CSR spends are no guarantee of corporate ethics

In his Independence Day speech, Prime Minister Modi said, “Wealth creation is a national service.” He declared, rightly, that wealth creators should be honoured, not pilloried.

How does he reconcile this with his absurd new law making it a criminal offence, punishable with three years in jail, for big companies which fail to spend 2% of their profits on what the government defines as corporate social responsibility? Such spending was earlier voluntary. Making shortfalls a criminal offence will shift the emphasis from good outcomes to mere spending, with perverse results.

Vijay Kelkar says if shortfalls in spending are made criminal offences for everybody, over half our ministers and officials will be jailed for not meeting budgeted spending targets approved by Parliament.

Creating wealth through high quality accountability to customers, shareholders, staff and suppliers is the highest form of social responsibility. Many companies fail in all these respects. The answer is not forced donations to NGOs in prescribed areas like education, gender, environment, and poverty. Many shady businessmen run trusts galore to launder black money. Others create trusts to fund grants and scholarships to children of politicians and bureaucrats, bribes by another name.

Famously, former Maharashtra chief minister A R Antulay had to resign over allegations that he got builders to donate heftily to his many trusts, as a condition for getting contracts. A recent Economic Times investigation exposed corporate promoters who gave CSR donations to their own NGOs and then recycled the cash back to themselves.

Businessmen guilty of gross irresponsibility to consumers, shareholders, staff and the environment can nevertheless fulfil their CSR quota and win awards. Ramalinga Raju of Satyam Computers forged documents and inflated profits to fool shareholders, banks, the government and other stakeholders, and ended up in jail. Yet, his Byrraju Foundation won several awards. It set up a rural call centre, enabling villagers without college degrees to join the globalisation bandwagon. It took telemedicine to rural areas, enabling villagers to interact with specialist urban doctors. It provided rural services like healthcare, education, water and sanitation. It ran an ambulance service, attracting so much praise that many states replicated it. Did this make Raju a paragon of social responsibility?

“The focus is now on how much money you give to what cause and the whole question of how you make that money is totally ignored,” says Ruchira Gujral, Unicef’s corporate engagement specialist.

Globally, the classic case of a massively irresponsible company winning CSR awards was British Petroleum (BP). It created a “green” logo and claimed to be among the world’s biggest producers of solar panels and wind power (though these didn’t account for more than 3% of its business). It topped Fortune magazine’s corporate responsibility list in 2004, 2005 and 2007. It won several CSR awards in China.

Yet behind this green imagemanship lay a horrendous record of neglecting safety. BP’s poorly maintained Texas refinery exploded in 2005, killing 15 and injuring 180. The Center for Public Integrity, Washington, says that in Ohio and Texas, where five major oil companies operate refineries, BP accounted for 97% of all “egregious, wilful” safety violations. Worst was its negligence that caused the greatest marine disaster in history — the explosion of the Macondo offshore well, leaking 210 million gallons of oil, and devastating beaches and marine life, including thousands of turtles. The same BP claimed to be a turtle saviour by financing a turtle sanctuary in Malaysia, and won a CSR award!

Lesson: allocating some profits to green, rural or other social causes is no indicator of responsibility or ethics. Rather, CSR allocations can camouflage unethical behaviour.

Many terrorist organisations provide good health and rural services to gain adherents. Should they get awards?

Many top NGOs refuse to accept corporate donations saying this could be unethical or cause conflicts of interest. The CSR law ignores this.

The Injeti Srinivas Committee has just submitted a report to the finance minister suggesting that CSR spending should be made tax deductible, and failure to meet the 2% CSR quota should at worst be a civil offence, not a criminal one. This will change the CSR approach to one that relies on incentives rather than punishments, on carrots rather than sticks. The Committee adds that CSR should not become a means of using corporations to fund what the government should be funding.

The whole concept of CSR needs rethinking. The donations approach, with spending targets for corporations, is simply the wrong way to go about it. Jailing crooks is a far better way of improving corporate responsibility than mandating a 2% CSR target.

What do you think?