Maximizing CSR's Impact-India Inc's Challenge
Reducing CSR to compliance requirements and not truly leveraging the funds for impact represents a tragic opportunity loss, writes George Aikara.
In 2013, when the companies act introduced section 135, making CSR a statutory obligation, it redefined business responsibility towards community success. It came with several complications, one of which was the incomplete drafting of the rules and had to be amended thrice, in 2017, 2019 & 2020. The companies (CSR) rules 2014 had to be amended five times 2014, 2015, 2016, 2020, and 2021 with 2020 being a major overhaul. After several FAQs and clarifications, grey areas and unreasonable statutes remain.
The real issue facing India Inc. was the requirement to allocate and spend funds in a space where a company doesn't possess domain expertise. Donating to a social cause is relatively simple, but aligning and executing on project mode, in synergy with organizational philosophy, creating the most significant possible impact through a targeted model is more complex. In our work with over 200 companies on their CSR spending and studies of CSR trends and projects, we believe that not all CSR impact is equal for similar expenditures. Social development consists of the most complex human issues interlinked with other human conditions. It is rare to solve for it through short ad-hoc interventions.
It is like putting a band-aid over a tumor. Solving the underlying issues requires a deeper understanding of the development and the commitment to engage with the problems interlinked over a longer timeframe. Certain types of CSR interventions, especially infrastructure linked, are time adequate to execute provided a proper need assessment is conducted, and the project can quantify the impact. Those trying to address the human or environmental conditions require the knowledge, developmental tools, and long-term commitment to achieve meaningful impact. The unfortunate limitation of most CSR is the requirement to show and demonstrate results and quick wins for reporting to stakeholders. This requirement often skews projects towards those that can provide higher metrics irrespective of the quality of the impact.
Reducing CSR to compliance requirements and not truly leveraging the funds for impact represents a tragic opportunity loss. As per the govt. CSR portal, 65% of eligible companies (14,527/22,531) in 2019-20 had either failed to spend or were less than prescribed. This number was 72% in the previous year. The data for 2020-21 is incomplete but will predictably be on the same lines.
One of the critical factors for this under-utilization/spending is the time lost in indecisions and buy-in at the board level, mainly due to a knowledge-awareness gap. As a result, the CSR outlay, if done, is often disjointed & inconsistent across years. Short-term projects with high vanity metrics tend to get selected and cycled through over the years, which is unfortunate from an impact perspective. The rules only allow the amount spent by March to be reported as CSR spending for the year. Half the year is lost when the audited financials are ready and the CSR outlay for the financial year prepared. Then the rush to utilize it before March begins unless the company is prepared to commit to a long-term project and transfer funds to a separate unspent CSR bank account. There are financial penalties for non-spending and non-transference both on the company and the defaulting officer, yet strangely, many companies take that regulatory risk. The shortcut to the CSR obligation is to transfer the amount to any of the notified central govt. funds, and many companies choose this. However, the company is giving up the opportunity to control and direct its impact.
A good strategy for companies to manage and optimize their CSR spending after determining their CSR policy is to form an action plan broken into three parts. Identify a long-term focus project to which a minimum amount can be committed based on historical CSR prescribed spending. Keep a percentage allocated to specific interventions which can be reviewed and renewed annually. The remaining open-ended balance could be allocated for emerging and essential short-term community requirements in the last two quarters. Partnering with an organization with development sector expertise can vitally strengthen the social impact that the company could achieve.
By virtue of being in business and providing employment, every company has a positive socio-economic impact by default. Customers, investors, and employees increasingly demand more socially responsible actions by companies differentiating regular companies from exceptional, inspirational ones and generating the hardest of all currencies to obtain- goodwill. All successful businesses, like all successful individuals, owe giving back and helping the larger underserved community. Utilizing and channeling their CSR funds wisely can elevate its contribution to transformative impact in the society and communities it operates in.
(George Aikara is the CEO of United Way Mumbai)
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