CSR: forcing corporates into social sector a bad idea

The provision of expenditure of 2% of profits on corporate social responsibility (CSR) is a relatively new addition to corporate governance in the country. That our profit-making entities should be nudged to actively participate in nation-building is indeed a laudable idea. To take advantage of the changed ground rules, some of the large corporates have established in-house CSR wings. Others have taken the route of forming public trusts, albeit these trusts are fully controlled by them.

The expectation that everyone must directly contribute to nation-building is neither unreasonable nor new. It is laudable that the profit-making entities, in other words the corporates, are also involved in the process of nation-building. After all, they have earned their profits from the same society and they must pay back to it! At times, however, this expectation is stretched too far.

If you are in the army, you must know how to pick up a gun and fight, irrespective of whether you are a soldier, surgeon or a cook. That system wherein a specialist can double-up as a generalist works very well in the armed forces. Situations likely to arise in the battlefield have forced the army to hone this specialist-generalist strategy. It needs to be evaluated whether what is good for the armed forces is good for society in general.

Social responsibility has generally been the domain of governments. Given that governance often smacks of rot, favouritism and corruption, why should we leave such pious objectives to governments only! By popular perception, government-led development suffers from lack of transparency, misdirected objectives, pilferage of public funds, etc.

After all, all the newspaper reports of corruption, mismanagement, organised loot and grotesque waste of public funds cannot be wrong. Course correction may be the need of the hour to trim flab in the government machinery. The question is whether the solution lies in bringing in newer players, even if they are alien to governance.

Commercial entities like private corporations have sharpened skills in providing specialised goods and services. Notwithstanding service rendered to the society, profit still remains the prime motive for them. It may be a commendable idea to mould them into benefactors of society via the CSR route. But it should also be understood that social causes have never been a priority for business enterprises. Their indulgence in CSR could also lead to undesirable side-effects. Like any novice, one is bound to fumble, resulting in waste of resources, when forced into uncharted territory. Battlefield exigencies may necessitate all members of the armed forces to know how to fight, but the picture is different when it comes to dealing with contingencies in civil settings.

Any fair expenditure must not only be optimum but should also be transparent. By transparency, it is implied that everyone knows what anyone else is doing. Thus, any government expenditure not only must be optimum, but the vendor must also be selected transparently.

Inferior transparency audit

To the uninitiated, the standard of transparency between the corporate and government expenditures appears identical. There is, however, a fundamental difference between the two. It is admitted that corporate expenditure is auditable and deviant behaviour can easily be detected.

However, the rigour of transparency involved in a corporate audit is vastly inferior to any government audit. It would be entirely lawful to engage the services of relatives, protégés or even promoters in business, including in CSR work. Skeletal paperwork and bills are the only statutory requirements to allow it to pass through routine corporate audit.

For public-funded works, open tenders ensure that there is a level playing field. In all offerings, the government is bound to ensure equality of opportunity for all. In public-funded works in Karnataka, additional transparency is enforced through an online tender portal. The same, however, is not true for corporate expenditure. Thus, identification of a vendor by a corporate need not pass the test of open tendering.

The successful bidder need not offer the lowest cost and, most importantly, the criterion for selection of a vendor is not available for public scrutiny. Naturally, CSR expenditure need not conform to acceptable public standards of transparency. This not only smacks of nepotism and opening new channels for money-laundering but could also lead to wastage of resources.

While the idea of CSR is laudable, it may end up in generation of black money. By not following public transparency and financial prudence, determined corporates are able to generate black-money through the CSR route as well. A route adopted by corporates is to dump money into their own charitable trusts. Most trustees are the promoters themselves, their relatives or their protégés. The expenditure by these trusts can be equally opaque. Over-invoicing and bogus expenditure are key routes for generation of black money.

Not unsurprisingly, a significant fraction of the money received by these trusts can be siphoned off, leading to generation of black money. The very reason for corruption and opacity in the government machinery that is often used to rationalise CSR leads us back to the same problem!

Disregarding the lessons of division of labour, corporates that specialise in commercial activity have been nudged to stretch their presence to the social sector. Instead, it is best to allow them to do what they know best, in other words business. They may be taxed a bit more and the proceeds spent through social sector specialists. Forcing corporates into social spending is akin to compelling a teacher to join arms training.

If the government machinery cannot be relied on solely to achieve social objectives, the way to go is to encourage credible NGOs to fill the gap, not push corporates to step in.

(The writer is a senior IFS officer of the Karnataka Cadre)