India’s 2% quota is not the way to spread ethics

Aman Singh argues that regulation to require set spending on CSR is likely to achieve very little

Can the intangibilities of corporate social responsibility be quantified and regulated? It’s a debate that has been raging around the world for some time now, and came to a particular head in India in February this year, with the news that spending on CSR will no longer be voluntary for India Inc.

In fact, the government there has said that every company meeting certain profitability standards ‘shall be required to spend every year at least two per cent of the company’s average net profit during the three immediately-preceding financial years, on CSR activities of
the company’s choosing.’

As someone who watches the corporate responsibility scene in India closely and supports the spread of CSR, I have, and continue to be, very uneasy about this decision – for three reasons.

First of all, the Parliamentary Standing Committee on Finance that passed the regulation failed to define what constitutes ‘CSR activities’. What does that phrase mean? And why are we even using the term CSR to define an activity – unless of course the Indian government is just trying to get with the times and replace the idea of philanthropy with CSR?

Secondly, what factors will companies base these choices on? Which communities’ education, advancement, and so on, could help their own bottom line? An organization that aligns with the chief executive’s personal interests? The company’s own foundation? Or perhaps, donating that two per cent to a mainstream non-profit that helps companies easily check the compliance box without further involvement?

And finally, there is a high chance that this measure will actually serve to undermine the very message the government is trying to send out. The government wants this regulation to prompt the private sector to become more proactive about addressing its impact on the country’s society and environment – and shift the focus from shareholder profitability to stakeholder profitability.

But The Economic Times, a prominent Indian newspaper, said: ‘The ambiguity on what constitutes spending on CSR, the manner in which the amounts should be deployed, and whether corporations can give their mandatory spend to a trust or foundation run by the business itself can, in fact, lead Indian businesses to end up spending less than what they currently do on CSR.’  Which means that this may will end up as just another easy way for corporate India to check a box without ensuring large scale impact.

A small, hopeful, part of me wants to say, yes, this is the push the developing economy needs to address its long-term issues of social inequality, income disparity and lopsided growth. But the analytic and objective part of me knows it will take much, much more than a two per cent regulation to change corporate culture, whether that’s in India or the US.

Aman Singh is senior editor of corporate responsibility at Vault.com