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Should CSR be made compulsory after all?

Date: 17 Apr 2014

During the first decade of the 21st century, it was pretty much a consensus amongst all but the anti-corporate campaigners that CSR was best if it was voluntary. Legislation is there to enforce minimum standards, but CSR is about creating best practice, and doing so in a way that finds the best wins for both the company and society.

In recent years, that consensus has been challenged. We have just seen one of the latest practical forms of that challenge, with the passing by the EU Parliament of a law requiring around 6,000 companies across Europe to report on their non-financial impacts.

But this is just the latest of a steady trickle of moves to legislate aspects of CSR. Perhaps the most significant of these has been the CSR law in India, which came into force on April 1st this year.

The CSR provision is part of India's Companies Act 2013. It requires that companies - public or private - of a certain size should create a CSR Committee including three directors, one of whom should be independent, and this committee should oversee the investment of at least 2 percent of pre-tax profit in social causes.

It is estimated that, as a result of this law, around 8,000 companies will put around $2bn into the community - and this in a country where underdevelopment, poverty and inequality are all still major widescale issues.

It was not the first law in the world to investigate such a process, but it is the most blunt and audacious example that has been applied to a large business community. That makes it an interesting example, impossible to write off as a mere aberration on the part of some crackpot dictatorship in some dark corner of the world.

So is this the way forward? After all, people like me have been banging on about CSR for 20 years and although the scale of engagement and achievement of the leaders has grown in impressiveness over that time, the actual quantity of businesses committed to the journey has not yet become so much greater. There remain plenty of laggards. Indeed, since the majority of businesses probably fall into that category, it's arguable as to whether they're laggards, or whether it's the engaged companies that are the aberration.

The problem, as always, is one of definitions. Back in 2001, I was one of a number of people first defining CSR as being about core business process, not just the extra charitable activities. Since then, those leader companies have become exciting precisely because they are redefining how far you can push that focus to transform the business into a commercial force for good.

But the definition of CSR in the Indian law remains the one that we were trying back then to overcome. It focuses on acts that promote poverty reduction, education, equality, environmental protection and skills development. Which is why you can put a figure on it. 2 percent of pre-tax profit. If you're addressing CSR through how you develop and sell your products, such figures are meaningless.

In effect, the Indian CSR law is a self-administered tax on business. And even though one might be tempted to support it because it's a country that could do with additional resources going into an impoverished society, the problem is that it makes CSR an onerous duty and completely confined to the realm of philanthropy.

What's worse, not only does it potentially distract attention away from core business embedded CSR, but it actually actively militates against such a definition. It discounts from the tally of 'CSR spending' anything from which the company might get any sort of benefit. So all those "win-win" projects that have companies putting in support in an area that is a natural fit for what they do to make money - those are now actively discouraged.

There's nothing wrong with a government deciding to tax businesses on its territory. Of course, you have to be alive to the consequences if you snatch too much cash away in tax, but it's what governments are there to do. And there's nothing wrong with a government ring-fencing tax income to be spent on specific social projects or causes.

But equating that process with CSR threatens to put the cause of genuinely far-reaching and valuable CSR as it becomes associated with the a pale shadow of what the real thing should aspire to achieve.

It is an object lesson in the dangers of legislating for something that is still in the process of evolution. You run the risk of killing the very thing that makes it work in the first place.

And there remains the concern - because India remains an environment where corruption is endemic, that ways will be found for some of those funds to find their way into the wrong hands. So, for instance, many of the funds newly released by companies will be channelled via some of the large numbers of NGOs that exist in that country. Many of these NGOs have integrity - although they often suffer from chaotic practices that may mean they struggle to be able to deal with significant inflows of resources. But others may be strongly associated with politicians or parties, and others may be fronts for corruption.

Indeed, legal firm Jones Day warned that US and British companies with substantial enough operations in India to be caught by the act may have to be very careful that "CSR" activities don't fall foul of anti-corruption and bribery measures in their home countries. That should tell you a lot of what you need to know.

Whenever legal measures around CSR are discussed - whether by the EU Parliament, the US Congress or other governments around the world - it is often said that the resistance of companies and their lobbying associations to some of these measures is just another symbol of how the majority of companies are careless as to their impact on the world, and purely focused on maximising profit.

In the case of some companies, that may be true. But just as often, the truth is that the actual detail of the legislation makes it unhelpful, unlikely to achieve the positive ends that the authors imagine, and simply unhelpfully bureaucratic.

That's why people like me, who have been championing CSR at the deepest level, arguing for the widest possible adoption, for twenty years can look at measures such as the Indian CSR law and say that it is a step backwards, not a step forwards.

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