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Overview of Corporate Social Responsibility

Presentation by : S. Ravi, FCA

Corporate Social Responsibility (CSR): Definitions

‘The continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large’. – World Business Council For Sustainable Development‘A commitment to improve community well being through discretionary business practices and contributions of corporate resources’. – Philip Kotler and Nancy Lee (2005)‘A way companies manage the business processes to produce an overall positive impact on society.’ – Mallen Baker, Founding Director, Business Respect‘A multi layered concept that can be differentiated into four interrelated aspects – economic, legal, ethical and philanthropic responsibilities’. – Archie Carroll (1991)

Overview of Corporate Social ResponsibilityBy: S. Ravi, FCA

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The Pyramid of CSR

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Contribute resources to the community, improve quality of life

Obligation to do what is right, just and fair

Law is society’s codification of right and wrong

The foundation upon which all others rest

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Overview of Corporate Social Responsibility

By: S. Ravi, FCA

Current state of CSR in India

Priority of business is getting widened from 1 P to 3 Ps by inclusion of People and Planet with Profit.Short-term, charity based welfare interventions are being replaced by long-term, empowerment – based CSR. Based on the realization that business cannot succeed in a society that fails, CSR is being considered as an imperative for carrying on business in the society rather than as a charity. The new Companies bill passed by both Lok Sabha and Rajya Sabha mandates the corporates to spend 2% of their average net profits of the last three financial years towards CSR. This is applicable for companies with a turnover of 1000 Cr/ PAT of 5 Cr/ or net worth of 500 cr. The new bill replaces the Companies act 1956 and emphasizes carrying forward the agenda of Corporate Social Responsibility.

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Current state of CSR in India

It is mandatory for Central Public Sector Enterprises to allocate 2-3% of the PAT for the inclusive development of a backward district (CSR & Sustainability guidelines by Department of Public Enterprises 2013), in which one key project has to be in CSR and the other in Sustainability for the development of the disadvantaged and marginalized communities.

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CSR Importance and its Relevance Today

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CSR as a strategy is becoming increasingly important for businesses today because of three identifiable trends

CSR Importance and its Relevance Today

Overview of Corporate Social ResponsibilityBy: S. Ravi, FCA

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CSR as a strategy is becoming increasingly important for businesses today because of three identifiable trends

Few Key Steps to Implement CSR Successfully

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Better communication between top management and organisation

Appoint for CSR position

Good relationship with customer, supplier, stakeholder

Annual CSR audit

Feedback process

Companies Bill and CSR

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Companies Bill and CSR – Clause 135

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Every Company With

Net Worth of Rs. 500 Crores or more

Turnover of Rs. 1000 Crores or more

Net Profit of Rs. 5 Crores or more

During any Financial Year

Shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.

Companies Bill and CSR

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Overview of Corporate Social ResponsibilityBy: S. Ravi, FCA

Duty of the BoardDuty of the Corporate Social Responsibility CommitteeDisclose the composition of the CSR Committee in its reportApprove the Company’s CSR policy after considering the recommendations of the committeeDisclose the CSR policy in its report and on Company WebsiteEnsure the implementation of the policyTo spend at least 2% of the Company’s average profit for the last 3 financial years for this purposeGive preference to spending in local areas where it operatesSpecify reasons in report in case of failure Formulate and recommend a CSR Policy to the Board indicating the activities to be undertaken by the CompanyRecommend the amount of expenditure to be incurred on CSR related activitiesMonitor the Company’s CSR policy from time to time.

Activities Required for Qualifying Companies

Companies Bill – Permissible CSR Activities

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Overview of Corporate Social ResponsibilityBy: S. Ravi, FCA

Eradicating extreme hunger and poverty;Promotion of education;Promoting gender equality and empowering women;Reducing child mortality and improving maternal health;Combating [HIV], [AIDS], malaria and other diseases;Ensuring environmental sustainability;Employment-enhancing vocational skills;Social business projects;Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government or the state governments for socioeconomic development, and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; andSuch other matters as may be prescribed.

