Can CSR be mandatory? India passes law that will do just that
Regular visitors to the blog will know we’re always interested in innovative approaches to CSR (Corporate Social Responsibility) and how companies integrate their methodologies within their operations in an effective manner. A story that I read today perhaps turns CSR upside down as news from India comes in that corporations will be forced to conduct a CSR program! This had been rumoured for much of the year but I had been reluctant to write about it until it was confirmed, but new laws have now passed in India that corporations must spend 2% of their net income towards philanthropy. While I don’t see this becoming an international standard, I do think for some corporations a CSR program has become an unwritten rule – combining profits with simply doing the right thing. India will provide a real-life case study for a new kind of CSR; a mandated policy.
Mumbai, India
In real terms the market here feels that business in the West is self regulated and constant changes such as the emergence of CSR merely reflect good corporate citizenship combined with satisfying consumers and customers by meeting their expectations of what a company should do. The departure from this natural evolution in India will be fascinating to see whether CSR can become a matter of compliance versus a matter of self administration. India is a fairly unique case study however as it holds parameters which do not generally apply in the West, she has become one of the largest economies moving rapidly towards industrialization at a frantic pace whilst balancing internal concerns of population density and poverty and transforming toward becoming a net export economy. Self-regulation in the West has resulted in consistent annual growth in voluntary CSR, but could that all possibly change in the years and decades ahead? My best guess is that while governments will not step in and set a national target for all businesses of a certain size as in India, the different sectors within industry will continue to adjust and raise their own benchmarks. Whether that results in changes to business practices, production efficiencies, fair trade practices or philanthropy – each sector of the market will continue to adjust to what the competition is doing and balance profit with CSR in a very focused way. Placing that responsibility on government would result in the type of regulation that business owners will reject immediately, but with the example of the oil industry and the BP disaster this year a hybrid of government regulation with best corporate practices will continue to evolve.
As for the new law in India, it’s open to interpretation whether this is really mandating a CSR policy or more of a redistribution of profit towards causes that need support. The law states that 2% of earnings will be spent on philanthropic actions elected by the business, assuming that the law remains in place a modification is more than likely where companies can say they’ve donated time from employees, or materials and resources to an elected cause. In real terms India is not just doing this for the sake of regulation but also to make their companies more competitive on the world stage, if it works in India then there would be a good likelihood it could then be applied to other emerging economies. When you step back from this specific scenario surely an overall global commitment to CSR can only be a good thing. How well it is implemented, monitored and ethically administered will probably determine whether it will continue. That’s a story I would definitely keep an eye on. What do you think about government mandating CSR in general – and specifically in certain economies? Do you think it is counter-intuitive to what CSR is all about or makes sense in a situation such as this? I’d love to hear what you think.
This is about corporate philanthropy – a VERY small part of CSR, though often a starting point. Equating the two is not at all appropriate.
Imagine Canada has a voluntary program where companies can sign up to confirm they spent at least 1% of pre-tax profits, and only a very small percentage sign up (though that in part relates to the; I used to belong and like many of my colleagues could not justify the cost though I give a higher percentage). Mind you, I belong to Imagine Canada still through another route.
This one is about a percentage of net income, so may actually require a smaller absolute amount.
Jane,
Many thanks for your comments. I understand that it’s focused on corporate philanthropy but as a directive I think there is the potential for it to be a starting point for a more thorough application of CSR. Whether it’s a small part or not is open to interpretation – there’s every chance the 2010 definition of CSR will evolve as the years roll by, especially in different nations with very different economies. India for example may place philanthropy far above free trade or labour practices in terms of importance based on current needs. It will be interesting to see what is reported in the months ahead.
It is not a law as yet for all corporates but it has become mandatory for all public sector undertakings under DPE guideline. And you wont believe but they have actually started taking it seriously because it is connected to their pay scales as well. So i think its going to work. As far as the voluntary verses mandatory debate goes, people should realize that we ve had enough of voluntary guidelines with lack of initiative for years and therefore we should mandate it, if we want results. This is practical life not the utopia we wish to live in
Smita – Many thanks for your comments, there seems to be some disparity in how this is being reported (law versus recommendation) so I will research further. As you mentioned if it works that in itself is exciting, in corporations aren’t electing to participate I would imagine governance will continue to be an option. It’s a very interesting topic and thanks for writing.