Why Pavan Sukhdev thinks the mandatory 2% CSR spend is short-sighted

Dr Pavan Sukhdev

As a part of the ongoing series of my blogposts (read the earlier post here) on the recent legislation by the government mandating compulsory spending 2% of the company’s net profits in the CSR acitivities, I was in touch with Pavan Sukhdev, the Founder & CEO of GIST advisory and the author of the latest book, Corporation 2020. I also did a review of the book which is a treatise on the evolution of companies and looks at how a corporation in the year 2020 must and should look like. Not only it challenges the businesses to transform themselves into the corporations of the future, it also challenges the governments to provide enabling conditions for those corporations of the future. Here are 4 points that Pavan thinks that this Bill of compulsory 2% spend on CSR is short-sighted and after all not such a great idea:

  1. Redefining the term CSR: Pavan makes the difference between the old CSR (Corporate Social Responsibility) and the new CSR (Corporate Sustainability Response) paradigms. A company can spend an x amount of money on socially appealing causes and comply to the regulation. But is it what is actually desired? Pavan takes the example of Sterlite Industries with their core business interests in bauxite mining in Orissa (which inherently is environmentally damaging) and in turn offering to help fund a university or an eye hospital. Instead, it is much more important to Measure, Evaluate and Reduce the actual or net environmental footprint of such corporations.
  2. Investments v/s Impact: The regulation can mandate the 2% expenditure but doesn’t account for any ways to measure the impact of those invesments. Pavan says, “Isn’t the actual IMPACT worth measuring and reporting in the accounts (i.e. disclosure of externalities)? What is the use of investing in a new university department if all that happens is another building, and no skilled teachers creating human capital?”
  3. Existing Positive Externalities: Some companies are already creating positive social impacts and externalities from their business operations. For example, Infosys  has over a billion dollars of positive externalities through its human capital creation (see its balance sheet published April 2012). GIST advisory worked on those calculations. But will the government’s new 2% CSR rule actually pick that up? Pavan thinks otherwise!
  4. Accounting Reclassifications: And last but not the least, the age-old methods of “cooking up balance sheets” via legal methods – aka Creative Accounting and Re-classifications. Companies can spend the 2% on CSR and comply and yet find ways to discount those in their accounting techniques.

The old CSR by its very nature places an ethical burden on the companies. It is an add-on to core business models which are not meant for doing social good. Legislations may ensure compliance…but then, is that what we want? (you can comply and yet not make any positive difference)

Please leave your comments on what you think about the mandatory spending on CSR.

Image: Mr Pavan Sukhdev (Photo credit: theverb.org via flickr)

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3 thoughts on “Why Pavan Sukhdev thinks the mandatory 2% CSR spend is short-sighted

  1. I agree on the points raised by Mr Sukhdev -particularly on the approach to CSR in a new paradigm. However, in India and also globally, its been seen that regulations tend have an impact in consolidation and bringing in the focus . The madate will bring in new comanies under the fold -who were fence sitters and were contemplating how to go about it -now they need to dive and learn swimming. For the biggies, they were doing it anyway-only now theu need to look at it from a little change mindset. But to me it seems , it brings in a big push for the skills development and livelihood as estimate says 25000 _ companies will be under the fold with a committment spend of over 10k crore INR into the system. Need is -after what Min of Cor Affairs has done, Mr Ramadorai and Dr Narendra Jadav to come together and create a CSR framework which will help align the corp objectives with the needs of the sustainability . SOPs should be given to bring in non renewal energy, green skills and get the 2% corpus to good use or like STerlite industry-whose Business objective it itself detrimental to environmental-how does 2% of mandated CSR help?

    1. Thanks for your comment Rajat. After been to several sustainability conferences, I found out that we are all speaking the right language with the right ideas about sustainability – what it is and what it should do and how it can be embedded within the business model. But when regulations like these come, they annoy the businesses. Though you’re right in pointing out about consolidation – it can perhaps be a good starting point but not an end in itself.

      1. The 2% clause of the new companies bill does not make it compulsary to spend. It only advises and if you don;t spend you just need to state why. It is not a complete solution and may annoy some people but it is a step in the right direction and will get companies talking about this atleast. More eveloved oragnizations can keep doing the good work and try not to get annoyed

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