Our lawmakers have hastily copied CSR law from India, without learning anything from India’s implementation.
With a mandatory provision on corporate social responsibility (CSR) in the new Industrial Enterprise Act 2016, there is a need to refine the concept of CSR in the Nepali context. The Act makes it mandatory for all business units with a turnover of over Rs 150 million to annually allocate a minimum 1 percent profit on CSR activities. If they fail to do so, they will be subject to a penalty of 0.75 percent of their annual turnover. Similar provisions have been made in the laws governing banking and financial institutions. But what constitutes CSR is nowhere defined in the law, and businesspeople are eagerly waiting for the publication of the rules and regulations governing CSR implementation.
Our lawmakers have hastily copied the law, albeit in a crude manner, from India, seemingly without learning anything from India’s own implementation. In India, CSR is mandatory only in companies where either, a) the net worth is over IRs 5 billion, b) turnover is over IRs 10 billion, or c) net profit is over IRs 50 million. And the applied rate is 2 percent on three-year average profit after tax. The provision is expected to be applied in 2500+ companies. In the case of Nepal, there are only around 700 companies. Given the size of the Nepali economy vis-à-vis Indian economy, CSR policymakers in Nepal are definitely trying to bite more than they can chew. (For more critique on CSR policy, refer to ‘Twisted CSR’, Republica, October 12). I wish to start a fundamental debate on CSR here. First, a brief review of Nepali scenario will be relevant.
A review on CSR in Nepal carried out by Caroline Welzel in 2006 speaks of “low visibility… and lacking coherence, strategy and exchange”. There is “little pressure to exercise CSR” as very few Nepali companies are part of international supply chains. Many CSR activities started out as “philanthropy” and marketing is regarded as “immoral”. There is, moreover, “no link” to core business activities. Similarly, a study of 30 private sector businesses organized by UN-HABITAT in 2008 revealed that CSR is understood as philanthropy: done after making profits, writing checks, and after compliance with business laws. It is primarily determined by the CEO, that too on an ad hoc basis.
More recent study of CSR in 16 business enterprises carried out by Taylor Knoop (2014) notes some positives. The study states that “it is no longer possible to say that CSR does not exist in corporate Nepal”. But CSR in Nepal is defined as “giving back to the community”. The study goes further: This understanding of CSR means that businesses are undertaking activities with limited engagement, although the trend seems to be turning. Giving is an “unspoken moral obligation” felt by corporations, although (in some cases) image branding and trust building are also motivators.
The prolonged political transition and its impact on businesses prompted Nepali businesspeople to come out of their cash-cow mentality and look for long-term ethical business perspectives. This, in turn, led to the emergence of bodies like the Corporate Ethic Forum (FNCCI) and a private sector NGO, National Business Initiative (NBI), and started the process of drawing code of conduct for ethical business. However, there is more rhetoric than action, and copious corporate white-washing and window-dressing.
Comparing NCell CSR activities with its attempts to evade over Rs 40 billion in capital gain taxes gives a poor impression. To add insult to the injury, this is the same organization that has signed an “integrity pact” with the Transparency International Nepal chapter.
An investigation into a daylight murder of the president of FCAN revealed nefarious links between business and crime. And the recent legal push for CSR has come primarily from the devastating April Earthquake 2015.
Philanthropy to sustainability
The Asian CSR Network, based in Singapore, has succinctly phrased the evolution of CSR understanding, corresponding to a shift in the kind of question we ask: from what, to why, to how. We have progressed from asking ‘what is CSR?’ to ‘why CSR?’ The emerging issue is: how to implement the commitment to CSR? But the debate over fundamental assumptions behind CSR is still on. Basically, there are three stages in the CSR evolution process: starting from corporate philanthropy to risk management to—what professor duo Michael Porter and Mark Kramer of Harvard University label—Creating Shared Value.
By requiring businesspeople to set aside some money from their profits into a separate kitty for CSR activities, policymakers have basically reduced CSR to “corporate giving”. This is like saying, “you have taken something from the society, now it is time to give it back to the society”. Further, making CSR mandatory with a clear penalty provision, policymakers have robbed the element of voluntariness or altruism from CSR.
Corporate philanthropy is definitely a genesis of CSR. But it is a narrow concept. And the fundamental debate against CSR revolves around this narrow concept: Instead of the government, why should business be involved in discharging social responsibilities? The Economist survey on CSR (January 22, 2005) still voices the “minimalist idea” advocated by Nobel laureate economist Milton Friedman ages ago: “the proper business of business is business”. The concept of stakeholder-ship only dilutes the concept of ownership and accountability. What then? Is there no such thing as CSR?
Depending on whether the activity raises or reduces profits and increases or reduces social welfare, The Economist survey points out four typologies of CSR: good management (raises profits and increases social welfare), delusional CSR (reduces profits as well as social welfare), pernicious CSR (raises profits at the cost of social welfare) and borrowed virtue (increases social welfare at the cost of profit). Using business ethics as an evaluation criterion, it goes on to say that except “good management” there is nothing like CSR. I suppose the two Harvard professors’ concept of Creating Shared Values is an expansion of good management. When we say good management, it assumes the possibility of bad or mismanagement. Let us now take up the issue of risk management.
Amid the concentration of economic power in the corporate world, especially in multinational corporations, there is an implicit need to redress corporate wrongdoings or negative externalities. CSR as a risk management function comes partly from a need to exercise company public relations (PR) and, mostly, from a need to “comply” with statutory rules and regulations governing business matters. There could also be an element of “company choice” to have certain CSR activities emanate from norms and customs in a given situation or to mitigate immense reputational damage.
By carrying out CSR activities companies basically, intend to mitigate business risks. Failure to do so might invite further government intervention. Therefore CSR could be a strategy to keep the government at bay. Imagine the scale of damage done to business reputation by the collapse of Rana Plaza building in Dhaka, Bangladesh on April 23, 2013 or by the Volkswagen emission cheating, costing it $18bn in fines from US regulators. No one has forgotten the Bhopal Gas tragedy in December 1984 that killed nearly 4,000 people and affected 500,000 more.
The good management prescribed by The Economist needs elaboration here. A study on CSR in Nepal asserts that CSR starts where philanthropy ends. And CSR is postulated as a strategic concept that will ultimately benefit both the company and the society. The greatest impact of a company on society is through its core business, the work—and marketplaces, supply chains, products and production methods.
CSR is not so much about how you spend your money; it is more about how you make money. Just understanding this puts CSR in a fundamentally different light. When the two Harvard professors speak of creating the shared value they are basically speaking of shared “economic values” and “social and environmental values”. The FSG, a consulting firm, writes, “Creating shared value offers an alternative path to corporate philanthropy. It focuses on finding the business opportunities hidden in social problems”. Issues like poverty, pollution, and poor health are “not externalities to be dismissed, but rather core business concerns (and opportunities) that have a substantial impact on growth and operational efficiency”.
When businesses tackle social problems as a central part of their competitive strategy, they achieve “large-scale and fundamentally sustainable changes in society”. Increasingly, the acronym CSR now stands for Corporate Sustainability and Responsibility.