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:
- 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.
- 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?”
- 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!
- 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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