Schedule VII of the Companies Bill requires the CSR policy created by the CSR committee involve at least one of the following focus areas:

Points of Concern

The Companies Bill does not define CSR only contains a list of activities that may be included by a company in its CSR policy. The bill does not prescribe the proportion of funds to be contributed towards any activity.2% spending on CSR is not mandatory for Companies, the rules are in line with the ‘Comply or Explain’ principle with penalties applicable only if an explanation is not offered. This could really be an escape clause for companies not meeting the necessary CSR requirements.Tax treatment to CSR spending by companies whether it is to be treated as non-deductible income since it is an allocation of profit, or, whether it is to be treated as an allowable expenditure under the Income Tax Act.Even central public sector enterprises, subject to CSR norms under separate guidelines, will, on enactment of the bill, come within the purview of these new provisions.

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Tax Exemption

Section 80G of Income Tax Act – DonationsThis section does not restrict the deduction to individuals, companies or any specific category of taxpayer. Allowable to all kind of Assessee. Donations made to foreign trusts do not quality for deduction under this section.Deduction cannot be claimed for donations made to political parties for any reason, including paying for brochures, souvenirs or pamphlets brought out by such parties.Only donation made to prescribed funds and institutions qualify for deduction.Maximum allowable deduction:- If aggregate of the sums donated exceed 10% of the adjusted gross total income, the amount in excess of 10% ceases to be entitled for tax benefit.Only donations in cash/ cheque are eligible for the tax deduction.NRIs are also entitled to claim tax benefits against donations, subject to the donations being made to eligible institutions and funds.

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Tax Exemption

Section 35 AC of Income Tax Act – Expenditure on eligible projects/ schemes To promote reinvestment of business profits in areas where massive capital input is required for socio-economic development, a tax incentive has been provided under Section 35AC of the Income Tax Act, 1961.The section provides that where an assessee incurs any expenditure by way of payments of any sum to:i) a public sector company or;ii) a local authority or;iii) to an association/ institution approved by the National Committee for carrying out any eligible project or scheme for promoting the social and economic welfare or upliftment of the public as the Central Government may specify, then the amount so paid shall be allowed as deduction from the business income of the assessee/ contributor of such amount.

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Public Sector Undertakings – Key Contributors To Socio-Economic Development of India & CSR

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The government of India formed public sector undertakings (PSUs) with the purpose of building industrial capacity, creating employment opportunities and improving the socio-economic condition.

Both, central public sector enterprises (CPSEs) and state level PSUs have played a vital role in supporting the socio-economic development of the country. They are actively involved in various areas of CSR such as education, healthcare, improving infrastructure, social empowerment, vocational training and environmental protection among others.

With a high degree of support from the government, CSPEs acts as a catalyst of social enterprise by providing such diverse services for grass root development.

Public Sector Undertakings – Key Contributors To Socio-Economic Development of India & CSR

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Over the past two decades, India has emerged as one of the world’s strongest emerging markets and PSUs have played a vital role in achieving this growth and development.

In order to sustain this growth, CSR initiatives have become important as they form a crucial part of the companies’ strategic decision-making process. In order to integrate this into their business models and achieve the nation’s aim of inclusive growth, the revised CSR and sustainability guidelines issued by the Department of Public Enterprises (DPE) in December 2012 (effective April 2013) are expected to play a crucial role.

The revised guidelines has urged the CPSEs to embrace a robust CSR practice that is in the interest of all stakeholders.

Key Highlights of the Revised CSR and Sustainability Guidelines for CPSEs

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CPSEs expected to formulate their policies with a balanced emphasis on all aspects of CSR and Sustainability – equally with regard to their internal operations, activities and processes, as well as in their response to externalities. Earlier guidelines focused mainly on CSR activities for external stakeholders.

Earlier, CSR and sustainable development treated as two separate subject areas and were dealt with differently for the purpose of memorandum of understanding (

MoU

) evaluation. However, now they are combined into a single set of guidelines for greater transparency.

Key Highlights of the Revised CSR and Sustainability Guidelines for CPSEs

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The revised CSR and sustainability budgetary allocation for CPSEs is as under:CPSEs to take up at least one major project mandatorily for development of a backward district.CPSEs expected to act in a socially responsible manner at all times. Even in their normal business activities, CPSEs should try to conduct business in a manner that is beneficial to both, business and society.

PAT of CPSE

in the previous year

Budgetary allocation

(as % of PAT in previous year)

Less than Rs. 100 Crore

3% - 5%

Rs. 100 Crore to Rs. 500 Crore

2% - 3%

Rs. 500 Crore and above

1% - 2%

Key Highlights of the Revised CSR and Sustainability Guidelines for CPSEs

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CPSEs have to disclose the reasons for not fully utilizing the budget allocated for CSR and Sustainability activities for a year. Further, if the CPSEs are unable to spend the earmarked amount for CSR in a particular year, it would have to spend the amount in the next two financial years, failing which, it would be transferred to ‘Sustainability Fund’.

