India has gone further than any other country in legislating on corporate social responsibility, but the law should be revised to be more precise and engage company stakeholders better.
The corporate social responsibility (CSR) movement began as a response to advocacy for corporations to play a role in ameliorating social problems due to their economic power and overarching presence in daily life.
Now, the movement is transitioning from its reliance on purely voluntary activity to the greater use of laws. The push for legislation came because voluntary CSR presented problems such as free-riding (companies taking advantage of benefits without actually spending), greenwashing posing as CSR, and false disclosures.
Governments are now modifying their laissez faire approach and considering legal rules.
The US Securities and Exchange Commission, for instance, has moved beyond its mandate as a market regulator to issue rules on conflict minerals, resource extraction payments and gender diversity. And, in 2014, the European Union issued a directive on disclosure of non-financial and diversity information.
Similarly, Australian companies are required to disclose how they will manage their environmental and social sustainability risks.
India at the forefront
India has gone further than any other country. In 2013, it enacted Section 135 of the Indian Companies Act prescribing a mandatory “CSR spend of 2% of average net profits … during the three immediately preceding financial years” for all companies meeting specified financial thresholds. In other words, companies “having net worth of rupees five billion or more, or turnover of rupees ten billion or more or a net profit of rupees fifty million or more during any financial year” have to ensure that they spend 2% of average net profits made during the three preceding years on CSR activities.
In order to assess the effectiveness of this unique experiment in mandating CSR spending and disclosure, we studied the reporting practices of the four largest banks by market capitalisation in India compared with banks from Australia, China, and Japan where there is no such law. In order to do so, we assessed annual and CSR reports of our sample of companies from 2012, one year before the law was passed.
Indian banks did not have CSR reports before 2012. The CSR committees formed by the banks function in the spirit of the law within defined targets, monitoring CSR spend, and reporting reasons for shortfalls in spending.
Of the Indian banks evaluated, only the State Bank of India (SBI) disclosed its CSR spend prior to the promulgation of the new Companies Act; all banks disclosed this spend from 2013.
Despite the new law mandating a CSR spend of 2% of pre-tax profit for corporations of this size, only ICICI Bank met the target in 2014. But it fell to 1.9% in 2016. Kotak Mahindra Bank reported a CSR spend of less than 0.69% of pre-tax profits in 2016.
In spite of not meeting the targeted CSR spend, none of the banks reported any fines or proceedings for breaching the law.
During this period (2012-2016), Australian banks had the highest disclosures, followed by Japan, China and India.
There’s a marginal difference in Indian bank disclosures after the new law was passed in 2013. But these differences may well be due to the different cultures and other non-market factors at play.
Date:July 03, 2017