Part 3 – Approaches to the 2% rule in India
India both leads the world in some areas of CSR and trails a long way behind in others. Part 3 (in a 5 part series) explores the approaches companies are taking to the mandatory ‘CSR’ spend in India’s Companies Act 2013.
Parts 1 and 2 reviewed the requirements of the 2% law and the history of CSR in India.
It’s fair to say that while in India I observed a wide variety of approaches to the new CSR laws.
Approaches to the 2% rule in India
Many of the companies I spoke to were planning on utilising (and in some cases setting up) a Foundation to administer spending. The focus was generally on causes rather than on social impact and on reputational enhancement instead of measurable difference to social needs. To my mind, this is philanthropy 101, and doesn’t even really go close to the full breadth of CSR/sustainability/CR and is quite a distance from creating shared value. For all the companies I spoke to, the 2% rule would result in an increased spend (although I heard about more than one company for which that did not apply). For a more Indian-centric view, look here.
The discussion of percentages reminds me of the 1% Club that BITC used to have (more than a decade ago) which encouraged business to give 1% to charity. It was abandoned some years ago (probably for the worst), but worthy of note because very few companies ever exceeded the 1% threshold. India’s requirement for 2% pre-tax is a very large number by any global standard.
A few companies that I spoke to (mostly innovative start-ups) wanted to be able to do more with their core products and were frustrated by being ham-strung by the legislation into what they thought of as sub-optimal donation to non-strategic causes.
Other companies were scrambling to understand exactly what they had to do to comply with the legislation and how to calculate the value of volunteering. It seems many companies are still grappling with the new CSR rules.
I spoke to one consultant (who confessed he thought he had a self-selected client group that were trying to be more strategic on CSR) and he said that probably 60% of his clients’ spend was on ad hoc community investment programmes and 40% on more strategic ventures. Schools and Health were predominant in his experience.
There were lots of companies talking about what they plan to do in relation to child education, health and there was lots of energy for toilets.
The CSR conference I attended (as is often the case at such things) had a relatively extensive NGO pavilion which, while very interesting for me, was mostly frequented by non-Executives who didn’t have spending power. At least two of the NGOs I spoke to told me (on the quiet) that they thought it was a waste of time. The few Executives they had spoken to showed no interest in forming a strategic relationship, even while they were protesting about not knowing how to spend their 2% rule funds.
It seems as though some of the most effective NGOs were being overshadowed by larger NGOs, and also that corporate foundations were generally looking to increase their own activity instead of working with NGOs.
In what was rather a clever insight into what might happen, the legislation prescribes that only charities that have at least three years of operation are eligible to receive funds from the 2% rule. This means that it is very difficult to set up new NGOs to receive funding without waiting for some time to use them. This has forced some companies to collaborate with NGOs in order to meet their 2% target.
The legislation expressly permits collaboration across companies to meet desirable social outcomes. While I think this is excellent, it is currently and under-utilised.
The NGOs I spoke to were more concerned about the increased competitiveness for funding that they were feeling. It was slightly strange to me that such a large increase in the pool of available funds might lead to the feeling of increased competition. There seemed to be very little incentive for NGOs to work together.
On the other side. Executives that I spoke to were unhappy with the level of clarity on just how companies could collaborate and the difficulties in doing so. Not least of which the lack of ability to capture increased reputational benefits if they worked alongside other companies.
There were also several NGOs that were setting up portals to track CSR activity on a proprietary basis, which is useful, but there seemed to be a distinct lack of central systematisation to help with understanding what the impact of spending to meet the requirements of the 2% rule would be and rather more focus on getting the money spent. There is also some emerging research about how (and how effectively) companies are in directing their 2% spend. Including research mapping educational initiatives from Samhita, which also maps supply and demand-side initiatives (interesting methods!).
Having some kind of central resource to allow companies to better decide where their resources should be allocated would be a big benefit to the amount of impact that the 2% rule will make to real social need in India.
Some companies are exploring the possibility of collaborating to solve multiple issues in a single business location. For example, it would be good CSR for a power company, telecommunications company, sanitation company and water company to team up to deliver solutions to any one of the 72,000 villages that don’t have those things (with combined population greater than the UK).
The legislation also allows for the possibility of social investors to collaborate with corporate foundations to achieve shared value in under-served communities. Entrepreneurs take note!
The Prime Minister’s 2% Fund
Some companies have decided to donate their 2% (arguably 2.86%) to the Prime Minister’s CSR fund. I agree with my new friend Mr Rajesh Tiwari, who has publicly advocated to keep CSR and Government Schemes separate. I agree with him that it’s not necessarily a good idea for a few reasons.
So, the Government has two tools at its disposal in addition to legislation: taxation and government infrastructure. The Indian government definitely has capability to leverage taxation. Presumably it also some actual capability to implement social services and very good access to implement more through its own procurement.
The rationale behind mandating companies to spend 2% of pre-tax profits is (also presumably) that companies can use their expertise to more efficiently allocate resources to solve social needs than government. Otherwise a tax would be a more efficient way to do that.
Which all seems potentially like a perfectly plausible way of achieving the public policy goal of solving social need. After all, “business has always been at its best when it is solving social issues”, as we CSR-types are prone to saying.
But several Executives told me that they had been contacted by the Indian Government and requested to put their 2% spend into the Prime Minister’s CSR fund. If that fund is then to be administered by Government, then why not just tax companies and let the government decide how best to use the resources?
Alternatively if the Prime Minister’s fund is to be administered by an independent Board of Trustees (like any normal charity and as good governance would require), then why is the Government using its resources to fundraise for an independent charity?
Now I need to confess my ignorance about exactly how sharp / edgy / dodgy / corrupt practice is defined in India, but something doesn’t seem at all right about this. Especially with fresh revelations about Government complicity in corruption involving large local corporations.
Most of the people from outside India that I talked to on my visit agree that the 2% rule was a great opportunity, but one that is fraught with peril. We (mostly) all thought that the 2% rule has incredible potential to do good (there is plenty of scope for that in India!). And there is very great potential for a very large pot of aggregated money to do more good than small pots controlled by companies who are overly concerned about building their reputation from the 2% rule spend.
But our hopefulness at the good it might do was accompanied by our fear that at least some of the spend would be wasted through things like duplication of effort, inefficient outcomes, corruption, well-meaning charity that wasn’t run by good managers, capturing brand benefit (but not social outcomes), lack of measurement of social impact and underhand practice that is outside the control of fund administrators. And I’m a bit nervous that the corruption and inefficiencies (from an outsider’s perspective) that pervade and plague India (including in the 3rd sector) will mean that less is done with larger amounts rather than more.
I fully and honestly believe that Mr Modi wants to do good with the legislation (he has certainly stared down lots of opposition from various parts of Indian society in making it happen). Some companies, like Samsung, are also putting their faith in the fund. But good intentions don’t always translate into good results for the people who are supposed to benefit the most. I hope that Mr Modi puts CSR’s best and brightest very close to the administrators of the fund that bears the name of the highest position in India. CSR is never allowed to fail (anywhere, globally, ever) and so failure at this level would set CSR back potentially decades in India. That’s not what India needs.
In the next post I’ll explore using CSR to go beyond the 2% requirement.