Law Street in The Economic Times (Oct 2009) - Make this world a better place

Dear Readers,

I was in Mumbai recently, the city aptly described in Slumdog Millionaire, where luxurious residential towers and just next door are plastic sheets sheltering the poorest of the poor. The rich seem to have grown richer and the poor poorer. But, small efforts can collectively promise a better future for the poor, even if it seems impossible to bridge this growing divide. Government policies and collective action should spur us on to greater good. For reading this column on the web pages of The Economic Times, click here. As always, the column is also pasted below.

Best,
Lubna


Make this world a better place

• Standardized CSR reporting must be introduced
• India Inc must follow a standardized CSR Index
• India Inc must be allowed to transfer dividend income to reputed NGOs

Zenobia Aunty is in a somber mood these days. Various niggling issues are plaguing her. She feels that there is so much each of us can do to make this world a better place. Some of us don’t merely because of lack of time, or information on how to help. Initiatives such as Teach-India, Joy of Giving Week etc help but much more needs to be done.

Fortunately, business entities are increasingly expected to devote some of their resources towards social welfare (corporate social responsibility, as it is called). Today stakeholders look beyond mere numbers. The World Bank conducted a survey, albeit some years ago, of 107 MNCs. 80% or more MNCs reported analyzing the CSR performance of potential partner firms in developing countries; 50% or more chose certain partners over others because of CSR concerns; and 88% reported that CSR issues are more influential today.

From a sheer business standpoint it makes sense to report on CSR activities. It makes greater sense for intermediaries involved in policy initiatives to track such activities and for the government to support disclosure practices either directly or indirectly.

The World Bank in its report, viz: Opportunities and Obstacles for CSR responsibility reporting in developing countries (World Bank Report, March 2004) points out: Intermediary groups are critical in analyzing and deploying information and in creating demands for improved reporting. Stakeholder groups with built-in incentives for using, analyzing and monitoring the quality of the information are central to its long term sustainability.

In India, while a lot of companies and groups are actively engaged in CSR activities, CSR reporting is not obligatory under the Companies Act, 1956 nor prescribed in the proposed Companies Act. Way back in 1978, it was the Sachar Committee that had first recommended that a social report be made mandatory in annual reports to shareholders. Today we see a hotchpotch of reporting styles, if at all any.

Zenobia Aunty also learns that an NGO or two, do rate companies based on their CSR activities. But government backing and that of its stakeholders would create a better reporting environment and help in rewarding the socially conscious companies.

The World Bank states that there is no single reporting system or model of corporate transparency that fits all social or environmental problems. However, it suggests that matrices for reporting should in general be: Agreed upon by key stakeholders (representing what matters to them); Factual, accurate and verifiable; Reported at regular intervals in relatively simple language or data; Comparable across locations, firms and products; Flexible and dynamic – so that the metrics can change over time; Usable by key stakeholders and lastly easily accessible.

Zenobia Aunty adds: “Professional Institutions such as The ICAI or trade associations such as FICCI, CII, Assocham etc, can play an important role in bringing uniformity and in encouraging companies to take firm steps towards CSR accounting/disclosure.” Further awards for those Companies which give back to the society would also provide an extra impetus.

It may be easy to argue that a particular company has sponsored a village merely because its labor force is based in that village. Whatever, be it, by adopting the village it has helped Indian society.

While some Companies do report their CSR activities, others do not. There is no uniformity. In fact, lack of standardized reporting also means that those who do not contribute to society do not suffer any adverse impact at all, nor are those who give back to the society benefitted in any manner.

Steps must be taken to create a standardized CSR Index across India Inc. It could comprise essentially of four-five elements such as contributions towards – the environment, education, medical and lastly donations for disaster recovery plans come to mind. Weightages for each element could vary but disclosure of the parameters and weightages would be a must in the CSR Index.

It may be too much to ask the government to provide additional tax concessions (other than those available – say for donation to a PM’s National Relief Fund), to companies that are actively engaged in CSR activities. However, in the long run, market forces would reward such companies.

Other policies also need to change and it is here that the government can help. Zenobia Aunty wanted XYZ Company to divert her dividend income to a reputed NGO’s bank account. Alas XYZ Company as per the Companies Act is required to send the dividend cheque to Zenobia Aunty or to transfer the dividend directly to her bank account. Companies must have the option of crediting the bank account of an NGO with the dividend amount, at the direction of a shareholder. In fact, they can then even sponsor a particular NGO and provide for a form in their Annual Report or newsletter that would facilitate such a transfer. Small things can go a long way.