Social Audit of Corporate India
There’s a famous quote which goes, “What gets measured gets managed”.
This notion, although appreciable, has a bit of a chasm with reality, especially in the field of qualitative analysis. Because, if one were to believe that only things that can be measured are the ones that can be managed, do they also believe that things which can’t be measured don’t get managed?
With that in mind, let’s delve into the issue of corporate social responsibility. The Ministry of Corporate Affairs recently mandated that companies in India must conduct a social audit of their CSR expenditure. The intention is to further strengthen CSR norms in the country and increase the social accountability of companies.
However, the new mandate raises many new questions (as well as old) about the efficacy of the CSR framework in India. Even though CSR has been widely vouched for its ability to address the public scrutiny and compliance of corporations, there are several gaps that need to be filled in its effective implementation.
Let’s look at some of these gaps, shall we?
First, What’s a Social Audit?
A social audit is a formal review of a company’s efforts, procedures and codes of conduct regarding social responsibility and the company’s impact on the society. It’s basically an assessment of how well the company is achieving its social goals.
Corporations, however big or small, are expected to deliver value to consumers and shareholders as well as meet environmental and social standards. The idea is to strike a balance between profitability and accountability. What a social audit does is essentially serve a way for businesses to see if their actions are being received positively or negatively by the society and how they are affecting their public image.
Although the scope of a social audit can be wide-ranging, it typically includes the following:
Changing Contours of CSR in India
With the enactment of The Companies Act, 2013, CSR measures gained increasing prominence in India. Although the idea of a company being vigilant of its positive or negative impact on the society and environment wasn’t alien before, the statutory mandate for profit-making companies to give back to the society became a first after Section 135 of the Act was enforced.
While implementation of CSR norms was the chief regulatory goal back then, now, almost a decade later, assessment seems to be the new goal. This is perhaps the natural life cycle of any law that passes — implementation followed by assessment.
But what sets apart CSR is the fact that it is a strategic philanthropic exercise. And while laws, by nature, are binding and enforceable in character, CSR, by definition, is a responsibility which means it’s not binding. The legislative signal on the issue has more of a “comply or explain” character.
The perception towards CSR has evolved over the decades from a voluntary charitable exercise to a strategic community responsibility. Even though it is not a form of forced philanthropy or “tick-box responsibility”, as they call it, it entails investing hard capital and resources to serve the society and build a company’s reputation.
What’s the Global Model?
Well, it is difficult to chart a model for something that has no commonly agreed-upon definition all over the world. Some like Milton Friedman say that social responsibility is nothing but a business tool to increase profits of a unit. Others, however, are more purposeful when they define CSR as anything that involves doing good work for societal progress.
But at the end of the day, there are no overarching pointers or lists dictating exactly what must constitute a CSR initiative by a company.
Alright, let’s pivot towards a more nuanced approach. Instead of focusing on the definition side of things, let’s look at the intent. Let’s say that CSR is any way through which a company intends to give back to the society or shares resources with the society. But then again, how does one determine intent? If one knows anything about civil and criminal litigation, it’s that it is not intent but the act that lies at the core of legal procedures. If people were prosecuted on the basis of intent, then there would be no end to guilty verdicts. Similarly, if companies’ CSR initiatives were measured in terms of their charitable intents alone, then let’s just say that their financial statements would look a lot different.
That is precisely why the idea of making CSR a mandatory practice for companies has been dismissed time and again by countries. Although globalisation has led to changing revenue-generation models and business structures around the world, what lies at the heart of a positive corporate citizenship is often left open to the interpretation of individual companies and their business targets.
It is important to note that the Companies (CSR Policy) Amendment Rules, 2021 bring an impactful change in terms of increasing the scope of CSR spends. It is now forbidden for companies to invest in CSR activities that are only beneficial to their own employees and their families.
This is where we revisit the earlier discussion on charitable intent as opposed to charitable action. The Indian law, evidently, seems to have overcome this ethical conundrum to some extent by combining traditional philanthropy with strategic expenditure. The new norms on social audits add further wings to this exercise.
Plus, India’s approach towards CSR spending differs categorically from other countries in two chief ways. For one thing, the Government of India mandates CSR spending whereas others don’t. And secondly, CSR in India is understood in a way that allows businesses to mitigate their negative impacts in a holistic manner. Companies are encouraged to proactively engage and invest in projects related to community wellbeing. Social responsibility and business success are framed and perceived as somewhat antithetical to each other in India.
On the contrary, wealthier nations like the UK, USA, Canada, Australia etc. perceive the two as somewhat mutually beneficial. CSR funding in these countries are mostly offered to cultural or other non-governmental organisations on an incentive basis for their good codes and practices of governance. Intrinsic business skills that are embedded in the company’s business matrix (like carbon footprint, gender equality, racial inclusivity etc.) are given more prominence when considering them for CSR grants.
In any case, if the world is to achieve the ideals of sustainable development, institutional mechanisms need to evolve quickly to accommodate CSR into the very fabric of corporate existence. The practice of looking beyond profits needs to be borne, not built. There will always be challenges, of course, in measuring social accountability of entities which weren’t established with any social responsibilities to begin with. But like Darwin’s finches, corporate firms must adapt or be outrun by the changing winds of social selection.
(Originally published April 6th 2022 in the TRANSFIN E-O-D Newsletter)