, water, energy, minerals, people, etc. We saw what happens when companies take the community for granted—be it a multinational like Coca-Cola in Plachimada, Kerala, where it had to move out, or Vedanta in Niyamgiri, Odisha. They need a social licence to operate just as much as they need other licences," said Amita Joseph, director of Business and Community Foundation (BCF), a not-for-profit organization.
According to S.K. Jain, CSR general manger at India’s largest power producer, NTPC Ltd, communities need to be treated as business stakeholders. “As business, you are sharing the resources of the community. Plus, any business activity has an impact on the community," he said.
To gauge the extent of community engagement by businesses, Oxfam India, along with Corporate Responsibility Watch, Praxis and Partners in Change, created the India Business Responsibility Forum (IRBF) Index 2015. It divided companies’ community engagement into two parts: (i) whether companies view communities as business stakeholders, and if so (ii) what they do for community development. Most firms have scored very high on the latter parameter thanks to the implementation of the CSR 2014 rules. But when it came to seeing the community as business stakeholders, it was found that not many companies consult local communities.
The IRBF Index 2015’s grading is based on the data culled from publicly available documents and policies of companies dealing with the impact of business on local communities, resettlement and rehabilitation and the principles of free, prior and informed consent.
The best performers in the category of community development have scored higher than other best performers across IRBF Index 2015’s five parameters (non-discrimination at the workplace, employee well-being, inclusive supply chain, community development and community as business stakeholders).
State-owned NMDC Ltd scored 92.8% for community development.
“NMDC becomes a stakeholder in their lives (local communities)—from ensuring employment opportunities for the local populace to providing basic amenities and going beyond to providing them quality education and helping them to realize their aspirations," said Sandeep Tula, executive director (personnel and administration). The company scored 16% in the parameter, which looks at its policies and initiatives to check if it treats communities as business stakeholders.
According to Ranjit Singh, CSR general manage at Maruti Suzuki India Ltd, the country’s biggest car manufacturer, community development is critical for business growth. He said that in the company’s stakeholder mapping initiative, it included local community as one of the six key stakeholders (apart from customers, shareholders, employees, etc). “Business operations impact the lives of communities in important ways, creating opportunities as well as challenges for them. Often, a business may catalyse prosperity, skill development and mobility in a local community. It can also lead to stress in social and physical infrastructure," Singh said.
He added that if one of the purposes of business is to have a positive and meaningful impact on society around it, then the local community has to be viewed as a critical stakeholder of the business. In the community development parameter of the IRBF Index 2015, Maruti scored 61%, while it got 18% in the community as business stakeholders parameter.
To ensure engagement, NTPC claims to employ a so-called bottom-up approach in its social initiatives. “We have constant consultations with communities and only carry out an activity or initiative once we know that the community needs and wants it," said Jain. “True value in community development is only added if you do what they want and not what you want."
NTPC’s first community development policy was adopted in 2004 and ever since then, company says it has conducted need assessment surveys in its areas of operation before undertaking any work.
Despite acknowledging the importance of community engagement and the policy commitments of companies, IRBF Index 2015 suggests companies are not doing enough. NTPC, ranked among the top 10 performers in the community as business stakeholders parameter, scored 37% and 61% in the community development parameter. The IRBF report states, “... local people affected by business are not to be seen merely as recipients of 2% CSR investments, but as stakeholders with an active and non-negotiable interest in core business operations."
According to Joseph of BCF, spending on the social well-being of local communities alone is not sufficient. “It is all about how profits are made and not just a percentage of profits that is given away in CSR," she said. “It can only happen if companies genuinely engage with the communities and treat them as business stakeholders."
The mining sector has topped the list on the community as business stakeholder parameter. But the IRBF Index 2015 points out that it is important to differentiate between what firms in the sector are supposed to do legally as part of compliance and what their CSR initiatives are.
“Most of the time, both compliance and CSR get intermingled and ironically, companies showcase the compliances as part of their CSR," said the report. Mining can bring economic and social benefits to communities through local job creations and resource revenues; however, “of the 50 major mining districts of India, 60% figure among the 150 most backward districts of the country", states the report.
Protests against large projects by firms such as Vedanta and Posco point to the fact that the lack of sufficient consultation and community engagement could lead to social unrest. However, even severe critics like Joseph believe that things can change.
“Once you treat communities as important stakeholders, you will engage, listen, perhaps understand their perspectives and work towards a win-win for both, not one at the cost of the other. Many companies learnt this too late including the house of Tatas—be it in Singur or Nandigram," she said.
Giving the example of the backlash faced by Hindustan Unilever Ltd after the release of a rap song on the mercury contamination in Kodaikanal in Tamil Nadu (Kodaikanal Won’t by Sofia Ashraf, released in July 2015), she said it could have been avoided had the firm taken remedial action earlier.
Working with the community not only helps avert any future conflict, but also helps the business, according to consultants. “Responsible investments and genuine engagement with communities is the key to sustainable corporate longevity and brand equity," said Abhay Gupte, senior director of enterprise risk services at financial advisory firm Deloitte Touche Tohmatsu India Pvt. Ltd.