Two Elephants in the Indian CSR Room: time to focus on business impacts and state duties

As the Indian Nobel Laureate for literature, the poet Rabindranath Tagore writes in Stray Birds - “He who is too busy doing good finds no time to be good.” The new Companies Bill in India fails to heed this lesson. Equally important, it fails to see two elephants in the room that must be addressed in order to achieve responsible corporate behavior, inclusive economic growth that reduces mistrust between business and society, and protects rights for all.

The new Bill, passed on 8 August, mandates a philanthropic approach to corporate social responsibility, or CSR - defined as spending 2% of Profit-After-Tax - on social welfare, or reporting reasons for not doing so. Corporate contributions should be made to activities within the list defined by the bill (ranging from addressing hunger and poverty to promoting education, reducing child mortality and improving maternal health). Failure by companies to report on their efforts could result in fines and even prison (up to three years) for officers in the company.

The Companies Bill itself applies to 800,000 companies with net worth of at least $US 90 million, turnover of $US 180 million, or net profit of $US 900,000). The CSR clause will apply to a smaller percentage of firms, approximately 2,500 including the top 100 companies in each industry sector, according to Ernest and Young. It is worth noting that CSR spending is already mandated for India’s 250 State-Owned Enterprises.

While such spending may help some in need, the Bill fails to focus on addressing core business impacts as set out by guidelines developed by the government itself, and the state’s duties in line with the UN Guiding Principles on Business and Human Rights (which India and all other members of the UN Human Rights Council endorsed in 2011). The stark truth is that human rights abuses such as sub-par working conditions, sexual harassment, bonded labour and child labour as well as violations linked to land acquisition, water pollution, abusive security forces and unsafe clinical trials etc. – require the state to do more than mandate corporate philanthropy.

CSR as defined in the Companies Bill treats the poor as recipients of charity and not as citizens with rights. The bill may lead to a reduction in government accountability for delivering social goods and could exacerbate corruption. As one commentator eloquently put it, the Bill signals a “real confusion of the dharma [core truth or purpose] of different entities” (ie. between the state and private actors).

The Companies Bill also seems to convey the inexcusable message that companies can somehow offset negative impacts in one area of their work with corporate philanthropy in another. An example many in India point to is Vedanta’s “Creating Happiness” campaign promoting the company’s philanthropic contributions, at the exact time it is embroiled in accusations of human rights and environmental abuses in India and internationally. The Indian ministry of environment withdrew permission for Vedanta to continue the project due to some of these concerns.

At the same time, it must be noted that the Companies Bill is the result of a democratic process involving negotiation by elected officials. The main function of the bill - to improve corporate governance - is a worthy and necessary development. It is also important to recognise that there are interesting provisions aimed at strengthening corporate accountability, such as in relation to class action suits and transparency of directors’ pay. The intent of the CSR provision is not malicious. The simple idea is that corporate India already engages in corporate philanthropy and that these funds could be spent with more accountability, alignment with the needs of the country and with more impact.

In the time ahead, there are still two elephants in the room that need to be confronted as political leaders begin to write the detailed rules of the law. Indians have their own understanding of philanthropy – in which some companies have long, exemplary history. The bill mandates CSR in a specific way, compelling companies to act as per government-defined priorities. The pessimist in me feels that can be problematic, if not disastrous. Failure to confront governance challenges around adverse business impacts will foster further distrust between business and much of society in India (especially the poor in resource rich rural states). This distrust can result in sometimes-violent conflicts, which are perhaps the biggest threat to sustainable economic growth (and yes, profitability for firms), to India INC’s international reputation and to the the vision of an inclusive economy based on dignity and respect for all.

Elephant One:
Established guidelines on responsible business do not figure in the Companies Bill.

The Ministry of Corporate Affairs (MCA) steered the Companies Bill into law yet appeared to ignore its own previous work, and input from multiple stakeholders, in the process. In July 2011, the MCA released National Voluntary Guidelines (NVGs) on Social, Environmental and Economic Responsibilities of Business. The Guidelines seek to assist companies in addressing the impact of their core operations and make clear that a company should have a management approach or strategy to ensure appropriate policies and practices are in place across nine principles: Transparency; Ethics and accountability; Safe and sustainable goods/services; Employee well-being; Stakeholder responsiveness; Human rights; Environment; Responsible Policy Advocacy; Inclusive Development.

Principle 8 of the NVGs dealing with philanthropic contributions to support inclusive and equitable development affirms that, “Businesses should understand their impact on social and economic development, and respond through appropriate action to minimize the negative impacts”. In August 2012, the Securities and Exchange Board of India mandated the top 100 listed companies in India to submit Business Responsibility Reports based on the NVGs. This could have gone further but the orientation is a welcome one.

There are shortfalls within the NVGs as well. For example, they include some guidelines – relating to anti-trust, financial disclosure, child labour, forced labour, and pollution - that are already part of existing laws. While some effort is made to explain that some content of the NVGS are matters of legal compliance (see page 28), labeling as voluntary what is a matter of legal compliance is a major problem. This unnecessary ambiguity should be dealt with more clearly in future revisions. Further, implementation guidance suggests that companies should make choices about which core elements within the principle to follow based solely on “their alignment with internal values and business benefits”. As a result, a company could ignore certain human rights or labor rights if it so chooses, or some aspects of the environment principles. A better formulation would be that priority is based on risk of adverse impact, regardless of company values or the benefit to the company.

Nonetheless, the NVGs do offer one of the most coherent national frameworks I have seen across emerging and developing markets, with a healthy focus on doing core business responsibly. The Companies Bill should have at the very least referred to the NVGs as an overarching framework. In the days ahead, the MCA should take a lead in remedying this as the law moves to implementation.

Elephant Two:
State duties aligned with the UN Guiding Principles have not been prioritized.

The important human rights challenges identified earlier require the state to do more than mandate CSR (however defined). The Indian Government must fulfill its own duties, including protecting people from human rights abuses involving companies, and ensuring access to remedy for victims of abuse. The UN Guiding Principles on Business and Human Rights provide a road map and reference point for such discussions. Here are three starting points (drawn in part from IHRB's submission concerning India’s human rights performance review in the Human Rights Council in November 2011).

• Enforce laws when companies operate illegally: The Government has enacted a number of laws consistent with its international human rights commitments. Many of these relate directly to human rights and business concerns. But weak enforcement of legislation, and varied application of existing laws is endemic. In this context, responsible business proclamations carry no weight.

• Leverage the state-business nexus towards responsible business practices: Government procurement, natural resource concessions, legal licenses, and public finance should all be linked to responsible behaviour defined by addressing adverse impacts of core business operations.

• Invest in Access to Remedy: Ensure that potential or actual victims from economic development plans and corporate behaviour have access to remedy both through judicial and non-judicial means. Related, ensure those that raise concerns about irresponsible and/or illegal corporate behavior are not intimidated or criminalized.

It is time to take action on the two elephants – mainstreaming responsible business practices and fulfilling state duties – both of which have been ignored in debates around the new Companies Bill. Business leaders can be incentivized to behave responsibly, but human rights and respect for the rule of law in the economic sphere won’t be assured without an effective and accountable State.

Footnotes:

1. Disclosure: This commentary is written in my personal capacity. I was engaged in reviewing Principle 5 regarding Human Rights of India’s National Voluntary Guidelines on Responsible Business (NVGS). I was not paid for my input into this work, and since leaving India in 2012, I am no longer engaged in the process.