Emphasis is placed on the scalability of CSR and Sustainability projects, in terms of their size and impact, rather than on their numbers.

Employees to avail the infrastructure facilities created by the company from its CSR and Sustainability budget, provided the facilities are originally created essentially for the external stakeholders, and the use of these facilities by the CPSE’s employees (internal stakeholders) is only incidental and confined to less than 25 percent of the total number of beneficiaries.

SEBI - Making CSR Reporting Compulsory

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SEBI vide its circular CIR/CFD/DIL/8/2012 dated August13, 2012 has made it mandatory for 

top 100 listed companies (by market capitalization) 

to report certain critical information as part of their business responsibility.

This includes how much the company is spending on CSR as a percentage of its net profit, the number of stakeholders' complaints received and resolved, details of any pending case filed by stakeholder against any unfair trade practice, irresponsible advertising or anti-competitive behaviour adopted by the company.

The provisions of this circular shall be applicable with effect from financial year ending on or after December 31, 2012.

This will enable the shareholders to have a better understanding of the manner in which their companies' function and adopt responsible business practices.

The circular exhorts the companies to follow the 

national voluntary guidelines on social, environmental and economic responsibility

that have been formulated by Ministry of Corporate Affairs in July 2011.

World Bank - CSR Initiatives

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According to the World Bank, “Corporate social responsibility is the commitment of business to contribute to sustainable economic development by working with employees, their families, the local community and society at large to improve their lives in ways that are good for business and for development”.

The World Bank in India is working with the Department of Public Enterprises (DPE),

GoI

, to evolve CSR policies and guidelines through its knowledge missions and advocacy initiatives.

They together are working to create an institution that will undertake capacity building for CSR in Public Sector Enterprises and to develop a strong communications strategy for the CSR work of Public Sector Enterprises.

World Bank - CSR Initiatives

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The Ministry of Corporate Affairs has also set up through the Indian Institute of Corporate Affairs, the National Foundation for CSR in partnership with the World Bank.

The mission of the foundation includes building an enabling environment for the corporate sector to work in partnership with the government, non- governmental & civil society organizations and local communities towards goal of inclusive growth, reduction of poverty, and achievement of Millennium Development Goals.

The World Bank is

supporting the

GoI

to develop and coordinate CSR activities across the country

through workshops, knowledge missions, international seminars and training programs to bring about learning from international best practices and experiences as well as evolving CSR concepts worldwide and CSR policies evolved by Govts world over.

What the Companies should do?

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Determining the Corpus earmarked for CSR

Identifying the areas/activities for CSR

– Education, Healthcare, Social business project, Donation, Environmental Sustainability, Employment etc.

Identifying the Agencies

Baseline Survey

Dispersing

Monitoring and Impact Analysis

Some of the Positive Outcomes That can Arise When Businesses Adopt a Policy of Social Responsibility and Sustainability

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Overview of Corporate Social ResponsibilityBy: S. Ravi, FCA

Company Benefits

Improved financial performance

Lower operating costs

Enhanced brand image and reputation

Increased sales and customer loyalty

Greater productivity and quality

More ability to attract and retain employees

Reduced regulatory oversight

Access to capital

Workforce diversity

Product safety and decreased liability

Some of the Positive Outcomes That can Arise When Businesses Adopt a Policy of Social Responsibility and Sustainability

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Overview of Corporate Social ResponsibilityBy: S. Ravi, FCA

Benefits to Community and General Public

Environmental Benefits

Charitable contributions

Employee volunteer programs

Corporate involvement in community education, employment and homelessness programs

Product safety and quality

Greater material recyclability

Better product durability and functionality

Greater use of renewable resources

Integration of environmental management tools into business plans, including life-cycle assessment and costing, environmental management standards, and eco-labeling

CSR and Sustainability Initiatives - Examples

Tata Consultancy Services The Adult Literacy Program (ALP) was conceived and set up by Dr. F C Kohli along with Prof. P N Murthy & Prof. Kesav Nori of TCS in May 2000 to address the problem of illiteracy. ALP believes illiteracy is a major social concern affecting a third of the Indian population comprising old and young adults. To accelerate the rate of learning, it uses a TCS-designed Computer–Based Functional Literacy Method (CBFL), an innovative teaching strategy that uses multimedia software to teach adults to read within about 40 learning hours.

