Is it the government’s business to mandate how companies distribute their profit after having taxed it? Can it force philanthropy? Would that deliver inclusive growth? None of this is true, but the ministry of corporate affairs (MCA) seems to think it can do all this by mandating that firms above a certain size allocate 2% of their three-year average net profit to “CSR activities".

Ironically, the proposal contradicts the very notion of CSR, or corporate social responsibility. While the terminology is still in wide use, “social" is no longer interpreted as community welfare work by mature practitioners. The paradigm has shifted—from traditional philanthropy, through a CSR activity phase, towards corporate responsibility or sustainability.

CSR today is best seen as a broader framework shaping how a company does business so as to minimize adverse impacts on environment and society, where ethical behaviour and self–regulation are key. Firms are expected to factor in the implications of causing negative externalities such as hazardous waste or obesity, and of violation of norms—for example, child labour. This secures their reputation, long-term demand for products and supply of talent and finance.

Illustration: Jayachandran/Mint

Incorporation of CSR into a firm’s core strategy negates the old school argument that the “business" objective of profit or shareholder value maximization is in conflict with its “social" obligations. Long-term value creation for shareholders in a complex global business environment requires an organization to account for increasing stakeholder expectations of its environmental, social and governance (ESG) performance—since their preferences translate into behaviour that affects corporate profits. Several sets of research findings have established this. The theoretical construct here is that the stronger its stakeholder relationships, the easier it will be for a firm to meet its business objectives and develop a competitive advantage.

Using the ESG principle, CSR would mean inclusion, health and safety for employees; responsible products for customers; good governance, fair competition and legal compliance for regulators; ethical marketing and promotion for consumers at large; ethical sourcing and capacity building for sustainability across the supply chain; fair practices for labour; investment in local communities, including resettlement and rehabilitation in case of land acquisition; and resource conservation and waste management for the environment.

CSR cannot be enforced by the fiat of the state, but rather by the will of the multitudes with the ability to spend. The assumption here is the existence of an informed and conscious society. But information and consciousness remain big issues even in most developed societies— and to that extent constrain voluntary sustainable practices by businesses.

The government/regulator has twin roles here: first, to set clear standards—for example, product responsibility for food safety, hazardous chemicals in plastics, fuel emission in automobiles, or energy used by electrical appliances; and second, to make standardized reporting on ESG goals and performance mandatory. This would enhance the quality of information. Stakeholders, especially civil society, can use that information to evaluate the conduct of firms and become more empowered in their role as catalysts to raise the level of consciousness.

A recent report sponsored by the United Nations Environment Programme, the Global Reporting Initiative (GRI) and others—Carrots and Sticks: Promoting Transparency and Sustainability—says that of the total 142 country standards/laws on some form of sustainability reporting requirement, two-thirds are mandatory by governments. Further, GRI believes that over the next five years, regulators worldwide are likely to adopt a ‘‘report or explain’’ approach.

Corporate affairs minister Salman Khursheed rightly plans to introduce a “report or explain" mandate into the Companies Bill, 2009. However, while he defines CSR as being about “the way we conduct our business, and not about keeping something apart for community welfare", this perspective is sorely lacking in his ministry’s CSR e-reporting format introduced earlier this year. The thrust is on a company’s welfare activities for communities and geographies in the vicinity of its operations. Data requirement on environment is even more perfunctory, with no scope for comparable metrics even though resource intensity varies widely across sectors; none on goals and performance. Instead of signalling this partial view of CSR, this platform should be the one that aggregates and ensures quality of disclosure on all facets of corporate responsibility.

Mandatory authenticated reporting will allow the market to operate more effectively in influencing the conduct of firms. Companies operating in India demonstrate a wide variation in commitment—in many, CSR is still relegated to public relations or marketing departments. Only the more visionary firms drive it at the senior-most levels.

A final point: MCA’s motive in mandating a profit share for CSR activities evidently stems from the government repeatedly asking of industry to contribute towards inclusive growth. But it is not the government’s business to mandate that. In any case, that leaves ample scope for ambiguities in interpretation and is unlikely to result in sustainable and significant outcomes.

Instead, the government needs to be more flexible in partnering with the private sector for efficient utilization of taxpayer money allocated for education, healthcare, sanitation and so on. And it needs to actively encourage for-profit social enterprise.

Poonam Madan heads the corporate responsibility practice at communications firm Genesis Burson-Marsteller and was formerly a national topic editor at Mint

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