INDIA may be experiencing a quiet revolution that could fundamentally transform corporate and investment behaviour and raise essential funds for social sector initiatives.
The “Two per cent CSR (Corporate Social Responsibility)” scheme or “One Additio nal Line” (OAL), adopted by the Indian government, is an unprecedented attempt to generate billions of dollars that could facilitate improvements in healthcare, education and sanitation in some of the poorest areas. But it has often been grossly misunderstood. OAL appears on a company’s profit and loss account under expenses, as an independent item which reads ‘CSR expenditure’.
A simple entry, it discloses the amount of money being given to corporate social responsibility. Large companies that meet certain financial criteria must spend at least two per cent of the average net profits made during the previous three financial years on CSR; or if they cannot pay, they must explain the reasons in their financial reports. Some have criticised the scheme as a cunning new form of mandatory tax, but this is clearly not the case.
First, to be very clear, the actual spending of CSR expense is not mandatory, but its disclosure is. Companies do not need to spend two per cent or more on CSR, but if they don’t, they have to disclose the fact in OAL with an accompanying explanation. The two per cent figure is just a sug gestion as a minimum voluntary standard. Rather, the main point is the comparable disclosure which details what companies are doing for the community in which they operate their business.
Second, companies themselves can decide how to spend their money to support their community, which is clearly different from tax.
Third, all stakeholders, including companies, are self-incentivised and, as our research has shown, benefit from becoming more competitive and attracting additional funds from investors. How? Consider this question: “If OAL is mandated to all 6,000 listed companies in India, how would their management behave?” Would management keep the CSR expenditure figure at zero? No, because they know that they are going to be scrutinised by the public, as well as by investors. Traditional voluntary CSR reports have often failed to help investors make informed decisions because they were regarded as more of marketing tool, and are not applied consistently across the market. Now, if all 6,000 companies disclose their CSR activities in their audited financial statements, they will be taken seriously.
Our research into investment behaviour at the time OAL was proposed showed that management who practice good CSR are likely to be rewarded with higher share prices and bonuses. In addition, foreign investors, concerned about environmental scandals, human right violations and other irresponsible corporate behaviour in many emerging economies, will be attracted to Indian corporations clearly demonstrating their commitment to social responsibility. Once the scheme becomes established in India, and starts to attract funds from financial investors and global markets, other emerging economies will have to follow suit in order to compete.
I am currently in consultation with representatives in Brazil, China, Thailand, Vietnam and other countries about the scheme. Cynics might question the possibility of corruption. Unfortunately there will always be people who attempt to cheat the system. But the OAL scheme reduces the possibility because CSR expenditure is an independent line that is subject to the statutory audit.
After the Enron scandal, auditors have to be extremely careful about this line item. Auditors welcome the change as it gives a legitimate reason for proper CSR audit practice as well as earning them substantial fees. And, as OAL is not a tax and the expenditure goes directly to community projects rather than through government officials, OAL has a greater potential to succeed. However, without the scrutiny of the media and the public, it is unlikely that companies will change their behaviour, and India will not achieve its sustainable growth.
So, if you work for the media, why not develop CSR rankings? If you are an investor, make it clear that you support CSR friendly companies. If you are an analyst, activist or academic, look into companies’ CSR reports and report any wrongdoing. If you know senior managers and auditors of Indian companies, send this to them.
One Additional Line can significantly change how the market functions, and help achieve sustainable growth to change the lives of millions of India’s socially disadvantaged.
Visit http://www.sbs.ox.ac.uk/tomo-suzuki for more. Tomo Suzuki is professor of accounting and sustainability management at Saïd Business School, University of Oxford.