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CSR and Sustainability Initiatives - Examples

Larsen & Toubro (L & T) Limited Considering that construction industry is the second largest employer in India after agriculture, employing about 32 million-strong workforce, L&T set out to regulate and promote Construction Vocational Training (CVT) in India by establishing a Construction Skills Training Institute (CSTI) on a 5.5 acre land, close to its Construction Division Headquarters at Manapakkam, Chennai. CSTI imparts, totally free of cost, basic training in formwork, carpentry, masonry, bar-bending, plumbing and sanitary, scaffolder & electrical wireman trades to wide spectrum of the rural poor.CSTI has also set up a branch at Panvel, Mumbai, initially offering training in formwork, carpentry and masonry trades. The Manapakkam and Panvel facilities together provide training to about 300 candidates annually who are inducted after a process of selection, the minimum qualification being tenth standard. Since inception, these two units have produced about 2,000 skilled workmen in various trades, with about sixty percent of them being deployed to L&T’s jobsites spread across the country.

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CSR and Sustainability Initiatives - Examples

ITC Limited ITC partnered the Indian farmer for close to a century. ITC is now engaged in elevating this partnership to a new paradigm by leveraging information technology through its trailblazing 'e-Choupal' initiative. ITC is significantly widening its farmer partnerships to embrace a host of value-adding activities:Creating livelihoods by helping poor tribals make their wastelands productive;Investing in rainwater harvesting to bring much-needed irrigation to parched dry lands; Empowering rural women by helping them evolve into entrepreneurs; and Providing infrastructural support to make schools exciting for village children. Through these rural partnerships, ITC touches the lives of nearly 3 million villagers across India.

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CSR and Sustainability Initiatives - Examples

CISCO System Inc. The company pursues a strong “triple bottom line” which is described as profits, people and presence. It promotes a culture of charitable giving and connects employees to nonprofit organizations serving the communities where they live. It invests its best-in-class networking equipment to those nonprofit organizations that best put it to work for their communities, eventuating in positive global impact. It takes its responsibility seriously as a global citizen. Education is a top corporate priority for Cisco, as it is the key to prosperity and opportunity.

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CSR and Sustainability Initiatives - Examples

Successful companies allocate resources to ensure well being of stakeholders which also enables the company to acquire a key differentiator vis-à-vis its competition, thereby making the business sustainable. Tata Chemicals and HUL pioneered iodization of salt to combat iodine deficiency. Their market campaign to change the mindset of BPL customers to pay a little extra for the pack of iodized salt was clearly laudable. These efforts not only increased their market share and profitability but at the same time addressed an important nutritional issue of national importance.Hindustan Unilever (HUL), for example, invests in research working with nutrition and health specialists to further improve its “ready to eat” food business, enhance hygiene through its “regular hand wash” campaign, etc. These initiatives not only position its products distinctively against the competitors and enhance brand equity, but also ensure well being of customers and the environment.

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CSR and Sustainability Initiatives - Examples

Linking sustainability to business strategy can also improve access to supply chains. In order to combat the global shortage of pulp-wood for paper board production, ITC and Ballarpur Industries are helping small farmers with degraded land pieces by providing them saplings, financial and technical support and an assured buy back of timber. This ensures sustainable raw material supply for the company, and also improves farmer’s livelihood.

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CSR and Sustainability Initiatives - Examples

Social initiatives can also help enhance ethical values in society and at the same time can offer a distinctive edge to companies. Fluor Corporation, one of the largest construction companies in the world, worked for three decades with Transparency International to fight corruption; today its “anti-corruption” movement has 150 large companies across industries having signed a “zero-tolerance” policy on bribery. In industries marred by corruption, Flour is today perceived as an ethical player, thereby positioning itself with a significant competitive advantage.

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CSR and Sustainability Initiatives - Examples

Socially responsible initiatives has potential to improve employability in the society and at the same time provide companies access to skilled labor, a key driver of profitability across many industry sectors.Maruti has recently adopted forty Industrial Training Institutes (ITI) which not only enhances skill level of youth making them employable, but also guarantees supply of skilled personnel to Maruti. Similar investments in skills development training are made by companies like Microsoft, Infosys, Tata Steel and L&T.Rather than paying donations, using core strengths to address social issues is the best form of sustainable corporate social responsibility.

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Thank You

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