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Is the law requiring CSR spend in India working?

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I’ve previously written about my interest in India’s CSR Companies Act requiring larger companies to donate 2% of pre tax profits to good causes. The law was passed in April 2014 and an article in yesterday’s Guardian reviews progress two years on.

Debate has long raged in the Corporate Social Responsibility (CSR) community about the desirability of making CSR compulsory or even whether it is possible to make such a concept compulsory. The Indian law covers only the philanthropic spend by a company rather than responsible behaviour by a company and for me that’s far too narrow a view of what CSR is. Having said that it must be recognised that India has major social problems which government alone is not able to solve. So any intervention that will help address social issues and improve quality of life for marginalised communities should be welcome.

From the early days of the discussion about the forced spend in India there were concerns that it would turn into a tick box exercise for companies, that it might actually exacerbate inequality due to firms located in wealthier areas being more likely to support local projects and that it would lead to corruption with layers of bureaucracy siphoning off commissions. Commentary last year focused on lack of compliance by companies and that penalties could be enforced only on companies who failed to report their spending, not on those who did not actually spend the compulsory 2%. So, have things improved since then?

According to the Guardian article spend on charitable work in the private sector has jumped hugely from an estimated 33.67bn rupees in 2013 to around 250bn rupees. So this is good news, right? Well maybe. But such a large increase in spending may well create capacity problems in the charity sector. A charity that is flooded with money can find it very difficult to spend that money effectively. What do most human beings do with an oversupply of money in their pockets? Spend it on daft stuff. It certainly removes the pressure to be discriminating in our choices. If you are running a charity, having your income triple or more in a relatively short period of time does not automatically mean that you can access the right resources to scale up accordingly.

In the rush to spend the required amount, companies are also probably favouring the larger established and better known charities while smaller organisations find it hard to get a look-in and may also find it more difficult to deal with the bureaucracy of the corporate world. The easy option of funding the big charities or the government-approved projects is not resulting in the kind of innovative solutions that India needs. The focus needs to be more on outcomes than on money spent in order to ensure donations are being utilised effectively. The bias towards wealthier areas also appears to be a reality which means that the areas most in need are not seeing an uplift in living standards. As I’ve previously suggested this is short-sighted of companies who will need to grow their customer base in the future. That increase in consumers will come about through giving those who lack opportunity access to education and improved infrastructure. Quite simply, having access to power and water means kids can go to school rather than do household chores and can study due to light sources being available. If they get an education they get a chance to improve their earning ability enabling them to have a better quality of life and more disposable income as adults.

Despite the large increase in overall donation levels it appears that many companies are still failing to comply with the law. Reports suggest that 52% of the top 100 have not made their 2% donation. And while many Indian corporations have a long history of philanthropic involvement there are concerns that it’s far more difficult for them to use this to stand out now. It’s become more about legal compliance and there are fears that some of these long-term donors may scale back their giving if it doesn’t have the same reputational impact.

Disconcertingly it seems that corruption is indeed an issue with reports that some donations are being made on the understanding that they will be returned minus a commission. This implicates the charities in fraud as well as the donors. It may mean that charity employees are deciding that the greater good is served by getting some money for their work rather than none but the effect is to undermine trust in the charity sector, which can only be damaging in the longer term. It also demonstrates that some businesses are still failing to review their day-to-day practices through a lens of responsibility to society as a whole. Spending on good works while making profit through poor behaviour leads to cynicism amongst stakeholders, especially employees who are likely to be most aware of the inconsistency.

So the analysis is looking a bit bleak at the moment. But it’s early days in a major new initiative and it would be unrealistic to expect spectacular results at this point. A big plus has to be that it starts the conversation and gets corporate India discussing the part it can play in making things better for everyone. It will take imagination and persistence on the part of business, the charity sector and government to ensure that resources are used for projects that make a real difference and that this goes well beyond a mere compliance exercise of meeting a 2% target spend.