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Many of us would have seen this: A top corporate showing great images of how they have donated health products, solar lamps and other worthy things to the poor. The pictures generally show happy faces of “beneficiaries”. The corporate leaders, shareholders, and employees feel good that they are doing good for society. But, is this really doing justice to the whole paradigm of Corporate Social Responsibility?
Let’s first evaluate a company’s role in the society. While the government’s role is to ensure the economic and social well-being for its citizens, it has authorised companies to participate in this endeavour of creating social good by providing them license to use public resources. The companies in turn get strong economic incentives to solve problems in society.
Due to improper social impact measurement tools and laws, firms seem to be focusing more on their own economic incentives and going easy on their social responsibilities.
In the world of stock markets and demanding shareholders, we seem to have forgotten that the company exists to fill gaps in society, and the economic benefits for the company are just a spin off. Hence, social benefits need to be incorporated in the company’s core business models and value systems. This is especially important in a developing nation like India which houses the world’s highest number of poor.
The sheer magnitude of the problem calls for scalable solutions rather than one-off donations. In defence of companies, it is important to recognise that any firm that exists adds significant positive value to society by solving the inefficiencies in that society. What needs to be debated is
whether there is more harm being done than good by companies?
Having said that, the current role of companies is a bit amiss. It might be idealistic in today’s world to believe that companies will act socially responsible in their core business as their incentives are not aligned towards social objectives.
The government has gone for the easier option in the Companies Bill passed recently to ensure that companies are giving back to society by allocating at least 2 per cent of their average net profits in the last three years towards the CSR policy of the company, not quite caring if the other 98 per cent was probably generated by having a negative impact on society.
So in today’s world, the definition of CSR is “donating” at least 2 per cent of the company’s profits towards “some” social impact. This Bill puts more constraints on the companies such as reducing their already wafer-thin margins, increasing costs of CSR governance and compliance among others.
The Bill also allows CSR budgets to be used for “social business”. In my reckoning, all businesses are social. So, the Bill would do better to define the word “social”. Alternatively, why doesn’t the government tax the corporates 2 per cent more, and then use these funds for social benefit, rather than making corporates responsible for use of funds?
One of the biggest flaws with the Bill is that the company does not have any incentives to ensure that it is investing in social projects that have the most impact in the long term.
Instead, for the company it makes more sense to show “visible” social impact in the short term to shareholders, employees, and customers. As a result, most CSR money goes into doling out short-term freebies to seemingly vulnerable people. In addition, CSR is owned by communications and public relations to publicise these donations to show that the corporate has a heart too.
There is enough evidence, generated by grants of billions of rupees under CSR programmes for the last few decades, that short-term grants rarely have a positive social impact unless in extreme situations such as natural disasters.
For example, one of the well-known corporates donated solar lamps to 200 families in a village. They clicked smiling photos that were used to promote a benevolent image of the firm. But, did the donation create the desired impact?
At first, the 200 beneficiaries were happy and started using the solar lamps for daily purposes such as reading and going to farms at night. But, in a few months the solar lamps stopped working due to technical problems. The beneficiaries did not bother to get the lamp repaired as after sales service was unavailable in their village and they did not value the gifted lamp enough to take the effort to repair it. So, they went back to their old way of using kerosene lamps. Also, due to the donations, the value of solar lamp went down in surrounding villages that did not receive the donations.
So, how exactly should the 2 per cent CSR fund be utilised to ensure maximum social impact? Firstly, there is a need to understand that these are funds. Therefore, CSR funds need to be managed by proficient investment managers, rather than by PR teams.
Secondly, these are funds that have a 100 per cent risk exposure and no potential economic upside for the corporate. Hence, these funds can be utilised to cover risk for projects that are potentially very impactful in the long-run, but extremely risky.
One example is that instead of donating unaffordable solar lamps to few hundred beneficiaries, why can’t this money be used to develop an affordable solar lamp that can then be bought by billions of people? The potential impact is huge, but there is a risk of failure as well. But, then, CSR money is already written off the books, so the risk should not concern the corporate.
The second example is that startups have great potential for developing innovative sustainable solutions for social problems. But, Indian startups have few sources of debt working capital to grow their operations.
Why not use the CSR funds to guarantee a line of credit for such high-impact startups?
It’s time that the corporate leaders consider making CSR part of their business model and use the funds in a high impact manner, and the government takes steps to put in more effective regulations to ensure that companies create social good.
Nishant Kalidas Banore
Class of 2010
Co-founder of Desta